UNITED STATES
 SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549



FORM 10-Q



      [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2016
or

    [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934

For the transition period from _________ to __________

COMMISSION FILE NUMBER 1-33926
 
 
TRECORA RESOURCES
(Exact name of registrant as specified in its charter)

DELAWARE
75-1256622
(State or other jurisdiction of
(I.R.S. employer incorporation or
organization)
identification no.)

1650 Hwy 6 South, Suite 190
77478
Sugar Land, Texas
(Zip code)
(Address of principal executive offices)
 

Registrant’s telephone number, including area code:  (409) 385-8300

Former name, former address and former fiscal year, if
changed since last report.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
Yes  X    No                                

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes  X    No                                

 
 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ____                                                      Accelerated filer _ X__

Non-accelerated filer  _____                                                      Smaller reporting company ____

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes  No  X_

Number of shares of the Registrant's Common Stock (par value $0.10 per share), outstanding at August 1, 2016: 24,506,846.

 
 

 

TABLE OF CONTENTS

Item Number and Description
 
 
 
 
 
1
 
2
 
3
 
4
 
5
     
18
     
28
     
29
 
 
 
 
29
     
29
     
29

 
 

 

PART I. FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS.

TRECORA RESOURCES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

   
JUNE 30,
2016
(unaudited)
   
DECEMBER 31,
2015
 
ASSETS
 
(thousands of dollars)
 
 Current Assets
           
  Cash and cash equivalents
  $ 9,346     $ 18,623  
  Trade receivables, net
    17,581       19,474  
  Inventories
    20,064       15,804  
  Prepaid expenses and other assets
    2,200       2,392  
  Taxes receivable
    4,921       7,672  
  Deferred income taxes
    2,007       2,116  
          Total current assets
    56,119       66,081  
                 
  Plant, pipeline and equipment, net
    122,547       96,907  
                 
  Goodwill
    21,798       21,798  
  Other intangible assets, net
    23,605       24,549  
  Investment in AMAK
    54,865       47,697  
  Mineral properties in the United States
    588       588  
  Other assets
    130       171  
                 
     TOTAL ASSETS
  $ 279,652     $ 257,791  
 
LIABILITIES
               
  Current Liabilities
               
    Accounts payable
  $ 6,284     $ 8,090  
    Current portion of derivative instruments
    97       118  
    Accrued liabilities
    4,758       4,062  
    Current portion of post-retirement benefit
    388       294  
    Current portion of long-term debt
    8,061       8,061  
    Current portion of other liabilities
    904       2,050  
          Total current liabilities
    20,492       22,675  
                 
  Long-term debt, net of current portion
    69,138       73,169  
  Post-retirement benefit, net of current portion
    649       649  
  Derivative instruments, net of current portion
    25       59  
  Other liabilities, net of current portion
    2,513       2,351  
  Deferred income taxes
    23,856       16,503  
     Total liabilities
    116,673       115,406  
                 
EQUITY
               
  Common stock-authorized 40 million shares of $.10 par value; issued and outstanding 24.2 million and 24.1 million shares in 2016 and 2015, respectively
    2,451       2,416  
  Additional paid-in capital
    52,213       50,662  
  Common stock in treasury, at cost 0.3 million shares
    (300 )     -  
  Retained earnings
    108,326       89,018  
  Total Trecora Resources Stockholders’ Equity
    162,690       142,096  
  Noncontrolling Interest
    289       289  
   Total equity
    162,979       142,385  
 
               
     TOTAL LIABILITIES AND EQUITY
  $ 279,652     $ 257,791  


See notes to consolidated financial statements.

 
1



TRECORA RESOURCES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)


   
THREE MONTHS ENDED
   
SIX MONTHS ENDED
 
   
JUNE 30,
   
JUNE 30,
 
   
2016
   
2015
   
2016
   
2015
 
   
(thousands of dollars)
 
REVENUES
                       
  Petrochemical and Product Sales
  $ 44,366     $ 56,665     $ 91,547     $ 107,206  
  Processing Fees
    4,488       2,685       9,507       7,287  
      48,854       59,350       101,054       114,493  
                                 
OPERATING COSTS AND EXPENSES
                               
  Cost of  Sales and Processing
                               
    (including depreciation and amortization of  $2,028, $1,939, $4,247, and $3,965, respectively)
    37,280       44,756       77,709       84,776  
 
                               
   GROSS PROFIT
    11,574       14,594       23,345       29,717  
                                 
GENERAL AND ADMINISTRATIVE EXPENSES
                               
  General and Administrative
    5,491       4,933       10,940       10,108  
  Depreciation
    187       170       364       385  
      5,678       5,103       11,304       10,493  
                                 
OPERATING INCOME
    5,896       9,491       12,041       19,224  
                                 
OTHER INCOME (EXPENSE)
                               
  Interest Expense
    (607 )     (570 )     (1,235 )     (1,183 )
  Bargain purchase gain from acquisition
    11,549       -       11,549       -  
  Equity in Earnings (Losses) of AMAK
    1,801       (369 )     7,168       (310 )
  Miscellaneous Income (Expense)
    123       (33 )     110       (1 )
      12,866       (972 )     17,592       (1,494 )
                                 
  INCOME BEFORE INCOME TAXES
    18,762       8,519       29,633       17,730  
                                 
  INCOME TAXES
    6,678       2,145       10,325       5,572  
 
                               
  NET INCOME
    12,084       6,374       19,308       12,158  
                                 
 NET LOSS ATTRIBUTABLE TO NONCONTROLLING INTEREST
    --       --       --       --  
                                 
 NET INCOME ATTRIBUTABLE TO TRECORA RESOURCES
  $ 12,084     $ 6,374     $ 19,308     $ 12,158  
                                 
Basic Earnings per Common Share
                               
  Net Income Attributable to Trecora Resources (dollars)
  $ 0.49     $ 0.26     $ 0.79     $ 0.50  
                                 
  Basic Weighted Average Number of Common Shares Outstanding
    24,504       24,354       24,494       24,331  
                                 
Diluted Earnings per Common Share
                               
  Net Income Attributable to Trecora Resources (dollars)
  $ 0.48     $ 0.25     $ 0.77     $ 0.48  
                                 
  Diluted Weighted Average Number of Common Shares Outstanding
    25,185       25,155       25,135       25,150  

See notes to consolidated financial statements.

 
2



TRECORA RESOURCES AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
 
TRECORA RESOURCES STOCKHOLDERS
         
 
COMMON STOCK
 
ADDITIONAL
PAID-IN
 
TREASURY
 
RETAINED
     
NON-
CONTROLLING
 
TOTAL
 
 
SHARES
 
AMOUNT
 
EARNINGS
 
STOCK
 
EARNINGS
 
TOTAL
 
INTEREST
 
EQUITY
 
 
(thousands)
                             
JANUARY 1, 2016
  24,158   $ 2,416   $ 50,662   $ -   $ 89,018   $ 142,096   $ 289   $ 142,385  
                                                 
Stock options
                                               
  Issued to Directors
  -     -     114     -     -     114     -     114  
  Issued to Employees
  -     -     617     -     -     617     -     617  
  Issued to Former Director
  -     -     48     -     -     48     -     48  
Restricted Common Stock
                                               
  Issued to Directors
  -     -     81     -     -     81     -     81  
  Issued to Employees
  -     -     355     -     -     355     -     355  
Common stock
                                               
  Issued to Directors
  13     2     58     -     -     60     -     60  
  Issued to Employees
  35     3     8     -     -     11     -     11  
Treasury stock transferred from TOCCO to TREC
        30     270     (300         -           -  
Net Income
  -     -     -     -     19,308     19,308     -     19,308  
                                                 
JUNE 30, 2016
  24,206   $ 2,451   $ 52,213   $ (300 $ 108,326   $ 162,690   $ 289   $ 162,979  


See notes to consolidated financial statements.


 
3


TRECORA RESOURCES AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
   
SIX MONTHS ENDED
 
   
JUNE 30,
 
   
2016
   
2015
 
   
(thousands of dollars)
 
OPERATING ACTIVITIES
           
  Net Income
  $ 19,308     $ 12,158  
  Adjustments to Reconcile Net Income of Trecora Resources
               
    To Net Cash Provided by Operating Activities:
               
    Depreciation
    3,667       3,409  
    Amortization of Intangible Assets
    944       942  
    Unrealized Gain on Derivative Instruments
    (55 )     (289 )
    Share-based Compensation
    1,274       1,289  
    Deferred Income Taxes
    7,462       (69 )
    Postretirement Obligation
    94       4  
    Bargain purchase gain
    (11,549 )     -  
    Equity in (earnings) losses of AMAK
    (7,168 )     310  
  Changes in Operating Assets and Liabilities:
               
    Decrease in Trade Receivables
    1,893       6,149  
    Decrease in Taxes Receivable
    2,751       434  
    Increase in Inventories
    (4,260 )     (2,243 )
    Increase in Prepaid Expenses and Other Assets
    371       404  
    Decrease in Accounts Payable and Accrued Liabilities
    (1,112 )     (2,968 )
    Increase (Decrease) in Other Liabilities
    (347 )     969  
                 
    Net Cash Provided by Operating Activities
    13,273       20,499  
                 
INVESTING ACTIVITIES
               
  Additions to Plant, Pipeline and Equipment
    (16,383 )     (16,850 )
  Cash paid for acquisition of BASF facility
    (2,011 )     -  
  Acquisition Goodwill Adjustment
    -       (47 )
    Cash Used in Investing Activities
    (18,394 )     (16,897 )
                 
FINANCING ACTIVITIES
               
  Issuance of Common Stock
    11       46  
  Repayment of Long-Term Debt
    (4,167 )     (3,500 )
                 
    Net Cash Used in Financing Activities
    (4,156 )     (3,454 )
                 
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    (9,277 )     148  
                 
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
    18,623       8,506  
                 
CASH AND CASH EQUIVALENTS AT END OF PERIOD
  $ 9,346     $ 8,654  
                 
 
 
Supplemental disclosure of cash flow information:
     
  Cash payments for interest
  $ 1,186     $ 1,147  
  Cash payments for taxes, net of refunds
  $ 277     $ 6,902  
Supplemental disclosure of non-cash items:
               
  Capital expansion amortized to depreciation expense
  $ 637     $ 599  
   Estimated Earnout Liability (Note 6)
  $ 733     $ -  

See notes to consolidated financial statements.

 
4


TRECORA RESOURCES AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


1. GENERAL

Organization

Trecora Resources (the “Company”), was incorporated in the State of Delaware in 1967. Our principal business activities are the manufacturing of various specialty hydrocarbons and synthetic waxes and the provision of custom processing services.   Unless the context requires otherwise, references to “we,” “us,” “our,” and the “Company” are intended to mean Trecora Resources and its subsidiaries.

This document includes the following abbreviations:
(1) TREC – Trecora Resources
(2) TOCCO - Texas Oil & Chemical Co. II, Inc. - Wholly owned subsidiary of TREC and parent of SHR and TC
(3) SHR – South Hampton Resources, Inc. – Petrochemical segment and parent of GSPL
(4) GSPL – Gulf State Pipe Line Co, Inc. – Pipeline support for the petrochemical segment
(5) TC – Trecora Chemical, Inc. – Specialty wax segment
(6) AMAK – Al Masane Al Kobra Mining Company – Mining equity investment – 35% ownership
(7) PEVM – Pioche Ely Valley Mines, Inc. – Inactive mine - 55% ownership

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and in conformity with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, these unaudited financial statements do not include all of the information and footnotes required by GAAP for complete financial statements and, therefore, should be read in conjunction with the financial statements and related notes contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.

The unaudited condensed financial statements included in this document have been prepared on the same basis as the annual condensed financial statements and in management’s opinion reflect all adjustments, including normal recurring adjustments, necessary to present fairly the Company’s financial position, results of operations and cash flows for the interim periods presented.  We have made estimates and judgments affecting the amounts reported in this document.  The actual results that we experience may differ materially from our estimates.  In the opinion of management, the disclosures included in these financial statements are adequate to make the information presented not misleading.

Operating results for the three and six months ended June 30, 2016, are not necessarily indicative of results for the year ending December 31, 2016.

We currently operate in two segments, specialty petrochemical products and specialty synthetic waxes.  All revenue originates from United States’ sources, and all long-lived assets owned are located in the United States.

In addition the Company owns a 35% interest in AMAK, a Saudi Arabian closed joint stock company which owns, operates and is developing mining assets in Saudi Arabia.  We account for our investment under the equity method of accounting.   See Note 16 and 19.

Certain reclassifications have been made to the Statements of Income for the three and six months ended June 30, 2015, in order to conform to the three and six months ended June 30, 2016, presentation.  These reclassifications had no effect on net income for the three and six months ended June 30, 2015, as previously reported.

Certain reclassifications have been made to the Consolidated Balance Sheets for the year ended December 31, 2015, related to our adoption of ASU 2015-03 and ASU 2015-15 as noted below in Note 2.


 
5


 
2. RECENT ACCOUNTING PRONOUNCEMENTS

In May 2014 the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers ("ASU 2014-09"). ASU 2014-09 supersedes the revenue recognition requirements of FASB Accounting Standards Codification ("ASC") Topic 605, Revenue Recognition and most industry-specific guidance throughout the Accounting Standards Codification, resulting in the creation of FASB ASC Topic 606, Revenue from Contracts with Customers. ASU 2014-09 requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. This ASU provides alternative methods of retrospective adoption and is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption would be permitted but not before annual periods beginning after December 15, 2016.  The Company is currently assessing the potential impact of adopting this ASU on its consolidated financial statements and related disclosures.

In April 2015 the FASB issued ASU No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. The amendments in this ASU 2015-03 require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU 2015-03. In August 2015 the FASB issued ASU No. 2015-15, Interest - Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements - Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting. ASU 2015-15 was issued to address presentation or subsequent measurement of debt issuance costs related to line-of-credit arrangements that were not found ASU 2015-03.   Given the absence of authoritative guidance within ASU 2015-03 for debt issuance costs related to line-of-credit arrangements, the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. These standards are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015, and should be applied retrospectively. The Company adopted ASU 2015-03 and ASU 2015-15 on January 1, 2016.  At June 30, 2016, and December 31, 2015, related net loan fees of approximately $0.9 million and $1.2 million, respectively, have been netted against long term debt.

In November 2015 the FASB issued ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. The new standard eliminates the current requirement for organizations to present deferred tax liabilities and assets as current and noncurrent in a classified balance sheet. Instead, organizations will be required to classify all deferred tax assets and liabilities as noncurrent. The amendments are effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company is currently assessing the potential impact of adopting this ASU on its consolidated financial statements and related disclosures.

In February 2016 the FASB issued ASU No. 2016-02, Leases (Topic 842), to increase transparency and comparability among organizations by recognizing all lease transactions (with terms in excess of 12 months) on the balance sheet as a lease liability and a right-of-use asset (as defined). The ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with earlier application permitted.  Upon adoption, the lessee will apply the new standard retrospectively to all periods presented or retrospectively using a cumulative effect adjustment in the year of adoption.  The Company is currently assessing the potential impact of adopting this ASU on its consolidated financial statements and related disclosures.

In March 2016 the FASB issued ASU No. 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which will reduce complexity in accounting standards related to share-based payment transactions, including, among others, (1) accounting for income taxes, (2) classification of excess tax benefits on the statement of cash flow, (3) forfeitures, and (4) statutory tax withholding requirements.  The ASU is effective for annual reporting periods beginning on or after December 15, 2016, and interim periods within those annual periods.  The Company is currently assessing the potential impact of adopting this ASU on its consolidated financial statements and related disclosures. 

 
 
6

 
3. TRADE RECEIVABLES

Trade receivables, net, consisted of the following:

   
June 30, 2016
   
December 31, 2015
 
   
(thousands of dollars)
 
Trade receivables
  $ 17,881     $ 19,684  
Less allowance for doubtful accounts
    (300 )     (210 )
    Trade receivables, net
  $ 17,581     $ 19,474  

Trade receivables serves as collateral for our amended and restated credit agreement. See Note 9.

4. INVENTORIES

 Inventories include the following:

   
June 30, 2016
   
December 31, 2015
 
   
(thousands of dollars)
 
Raw material
  $ 2,957     $ 2,905  
Work in process
    18       56  
Finished products
    17,089       12,843  
    Total inventory
  $ 20,064     $ 15,804  

The difference between the calculated value of inventory under the FIFO and LIFO bases generates either a recorded LIFO reserve (i.e., where FIFO value exceeds the LIFO value) or an unrecorded negative LIFO reserve (i.e., where LIFO value exceeds the FIFO value).  In the latter case, in order to ensure that inventory is reported at the lower of cost or market and in accordance with ASC 330-10, we do not increase the stated value of our inventory to the LIFO value.

At June 30, 2016, and December 31, 2015, LIFO value of petrochemical inventory exceeded FIFO; therefore, in accordance with the above policy, no LIFO reserve was recorded.

Inventory serves as collateral for our amended and restated credit agreement.  See Note 9.

Inventory included petrochemical products in transit valued at approximately $2.2 million and $2.7 million at June 30, 2016, and December 31, 2015, respectively.

5. PLANT, PIPELINE AND EQUIPMENT

 
Plant, pipeline and equipment consisted of the following:

   
June 30, 2016
   
December 31, 2015
 
   
(thousands of dollars)
 
Platinum catalyst
  $ 1,612     $ 1,612  
Land
    5,376       4,577  
Plant, pipeline and equipment
    145,916       128,302  
Construction in progress
    20,387       8,980  
Total plant, pipeline and equipment
    173,291       143,471  
  Less accumulated depreciation
    (50,744 )     (46,564 )
Net plant, pipeline and equipment
  $ 122,547     $ 96,907  

Plant, pipeline, and equipment serve as collateral for our amended and restated credit agreement. See Note 9.

Interest capitalized for construction was approximately $41,000 and $72,000 for the three and six months ended June 30, 2016 and $56,000 and $95,000 for the three and six months ended June 30, 2015.

Construction in progress during the first six months of 2016 included equipment purchased for the hydrogenation expansion, the new reformer unit, a new custom processing unit, and a new cooling tower which is associated with our D train expansion.
 
 
 
7

 
 In May 2016 we purchased the recently shuttered BASF facility adjacent to our TC facility.  See Note 6 for additional information.

Amortization relating to the platinum catalyst which is included in cost of sales was $25,488 and $21,067 for the three months and $46,555 and $42,135 for the six months ended June 30, 2016, and 2015, respectively.

6. ACQUISITION OF BASF FACILITY

On May 2, 2016, we purchased the idle BASF facility adjacent to our TC facility in exchange for $2.0 million in cash, transaction costs of approximately $11,000 plus an earnout provision calculated through calendar year 2020 based upon revenue generated by the facility but limited to $1.8 million.  The cash payment was funded by working capital. The purchased facility includes production equipment similar to TC’s plus equipment that broadens TC's capabilities and potential markets.  The 6.5-acre site also includes substantial storage capacity, several rail and truck loading sites and utility tie-ins to TC.  The facility began operations in June 2016 in a limited capacity.

We have accounted for the purchase in accordance with the acquisition method of accounting under Financial Accounting Standards Board Accounting Standards Codification Topic 805 “Business Combinations” (“ASC 805”).  In accordance with ASC 805, we used our best estimates and assumptions to assign fair value to the tangible assets and liabilities acquired at the acquisition date.  These estimates are provisional and may be adjusted in future filings.

The assets and liabilities acquired have been included in our consolidated balance sheets and our consolidated statements of income since the date of acquisition.

We recorded an $11.5 million bargain purchase gain on the transaction as calculated in the table below (in thousands).

Cash paid
  $ 2,011        
Estimated earnout liability
    733        
Purchase Price
          $ 2,744  
                 
Fixed assets at FMV
               
Land
    980          
Site improvements
    30          
Buildings
    1,350          
Production equipment
    11,933          
              14,293  
                 
Bargain purchase gain
          $ 11,549  

The business acquired has been idle for the periods presented thus proforma financial presentation would be identical to our consolidated results.  We began operating the new facility in June 2016.

7. GOODWILL AND INTANGIBLE ASSETS, NET

Goodwill and intangible assets were recorded in relation to the acquisition of TC on October 1, 2014.

Intangible Assets

The following tables summarize the gross carrying amounts and accumulated amortization of intangible assets by major class (in thousands):



 
8


 
   
June 30, 2016
 
Intangible assets subject to amortization
(Definite-lived)
 
Gross
   
Accumulated
Amortization
   
Net
 
Customer relationships
  $ 16,852     $ (1,967 )   $ 14,885  
Non-compete agreements
    94       (33 )     61  
Licenses and permits
    1,471       (225 )     1,246  
Developed technology
    6,131       (1,073 )     5,058  
      24,548       (3,298 )     21,250  
Intangible assets not subject to amortization
(Indefinite-lived)
                       
Emissions Allowance
    197       -       197  
Trade name
    2,158       -       2,158  
Total
  $ 26,903     $ (3,298 )   $ 23,605  

   
December 31, 2015
 
Intangible assets subject to amortization
(Definite-lived)
 
Gross
   
Accumulated
Amortization
   
Net
 
Customer relationships
  $ 16,852     $ (1,404 )   $ 15,448  
Non-compete agreements
    94       (24 )     70  
Licenses and permits
    1,471       (160 )     1,311  
Developed technology
    6,131       (766 )     5,365  
      24,548       (2,354 )     22,194  
Intangible assets not subject to amortization
(Indefinite-lived)
                       
Emissions Allowance
    197       -       197  
Trade name
    2,158       -       2,158  
Total
  $ 26,903     $ (2,354 )   $ 24,549  

Amortization expense for intangible assets included in cost of sales for the three months ended June 30, 2016, and 2015, was approximately $474,000 and $471,000, respectively and for the six months ended June 30, 2016, and 2015, was approximately $944,000 and $942,000, respectively.

Based on identified intangible assets that are subject to amortization as of June 30, 2016, we expect future amortization expenses for each period to be as follows (in thousands):

   
Remainder of
2016
   
2017
   
2018
   
2019
   
2020
   
Thereafter
 
Customer relationships
  $ 560     $ 1,123     $ 1,123     $ 1,123     $ 1,123     $ 9,833  
Non-compete agreements
    10       19       19       13       -       -  
Licenses and permits
    63       106       105       106       106       760  
Developed technology
    306       613       613       613       613       2,300  
Total future amortization expense
  $ 939     $ 1,861     $ 1,860     $ 1,855     $ 1,842     $ 12,893  

8. NET INCOME PER COMMON SHARE ATTRIBUTABLE TO TRECORA RESOURCES

The following table (in thousands, except per share amounts) sets forth the computation of basic and diluted net income per share attributable to Trecora Resources for the three and six months ended June 30, 2016, and 2015, respectively.

   
Three Months Ended
June 30, 2016
   
Three Months Ended
June 30, 2015
 
               
Per Share
               
Per Share
 
   
Income
   
Shares
   
Amount
   
Income
   
Shares
   
Amount
 
Basic Net Income per Share:
                                   
Net Income Attributable to Trecora Resources
  $ 12,084       24,504     $ 0.49     $ 6,374       24,354     $ 0.26  
                                                 
Unvested restricted stock grant
            304                       148          
Dilutive stock options outstanding
            377                       653          
                                                 
Diluted Net Income per Share:
                                               
Net Income Attributable to Trecora Resources
  $ 12,084       25,185     $ 0.48     $ 6,374       25,155     $ 0.25  


 
9


   
Six Months Ended
June 30, 2016
   
Six Months Ended
June 30, 2015
 
               
Per Share
               
Per Share
 
   
Income
   
Shares
   
Amount
   
Income
   
Shares
   
Amount
 
Basic Net Income per Share:
                                   
Net Income Attributable to Trecora Resources
  $ 19,308       24,494     $ 0.79     $ 12,158       24,331     $ 0.50  
                                                 
Unvested restricted stock grant
            293                       133          
Dilutive stock options outstanding
            348                       686          
                                                 
Diluted Net Income per Share:
                                               
Net Income Attributable to Trecora Resources
  $ 19,308       25,135     $ 0.77     $ 12,158       25,150     $ 0.48  

At June 30, 2016, and 2015, 1,368,437 and 1,497,771 potential common stock shares, respectively were issuable upon the exercise of options and warrants.

The earnings per share calculations for the periods ended June 30, 2016, and 2015, include 300,000 shares of the Company that are held in the treasury.  In June 2016 these 300,000 shares previously owned by TOCCO were transferred up to the Company at cost to be held in treasury for future issuances.

9. LIABILITIES AND LONG-TERM DEBT

On October 1, 2014, we entered into an Amended and Restated Credit Agreement (“ARC”) with the lenders which from time to time are parties to the ARC and Bank of America, N.A., as Administrative Agent for the Lenders, and Merrill Lynch, Pierce, Fenner & Smith Incorporated as Lead Arranger.

Under the ARC, we may borrow, repay and re-borrow revolving loans from time to time during the period ending September 30, 2019, up to but not exceeding $40.0 million.  All outstanding loans under the revolving loans must be repaid on October 1, 2019.  As of June 30, 2016, and December 31, 2015, there was a long-term amount of $1.0 million outstanding.  The interest rate on the loan varies according to several options.  Interest on the loan is paid monthly and a commitment fee of 0.37% is due quarterly on the unused portion of the loan.  At June 30, 2016, approximately $39.0 million was available to be drawn; however, in order to maintain compliance with our covenants, approximately $23.5 million may be drawn.

Under the ARC, we also borrowed $70.0 million in a single advance term loan (the “Acquisition Loan”) to partially finance the acquisition of TC.  Interest on the Acquisition Loan is payable quarterly using a ten year commercial style amortization.  Principal is also payable on the last business day of each March, June, September and December in an amount equal to $1,750,000, provided that the final installment on the September 30, 2019, maturity date shall be in an amount equal to the then outstanding unpaid principal balance of the Acquisition Loan.  At June 30, 2016, there was a short-term amount of $7.0 million and a long-term amount of $50.8 million outstanding.  At December 31, 2015, there was a short-term amount of $7.0 million and a long-term amount of $54.3 million outstanding.

Under the ARC, we also had the right to borrow $25.0 million in a multiple advance loan (“Term Loans”).  Borrowing availability under the Term Loans ended on December 31, 2015.  The Term Loans converted from a multiple advance loan to a “mini-perm” loan once certain obligations were fulfilled such as certification that construction of D-Train was completed in a good and workmanlike manner, receipt of applicable permits and releases from governmental authorities, and receipt of releases of liens from the contractor and each subcontractor and supplier.  Interest on the Term Loans is paid monthly.  At June 30, 2016, there was a short-term amount of $1.3 million and a long-term amount of $18.0 million outstanding.  At December 31, 2015, there was a short-term amount of $1.3 million and a long-term amount of $18.7 million outstanding.

Debt issuance costs of approximately $0.9 million and $1.2 million for the periods ended June 30, 2016 and December 31, 2015, have been netted against outstanding loan balances per ASU 2015-03 and ASU 2015-15.   The interest rate on all of the above loans varies according to several options as defined in the ARC.  At June 30, 2016, and December 31, 2015, the rate was 2.71% and 2.42%, respectively.  We were in compliance with all covenants at June 30, 2016.

10. FAIR VALUE MEASUREMENTS

The following items are measured at fair value on a recurring basis subject to disclosure requirements of ASC Topic 820 at June 30, 2016, and December 31, 2015:

 
 
10


Assets and Liabilities Measured at Fair Value on a Recurring Basis

         
Fair Value Measurements Using
 
   
June 30, 2016
   
Level 1
   
Level 2
   
Level 3
 
   
(thousands of dollars)
 
Liabilities:
                       
Interest rate swap
  $ 122       -     $ 122       -  

         
Fair Value Measurements Using
 
   
December 31, 2015
   
Level 1
   
Level 2
   
Level 3
 
   
(thousands of dollars)
 
Liabilities:
                       
Interest rate swap
  $ 177       -     $ 177       -  

The carrying value of cash and cash equivalents, trade receivables, accounts payable, accrued liabilities, and other liabilities approximate fair value due to the immediate or short-term maturity of these financial instruments. The fair value of variable rate long term debt reflects recent market transactions and approximate carrying value.  We used other observable inputs that would qualify as Level 2 inputs to make our assessment of the approximate fair value of our cash and cash equivalents, trade receivables,  accounts payable, accrued liabilities,  other liabilities and variable rate long term debt.  The fair value of the derivative instruments are described below.

Commodity Financial Instruments

We periodically enter into financial instruments to hedge the cost of natural gasoline (the primary feedstock) and natural gas (used as fuel to operate the plant).  

We assess the fair value of the financial swaps on feedstock using quoted prices in active markets for identical assets or liabilities (Level 1 of fair value hierarchy).  At June 30, 2016, and December 31, 2015, no commodity financial instruments were outstanding.  For additional information see Note 11.

Interest Rate Swap

In March 2008 we entered into an interest rate swap agreement with Bank of America related to a $10.0 million term loan secured by plant, pipeline and equipment.  The interest rate swap was designed to minimize the effect of changes in the London InterBank Offered Rate (“LIBOR”) rate.  We had designated the interest rate swap as a cash flow hedge under ASC Topic 815, Derivatives and Hedging; however, due to the ARC, we felt that the hedge was no longer entirely effective.  Due to the time required to make the determination and the immateriality of the hedge, we began treating it as ineffective as of October 1, 2014.

We assess the fair value of the interest rate swap using a present value model that includes quoted LIBOR rates and the nonperformance risk of the Company and Bank of America based on the Credit Default Swap Market (Level 2 of fair value hierarchy).

We have consistently applied valuation techniques in all periods presented and believe we have obtained the most accurate information available for the types of derivative contracts we hold. See discussion of our derivative instruments in Note 11.

11. DERIVATIVE INSTRUMENTS

Commodity Financial Contracts

Hydrocarbon based manufacturers, such as the Company, are significantly impacted by changes in feedstock and natural gas prices. Not considering derivative transactions, feedstock and natural gas used for the six months ended June 30, 2016, and 2015, represented approximately 61.2% and 69.2% of our petrochemical operating expenses, respectively. The significant percentage decrease of petrochemical operating expenses illustrates the impact that feedstock price changes have on our operations.  During the first quarter of 2016, feedstock prices declined industry-wide but rebounded slightly in the second quarter of 2016.

We endeavor to acquire feedstock and natural gas at the lowest possible cost.  Our primary feedstock (natural gasoline) is traded over the counter and not on organized futures exchanges.  Financially settled instruments (fixed price swaps) are the principal vehicle used to give some predictability to feed prices. We do not purchase or hold any derivative financial
 
 
 
11

 
 instruments for trading or speculative purposes and hedging is limited by our risk management policy to a maximum of 40% of monthly feedstock requirements.

Typically, financial contracts are not designated as hedges.  As of June 30, 2016, we had no outstanding committed financial contracts.

The following tables detail (in thousands) the impact the agreements had on the financial statements:

   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2016
   
2015
   
2016
   
2015
 
                         
Unrealized gain (loss)
  $ -     $ -     $ -     $ 180  
Realized gain (loss)
    -       -       -       (180 )
Net gain
  $ -     $ -     $ -     $ -  

The realized and unrealized gains/(losses) are recorded in Cost of Sales and Processing for the periods ended June 30, 2016, and 2015.  As a percentage of Cost of Sales and Processing, realized and unrealized gains/(losses) accounted for 0% for the three and six months ended June 30, 2016, and 2015.

Interest Rate Swap

In March 2008, we entered into a pay-fixed, receive-variable interest rate swap agreement with Bank of America related to a $10.0 million (later increased to $14 million) term loan secured by plant, pipeline and equipment. The effective date of the interest rate swap agreement was August 15, 2008, and terminates on December 15, 2017.  The notional amount of the interest rate swap was $2.25 million and $2.75 million at June 30, 2016, and December 31, 2015, respectively.  We receive credit for payments of variable rate interest made on the term loan at the loan’s variable rates, which are based upon the London InterBank Offered Rate (LIBOR), and pay Bank of America an interest rate of 5.83% less the credit on the interest rate swap.  We originally designated the transaction as a cash flow hedge according to ASC Topic 815, Derivatives and Hedging.  Beginning on August 15, 2008, the derivative instrument was reported at fair value with any changes in fair value reported within other comprehensive income (loss) in the Company’s Statement of Stockholders’ Equity.  We entered into the interest rate swap to minimize the effect of changes in the LIBOR rate.

The following table shows (in thousands) the impact the agreement had on the financial statements:

   
June 30, 2016
   
December 31, 2015
 
             
Fair value of interest rate swap  - liability
  $ 122     $ 177  

Due to the ARC discussed in Note 9, we believe that the hedge is no longer entirely effective; therefore, we began treating the interest rate swap as ineffective at that point.  The changes in fair value are now recorded in the Statement of Income.  For the three months ended June 30, 2016, an unrealized loss of approximately $8,000 and a realized loss of approximately $33,000 were recorded.  For the six months ended June 30, 2016, an unrealized loss of approximately $14,000 and a realized loss of approximately $70,000 were recorded. For the three months ended June 30, 2015, an unrealized loss of approximately $1,000 and a realized loss of approximately $49,000 were recorded. For the six months ended June 30, 2015, an unrealized gain of approximately $9,000 and a realized loss of approximately $101,000 were recorded.

12. STOCK-BASED COMPENSATION

Stock-based compensation of approximately $627,000 and $588,000 during the three months and $1,274,000 and $1,289,000 during the six months ended June 30, 2016, and 2015, respectively, was recognized.

Restricted Stock Awards

On May 17, 2016, we awarded approximately 28,000 shares of restricted stock to a director at a grant date price of $10.68.    The restricted stock award vests over 4 years in 25% increments.  Director’s compensation recognized during the three and six months ended June 30, 2016, was approximately $13,000.

On March 1, 2016, we awarded approximately 135,000 shares of restricted stock to officers at a grant date price of $9.39.    One-half of the restricted stock vests ratably over 3 years.  The other half vests at the end of the three years based upon the
 
 
 
12

 
performance metrics of return on invested capital and earnings per share growth.  The number of shares actually granted will be adjusted based upon relative performance to our peers.  Compensation expense recognized during the three and six months ended June 30, 2016, was approximately $106,000 and $141,000.

On January 29, 2016, we awarded 35,333 shares of restricted stock to a director at a grant date price of $10.52.  The restricted stock award vests over 5 years in 20% increments with the first tranche issued on January 29, 2016.  Director’s compensation recognized during the three and six months ended June 30, 2016, was approximately $19,000 and $105,000.

Directors’ compensation of approximately $3,000 and $6,000 during the three months and $21,000 and $6,000 during the six months ended June 30, 2016, and 2015, respectively, was recognized related to restricted stock grants vesting through 2020.

Employee compensation of approximately $108,000 and $108,000 during the three months and $215,000 and $179,000 during the six months ended June 30, 2016, and 2015, respectively, was recognized related to restricted stock with a 4 year vesting period which was awarded to officers.  This restricted stock vests through 2019.

Employee compensation of approximately $0 and $181,000 during the three and six months ended June 30, 2015, for fully vested restricted stock which was awarded to various employees.

Restricted stock activity in the first six months of 2016 was as follows:

   
Shares of Restricted
Stock
   
Weighted Average Grant Date Price per Share
 
             
Outstanding at January 1, 2016
    148,040     $ 14.14  
   Granted
    198,354       9.77  
   Vested
    (42,575 )     13.60  
Outstanding at June 30, 2016
    303,819     $ 11.37  

Stock Option and Warrant Awards

A summary of the status of our stock option awards and warrants is presented below:

   
Number of Stock Options & Warrants
   
Weighted Average Exercise Price per Share
   
Weighted
Average
Remaining
Contractual
Life
 
                   
Outstanding at January 1, 2016
    1,376,437     $ 7.68        
   Granted
    --       --        
   Exercised
    (8,000 )     2.84        
   Expired
    --       --        
   Cancelled
    --       --        
   Forfeited
    --       --        
Outstanding at June 30, 2016
    1,368,437     $ 7.71       5.6  
Exercisable at June 30, 2016
    835,937     $ 7.49       5.6  

The fair value of the options granted were calculated using the Black Scholes option valuation model with the assumptions as disclosed in prior quarterly and annual filings.

Directors’ compensation of approximately $47,000 and $53,000 during the three months and $114,000 and $128,000 during the six months ended June 30, 2016, and 2015,  respectively, was recognized related to options to purchase shares vesting through 2017.
 
 
13

Employee compensation of approximately $309,000 and $309,000 during the three months and $617,000 and $657,000 during the six months ended June 30, 2016, and 2015, respectively, was recognized related to options with a 4 year vesting period which were awarded to officers and key employees.  These options vest through 2018.

Post-retirement compensation of approximately $24,000 and $49,000 was recognized during the three months and six months ended June 30, 2016, and 2015, related to options awarded to Mr. Hatem El Khalidi in July 2009.  On May 9, 2010, the Board of Directors determined that Mr. El Khalidi forfeited these options and other retirement benefits when he made various demands against the Company and other AMAK Saudi shareholders which would benefit him personally and were not in the best interests of the Company and its shareholders.  The Company is litigating its right to withdraw the options and benefits and as such, these options and benefits continue to be shown as outstanding.  See further discussion in Note 18.

See the Company’s Annual Report on Form 10-K for the year ended December 31, 2015, for additional information.

13. SEGMENT INFORMATION

We operate through business segments according to the nature and economic characteristics of our products as well as the manner in which the information is used internally by our key decision maker, who is our Chief Executive Officer.  Segment data may include rounding differences.

Our petrochemical segment includes SHR and GSPL.  Our specialty wax segment includes TC which includes the newly acquired plant discussed in Note 6.  We also separately identify our corporate overhead which includes financing and administrative activities such as legal, accounting, consulting, investor relations, officer and director compensation, corporate insurance, and other administrative costs.

   
Three Months Ended June 30, 2016
 
   
Petrochemical
   
Specialty Wax
   
Corporate
   
Consolidated
 
   
(in thousands)
 
Product sales
  $ 39,202     $ 5,164     $ -     $ 44,366  
Processing fees
    2,419       2,069       -       4,488  
Net revenues
    41,621       7,233       -       48,854  
Operating profit before depreciation and amortization
    9,476       584       (1,949 )     8,111  
Operating profit (loss)
    8,048       (196 )     (1,956 )     5,896  
Depreciation and amortization
    1,428       780       7       2,215  
Capital expenditures
    5,739       5,053               10,792  

   
Six Months Ended June 30, 2016
 
   
Petrochemical
   
Specialty Wax
   
Corporate
   
Consolidated
 
   
(in thousands)
 
Product sales
  $ 81,826     $ 9,721     $ -     $ 91,547  
Processing fees
    3,860       5,647       -       9,507  
Net revenues
    85,686       15,368       -       101,054  
Operating profit before depreciation and amortization
    17,886       2,647       (3,881 )     16,652  
Operating profit (loss)
    15,122       816       (3,897 )     12,041  
Depreciation and amortization
    2,764       1,831       16       4,611  
Capital expenditures
    11,401       6,993               18,394  

   
Three Months Ended June 30, 2015
 
   
Petrochemical
   
Specialty Wax
   
Corporate
   
Consolidated
 
   
(in thousands)
 
Product sales
  $ 52,342     $ 4,323     $ -     $ 56,665  
Processing fees
    1,521       1,164       -       2,685  
Net revenues
    53,863       5,487       -       59,350  
Operating profit before depreciation and amortization
    12,850       429       (1,679 )     11,600  
Operating profit (loss)
    11,902       (732 )     (1,679 )     9,491  
Depreciation and amortization
    948       1,161       -       2,109  
Capital expenditures
    6,204       2,903               9,107  
 

 
 
14


   
Six Months Ended June 30, 2015
 
   
Petrochemical
   
Specialty Wax
   
Corporate
   
Consolidated
 
   
(in thousands)
 
Product sales
  $ 99,525     $ 7,681     $ -     $ 107,206  
Processing fees
    3,045       4,242       -       7,287  
Net revenues
    102,570       11,923       -       114,493  
Operating profit before depreciation and amortization
    24,562       2,503       (3,491 )     23,574  
Operating profit (loss)
    22,519       196       (3,491 )     19,224  
Depreciation and amortization
    2,043       2,307       -       4,350  
Capital expenditures
    13,019       3,831               16,850  

   
June 30, 2016
 
   
Petrochemical
   
Specialty Wax
   
Corporate
   
Eliminations
   
Consolidated
 
   
(in thousands)
 
Goodwill and intangible assets, net
  $ -     $ 45,403     $ -     $ -     $ 45,403  
Total assets
    204,114       102,452       102,719       (129,633 )     279,652  

   
Year Ended December 31, 2015
 
   
Petrochemical
   
Specialty Wax
   
Corporate
   
Eliminations
   
Consolidated
 
   
(in thousands)
 
Goodwill and intangible assets, net
  $ -     $ 46,347     $ -     $ -     $ 46,347  
Total assets
    195,358       86,076       98,728       (122,371 )     257,791  

14. INCOME TAXES

We file an income tax return in the U.S. federal jurisdiction and a margin tax return in Texas. Tax returns for the years 2011 through 2014 remain open for examination in various tax jurisdictions in which we operate.  As of June 30, 2016, and December 31, 2015, we recognized no material adjustments in connection with uncertain tax positions.  The effective tax rate varies from the federal statutory rate of 35% primarily as a result of state tax expense and stock option based compensation offset by the manufacturing deduction.

15. POST-RETIREMENT OBLIGATIONS

In January 2008 an amended retirement agreement was entered into with Mr. Hatem El Khalidi; however, on May 9, 2010, the Board of Directors terminated the agreement due to actions of Mr. El Khalidi.  See Notes 12 and 18.  All amounts which have not met termination dates remain recorded until a resolution is achieved. As of June 30, 2016, and 2015, approximately $1.0 million remained outstanding and was included in post-retirement benefits.

See the Company’s Annual Report on Form 10-K for the year ended December 31, 2015, for additional information.

16. INVESTMENT IN AMAK

As of June 30, 2016, and December 31, 2015, the Company had a non-controlling equity interest (35%) in AMAK of approximately $54.9 million and $47.7 million, respectively. This investment is accounted for under the equity method. There were no events or changes in circumstances that may have an adverse effect on the fair value of our investment in AMAK at June 30, 2016.

AMAK’s financial statements were prepared in the functional currency of AMAK which is the Saudi Riyal (SR).  In June 1986 the SR was officially pegged to the U. S. Dollar (USD) at a fixed exchange rate of 1 USD to 3.75 SR.

The summarized results of operation and financial position for AMAK are as follows:



 
15


 
 
Results of Operations

   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2016
   
2015
   
2016
   
2015
 
   
(Thousands of Dollars)
 
Sales
  $ 610     $ 13,283     $ 9,602     $ 18,584  
Gross profit (loss)
    (3,000 )     1,034       (2,809 )     2,746  
General, administrative and other expenses
    2,043       3,036       4,189       5,538  
Loss from operations
  $ (5,043 )   $ (2,002 )   $ (6,998 )   $ (2,792 )
Gain on settlement with former operator
    9,195       -       25,421       -  
Net income (loss)
  $ 4,152     $ (2,002 )   $ 18,423     $ (2,792 )

Gain on settlement with former operator of approximately $9.2 million during the three months ended and $25.4 million during the six months ended June 30, 2016, relates to a settlement with the former operator of the mine resulting in a reduction of previously accrued operating expenses and recognition of spare part inventory.

Depreciation and amortization was $2.4 million and $5.9 million for the three months and $5.1 million and $11.0 million for the six months ended June 30, 2016, and 2015, respectively.  Therefore, net income before depreciation and amortization was as follows:

   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2016
   
2015
   
2016
   
2015
 
   
(Thousands of Dollars)
 
Net income before depreciation and amortization
  $ 6,223     $ 3,903     $ 23,201     $ 8,223  

 
Financial Position

   
June 30,
   
December 31,
 
   
2016
   
2015
 
   
(Thousands of Dollars)
 
Current assets
  $ 18,746     $ 26,078  
Noncurrent assets
    263,446       259,527  
Total assets
  $ 282,192     $ 285,605  
                 
Current liabilities
  $ 2,654     $ 22,740  
Long term liabilities
    87,935       89,364  
Shareholders' equity
    191,603       173,501  
    $ 282,192     $ 285,605  

The equity in the income or loss of AMAK reflected on the consolidated statements of income for the three and six months ended June 30, 2016, and 2015, is comprised of the following:

   
Three months ended June 30,
   
Six months ended June 30,
 
   
2016
   
2015
   
2016
   
2015
 
   
(Thousands of Dollars)
 
Company’s share of income (loss) reported by AMAK
  $ 1,464     $ (706 )   $ 6,494     $ (984 )
Amortization of difference between Company’s investment in AMAK and Company’s share of net assets of AMAK
    337       337       674       674  
Equity in earnings (loss) of AMAK
  $ 1,801     $ (369 )   $ 7,168     $ (310 )

See our Annual Report on Form 10-K for the year ended December 31, 2015, for additional information.


 
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17. RELATED PARTY TRANSACTIONS

Consulting fees of approximately $0 and $0 were incurred during the three months and $33,000 and $25,000 during the six months ended June 30, 2016, and 2015, respectively from IHS Global FZ LLC of which Company Director Gary K Adams holds the position of Chief Advisor – Chemicals.

Consulting fees of approximately $15,000 and $ 0 were incurred during the three months and $37,000 and $0 during the six months ended June 30, 2016, and 2015, respectively, from Chairman of the Board, Nicholas Carter.  Due to his history and experience with the Company and to provide continuity after his retirement, a three year consulting agreement was entered into with Mr. Carter in July 2015.

18. COMMITMENTS AND CONTINGENCIES

Guarantees

On October 24, 2010, we executed a limited Guarantee in favor of the Saudi Industrial Development Fund (“SIDF”) whereby we agreed to guaranty up to 41% of the SIDF loan to AMAK in the principal amount of 330.0 million Saudi Riyals (US$88.0 million) (the “Loan”). The term of the loan is through June 2019.  As a condition of the Loan, SIDF required all shareholders of AMAK to execute personal or corporate Guarantees; as a result, our guarantee is for approximately 135.33 million Saudi Riyals (US$36.1 million). The loan was necessary to continue construction of the AMAK facilities and provide working capital needs.  We received no consideration in connection with extending the guarantee and did so to maintain and enhance the value of its investment.  The total amount outstanding to the SIDF at June 30, 2016, was 310.0 million Saudi Riyals (US$82.7 million).

Litigation -

On March 21, 2011, Mr. El Khalidi filed suit against the Company in Texas alleging breach of contract and other claims.  The 88th Judicial District Court of Hardin County, Texas dismissed all claims and counterclaims for want of prosecution in this matter on July 24, 2013.  The Ninth Court of Appeals subsequently affirmed the dismissal for want of prosecution and the Supreme Court of Texas denied Mr. El Khalidi’s petition for review.  On May 1, 2014, Mr. El Khalidi refiled his lawsuit against the Company for breach of contract and defamation in the 356th Judicial District Court of Hardin County, Texas.  The case was transferred to the 88th Judicial District Court of Hardin County, Texas where it is currently pending.  On April 6, 2015, Mr. El-Khalidi nonsuited his defamation claim.  We believe that the remaining claims are unsubstantiated and plan to vigorously defend the case.  Liabilities of approximately $1.0 million remain recorded, and the options will continue to accrue in accordance with their own terms until all matters are resolved.

On or about August 3, 2015, SHR received notice of a lawsuit filed in the 14th Judicial District Court of Calcasieu Parish, Louisiana.  The suit alleges that the plaintiff became ill from exposure to benzene.  SHR placed its insurers on notice.  Its insurers retained a law firm based in Louisiana to defend SHR.

On or about March 18, 2016, SHR received notice of a lawsuit filed in the 172nd Judicial District Court of Jefferson County, Texas.  The suit alleges that the plaintiff became ill from exposure to benzene.  SHR placed its insurers on notice and plans to vigorously defend the case.

Environmental Remediation -

Amounts charged to expense for various activities related to environmental monitoring, compliance, and improvements were approximately $154,000 and $192,000 for the three months and $301,000 and $329,000 for the six months ended June 30, 2016, and 2015, respectively.

19. SUBSEQUENT EVENTS

In July 2016 AMAK issued four million shares to provide additional funds for ongoing exploration work and mine start-up activities.  Arab Mining Co. (“Armico”) purchased 3.75 million shares at 20 Saudi Riyals per share (USD$5.33 per share) and the remaining 250,000 shares are for future use as employee incentives.  We did not participate in the offering, thereby reducing our ownership percentage in AMAK to 33.44% from 35.25%.

 
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

FORWARD LOOKING AND CAUTIONARY STATEMENTS

Except for the historical information and discussion contained herein, statements contained in this release may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  These statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially, including the following: a downturn in the economic environment; the Company’s failure to meet growth and productivity objectives; fluctuations in revenues and purchases; impact of local legal, economic, political and health conditions; adverse effects from environmental matters, tax matters and the Company’s pension plans; ineffective internal controls; the Company’s use of accounting estimates; competitive conditions; the Company’s ability to attract and retain key personnel and its reliance on critical skills; impact of relationships with critical suppliers; currency fluctuations; impact of changes in market liquidity conditions and customer credit risk on receivables; the Company’s ability to successfully manage acquisitions and alliances; general economic conditions domestically and internationally; insufficient cash flows from operating activities; difficulties in obtaining financing; outstanding debt and other financial and legal obligations; industry cycles; specialty petrochemical product and mineral prices; feedstock availability; technological developments; regulatory changes; foreign government instability; foreign legal and political concepts; and foreign currency fluctuations, as well as other risks detailed in the Company's filings with the U.S. Securities and Exchange Commission, including this release, all of which are difficult to predict and many of which are beyond the Company's control.

Overview

The following discussion and analysis of our financial results, as well as the accompanying unaudited consolidated financial statements and related notes to consolidated financial statements to which they refer, are the responsibility of our management.  Our accounting and financial reporting fairly reflect our business model involving the manufacturing and marketing of petrochemical products and synthetic waxes.  Our business model involves the manufacture and sale of tangible products and the provision of customer processing services.  Our consistent approach to providing high purity products and quality services to our customers has helped to sustain our current position as a preferred supplier of various petrochemical products.

The discussion and analysis of financial condition and the results of operations which appears below should be read in conjunction with the Management’s Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements which appear in our Annual Report on Form 10-K for the year ended December 31, 2015.

We believe we are well-positioned to participate in new investments to grow the Company.  While petrochemical prices are volatile on a short-term basis and depend on the demand of our customers’ products, our investment decisions are based on our long-term business outlook using a disciplined approach in selecting and pursuing the most attractive investment opportunities. 

The drop in petroleum prices, which began in mid-September of 2014 and continued into 2016, reduced our average feedstock price per gallon approximately 21% over the second quarter of 2015.  However feedstock price per gallon the second quarter of 2016 was up approximately 8% over the first quarter of 2016. The formulas we use to sell the majority of our products typically have a 30 day trailing feed cost basis; and therefore, are slightly favorable to us during falling prices but are unfavorable when prices rise. 

Review of Second Quarter and Year-to-Date 2016 Results

We reported second quarter 2016 earnings of $12.1 million up from $6.4 million from the second quarter of 2015. We recorded a bargain purchase gain on the BASF acquisition of $11.5 million during the second quarter of 2016.  Diluted earnings per share of $0.48 were reported for 2016, up from $0.25 in 2015.  Sales volume of our petrochemical products decreased 13.3%, and sales revenue from our petrochemical products decreased 25.1% as compared to the second quarter of 2015.  Prime product petrochemical sales volumes (which exclude by-product sales) were down 11% over the second quarter of 2015.

We reported year-to-date 2016 earnings of $19.3 million up from $12.2 million from the first half of 2015. Again, the bargain purchase gain of $11.5 million impacted our 2016 earnings.  Diluted earnings per share of $0.77 were reported for 2016, up from $0.48 from 2015.  Sales volume of our petrochemical products decreased 0.9%, and sales revenue from our
 
 
 
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petrochemical products decreased 17.8% as compared to the first half of 2015.  Prime product petrochemical sales volumes (which exclude by-product sales) were down 3% over the first half of 2015.

Non-GAAP Financial Measures

We include in this Quarterly Report the non-GAAP financial measures of EBITDA, Adjusted EBITDA and Adjusted Net Income and provide reconciliations from our most directly comparable financial measures to those measures.

We define EBITDA as net income plus interest expense including derivative gains and losses, income taxes, depreciation and amortization.  We define Adjusted EBITDA as EBITDA plus share-based compensation, plus or minus equity in AMAK’s earnings and losses or gains from equity issuances and plus or minus gains or losses on acquisitions.  We define Adjusted Net Income as net income plus or minus tax effected equity in AMAK’s earnings and losses and plus or minus tax effected gains or losses on acquisitions.  These measures are not measures of financial performance or liquidity under U.S. GAAP and should be considered in addition to, not as a substitute for, net income (loss), nor as an indicator of cash flows reported in accordance with U.S. GAAP. These measures are used as supplemental financial measure by management and external users of our financial statements such as investors, banks, research analysts and others.  We believe that these non-GAAP measures are useful as they exclude transactions not related to our core cash operating activities.

The following table presents a reconciliation of net income, our most directly comparable GAAP financial performance measure for each of the periods presented, to EBITDA, Adjusted EBITDA, and Adjusted Net Income.

   
Three months ended June 30,
   
Six months endedJune 30,
 
   
2016
   
2015
   
2016
   
2015
 
Net Income
  $ 12,084     $ 6,374     $ 19,308     $ 12,158  
                                 
    Interest expense
    607       570       1,235       1,183  
    Depreciation and amortization
    2,215       2,109       4,611       4,350  
    Income tax expense
    6,678       2,145       10,325       5,572  
EBITDA
  $ 21,584     $ 11,198     $ 35,479     $ 23,263  
                                 
    Share-based compensation
    627       764       1,274       1,289  
    Bargain purchase gain on BASF acquisition
    (11,549 )     -       (11,549 )     -  
    Equity in (earnings) losses of AMAK
    (1,801 )     369       (7,168 )     310  
Adjusted EBITDA
  $ 8,861     $ 12,331     $ 18,036     $ 24,862  
                                 
Net Income
  $ 12,084     $ 6,374     $ 19,308     $ 12,158  
                                 
        Equity in (earnings) losses of AMAK
  $ ( 1,801 )   $ 369     $ (7,168 )   $ 310  
    Bargain purchase gain on BASF acquisition
    (11,549 )     -       (11,549 )     -  
    Total of equity in (earnings) losses and gain on acquisition
    (13,350 )   $ 369       (18,717 )     310  
    Taxes at statutory rate of 35%
    4,673       (129 )     6,551       (109 )
    Tax effected equity in (earnings) losses and gain on acquisition
    (8,677 )     240       (12,166 )     201  
Adjusted Net Income
  $ 3,407     $ 6,614     $ 7,142     $ 12,359  

Liquidity and Capital Resources

Working Capital

Our approximate working capital days are summarized as follows:

   
June 30, 2016
   
December 31, 2015
   
June 30, 2015
 
Days sales outstanding in accounts receivable
    31.7       29.4       35.0  
Days sales outstanding in inventory
    36.1       23.8       23.8  
Days sales outstanding in accounts payable
    11.3       12.2       12.9  
Days of working capital
    56.5       41.0       45.8  

Our days sales outstanding in accounts receivable remained fairly consistent.  Our days sales outstanding in inventory increased as of the end of the second quarter of 2016 primarily due a change to our inventory policy at SHR (maintain at least 20 days of finished product inventory) particularly while different units are down for inspection, maintenance and
 
 
 
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upgrades.  This work was completed in July.  We also like to keep additional inventory in the June through November time period which is hurricane season in the Gulf of Mexico.  Our days sales outstanding in accounts payable was down slightly from year-end 2015 due to slower construction expenses being incurred for capital projects.  Since days of working capital is calculated using the above three metrics, it increased for the reasons discussed.

Cash and cash equivalents decreased $9.3 million during the six months ended June 30, 2016, as compared to an increase of $0.1 million for the six months ended June 30, 2015.

The change in cash and cash equivalents is summarized as follows:

   
2016
   
2015
 
Net cash provided by (used in)
 
(thousands of dollars)
 
Operating activities
  $ 13,273     $ 20,499  
Investing activities
    (18,394 )     (16,897 )
Financing activities
    (4,156 )     (3,454 )
Increase (decrease) in cash and equivalents
  $ (9,277 )   $ 148  
Cash and cash equivalents
  $ 9,346     $ 8,654  

Operating Activities
 
Cash provided by operating activities totaled $13.3 million for the first half of 2016 $7.2 million lower than 2015.    For the first half of 2016 net income increased by approximately $7.2 million as compared to the corresponding period of 2015. Major non-cash items affecting income included increases in deferred taxes of $7.5 million, bargain purchase gain from the BASF acquisition of $11.5 million, and equity in earnings of AMAK of $7.5 million.

Factors leading to a decrease in cash provided by operating activities included:

·  
Trade receivables decreased approximately $1.9 million (due to a decrease in sales volume and prices from fourth quarter 2015) as compared to a decrease of approximately $6.1 million in 2015 (due to a decrease in sales volume from fourth quarter 2014),

·  
Inventory increased approximately $4.3 million (due to lower sales volume and  a new policy regarding safety stock) as compared to an increase of approximately $2.2 million in 2015 (due to lower sales volume and increased raw material purchases), and

·  
Other liabilities increased approximately $0.4 million (due to payments received from processing customers and the recognition of deferred revenue from BASF due to the acquisition) as compared to a decrease of approximately $1.0 million in 2015 (due to payments received from processing customers).

These uses of cash were partially offset by the following increases in cash provided by operations:

·  
Accounts payable and accrued liabilities decreased approximately $1.1 million (due to reduced construction expenditures and a decreased accrual for feedstock purchases) as compared to a decrease of approximately $3.0 million in 2015 (due to the variability in payment dates and decreases in federal and state taxes and officer compensation accruals) and

·  
Income tax receivable decreased approximately $2.8 million (due to the overpayment being applied to 2016 estimated taxes) as compared to a decreased of approximately $0.4 million in 2015 (due to a smaller overpayment being applied to 2015 estimated taxes).

Investing Activities

Cash used by investing activities during the first half of 2016 was approximately $18.4 million, representing an increase of approximately $1.5 million over the corresponding period of 2015. During the first half of 2016 we purchased equipment for the hydrogenation expansion, construction of the new reformer unit, a new cooling tower, and the new custom processing unit; upgraded roads throughout the petrochemical facility; continued to make improvements to storage; purchased the BASF facility; and made various other facility improvements.  Some of the expenditures in 2016 were budgeted under our D train expansion.  During the first half of 2015 we purchased equipment for the D train expansion, tank farm improvements, spare equipment, various facility upgrades, hydrogenation expansion and improvements at our specialty wax facility.
 

 
 
20

Financing Activities

Cash used by financing activities during the first half of 2016 was approximately $4.2 million versus cash used of $3.5 million during the corresponding period of 2015.  During 2016 we made principal payments on our acquisition loan of $3.5 million and our term debt of $0.7 million.  During 2015 we made principal payments on our acquisition loan of $3.5 million.

Anticipated Cash Needs

We believe that the Company is capable of supporting its operating requirements and capital expenditures through internally generated funds supplemented with borrowings under our credit facility.

Results of Operations

 
Comparison of Three Months Ended June 30, 2016 and 2015

 
Specialty Petrochemical Segment

   
2016
   
2015
   
Change
   
%Change
 
   
(thousands of dollars)
 
Petrochemical Product Sales
  $ 39,202     $ 52,342     $ (13,140 )     (25.1 %)