Forward Looking Information

This Quarterly Report on Form 10-Q (the “Report”), including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 2, contains forward-looking statements about the business, financial condition and prospects of TOR Minerals International, Inc. (the “Company”).  The actual results of the Company could differ materially from those indicated by the forward-looking statements because of various risks and uncertainties including, without limitation, changes in demand for the Company’s products, changes in competition, economic conditions, fluctuations in exchange rates, changes in the cost of energy, fluctuations in market price for titanium dioxide (“TiO₂”) pigments, interest rate fluctuations, changes in the capital markets, changes in tax and other laws and governmental rules and regulations applicable to the Company’s business, and other risks indicated in the Company’s filing with the Securities and Exchange Commission, including those set forth in the Company’s Annual Report on Form 10-K under Item 1A. Risk Factors.  These risks and uncertainties are beyond the ability of the Company to control, and, in many cases, the Company cannot predict all of the risks and uncertainties that could cause its actual results to differ materially from those indicated by the forward-looking statements.  When used in this report, the words “believes,” “estimates,” “plans,” “expects,” “anticipates,” “foresees,” “intends,” “may,” “likely,” “should”, “could” and similar expressions as they relate to the Company or its management are intended to identify forward-looking statements.

Basis of Presentation and Use of Estimates

The accompanying interim consolidated financial statements (the “financial statements”) have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”).  The financial statements include the consolidated accounts of TOR Minerals International, Inc. (“TOR”, “we”, “us”, “our” or the “Company”) and its wholly-owned subsidiaries, TOR Processing and Trade, BV (“TPT”) and TOR Minerals Malaysia, Sdn. Bhd. (“TMM”).  All significant intercompany transactions have been eliminated.  (All adjustments (consisting only of normal recurring adjustments) necessary for a fair statement of the consolidated financial position, results of operations and cash flows for the interim periods presented have been made.)  Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to SEC rules and regulations.  These financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2016, in our Annual Report on Form 10-K filed with the SEC on March 7, 2016.  Operating results for the three month period ended March 31, 2017, are not necessarily indicative of the results for the year ending December 31, 2017.

Recently Adopted Accounting Standards

In March 2016, the FASB issued ASU 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 changes how companies account for certain aspects of share based payment awards to employees, including the accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as classification in the statement of cash flows. ASU 2016-09 is effective for annual periods beginning after December 15, 2016, including interim periods within those annual periods. The adoption of this standard, which we adopted on January 1, 2017, did not have a material impact on the Company’s financial condition, results of operations or cash flows.

New Accounting Standards

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” as amended by multiple standards updates. The pronouncement was issued to clarify the principles for recognizing revenue and to develop a common revenue standard and disclosure requirements for U.S. GAAP and IFRS. The pronouncement is effective for reporting periods beginning after December 15, 2017. We are in the initial stages of evaluating the effect of the standard on our financial statements and continue to evaluate the available transition methods. We will continue to evaluate the standard as well as additional changes, modifications or interpretations which may impact the Company.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes all existing guidance on accounting for leases in ASC Topic 840. ASU 2016-02 is intended to provide enhanced transparency and comparability by requiring lessees to record right-of-use assets and corresponding lease liabilities on the balance sheet. ASU 2016-02 will continue to classify leases as either finance or operating, with classification affecting the pattern of expense recognition in the statement of income. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. ASU 2016-02 is required to be applied with a modified retrospective approach to each prior reporting period presented with various optional practical expedients. We are currently in the initial stages of evaluating the potential impact of adopting ASU 2016-02 on our financial statements and related disclosures.

Income Taxes

The Company records income taxes using the liability method.  Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.

Income taxes consisted of federal income tax benefit of approximately $54,000, state income tax expense of approximately $4,000 and foreign tax expense of approximately $12,000 for the three month period ended March 31, 2017, as compared to a federal income tax benefit of approximately $81,000, state income tax expense of approximately $5,000 and foreign tax expense of approximately $151,000 for the same three month period in 2016.

When accounting for uncertainties in income taxes, we evaluate all tax years still subject to potential audit under the applicable state, federal and foreign income tax laws.  We are subject to taxation in the United States, Malaysia and The Netherlands.  Our federal income tax returns in the United States are subject to examination for the tax years ended December 31, 2013 through December 31, 2016.  Our state tax return, which is filed in Texas, is subject to examination for the tax years ended December 31, 2012 through December 31, 2016.  Our tax returns in various non-U.S. jurisdictions are subject to examination for various tax years dating back to December 31, 2012.

As of January 1, 2017, we did not have any unrecognized tax benefits and there was no change during the three month period ended March 31, 2017.  In addition, we did not recognize any interest and penalties in our financial statements during the three month period ended March 31, 2017.  If any interest or penalties related to any income tax liabilities are imposed in future reporting periods, we expect to record both of these items as components of income tax expense.

Long-term Debt – Financial Institutions

Following is a summary of our long-term debt to financial institutions as of March 31, 2017 and December 31, 2016, in thousands:

Short-term Debt

U.S. Operations

On December 31, 2010, the Company entered into a credit agreement with American Bank, N.A. (the “Lender”) which established a $1,000,000 line of credit (the “Line”), and on March 1, 2012, the Line was increased from $1,000,000 to $2,000,000.  On March 17, 2017, the Lender increased the minimum interest rate floor from 4.75% to 5.0%.

On June 23, 2016, the Company and the Lender amended and restated the credit agreement (the “Amended Agreement”). Under the terms of the Amended Agreement, the Lender extended the maturity date on the Line from October 15, 2016 to October 15, 2017. In addition, the Company requested that the Lender reduce the Line from $2,000,000 to $1,000,000. Under the terms of the Amended Agreement, the Company is required to maintain positive net earnings before taxes, interest, depreciation, amortization and all other non-cash charges on a rolling four-quarter basis. The Company was in compliance with all covenants at March 31, 2017.

Under the terms of the Amended Agreement, the amount the Company is entitled to borrow under the Line is subject to a borrowing base, which is based on the loan value of the collateral pledged to the Lender to secure the indebtedness owing to the Lender by the Company.  Amounts advanced under the Line bear interest at a variable rate equal to one percent per annum above the Wall Street Journal Prime Rate as such prime rate changes from time to time, with a minimum floor rate of 5.0%.  At March 31, 2017, no funds were outstanding on the Line.

European Operations

On July 13, 2015, TPT amended the short term banking facility (the “TPT Amended Agreement”) with Rabobank.  Under the terms of the TPT Amended Agreement, the TPT line of credit was reduced from €1,100,000 to €500,000 ($1,175,000 to $534,000 at March 31, 2017) and interest was changed from a variable interest rate of bank prime plus 2.8% to the average 1-month EURIBOR plus the bank margin of 3.3%.  The interest rate was 2.93% at March 31, 2017.  No funds were outstanding on the TPT line of credit at March 31, 2017.  TPT was in compliance with all covenants at March 31, 2017.

Asian Operations

On August 24, 2015, TMM amended its short term banking facility with HSBC to extend the maturity date from June 30, 2015 to June 30, 2016.  TMM is currently negotiating with HSBC to extend the maturity date to June 30, 2017.  The HSBC facility includes the following in RM:  (1) overdraft of RM 500,000 ($113,000 at 3/31/2017); (2) an import/export line (“ECR”) of RM 10,460,000 ($2,364,000 at 3/31/2017); and (3) a foreign exchange contract limit of RM 5,000,000 ($1,130,000 at 3/31/2017).  At March 31, 2017, no funds were outstanding on the HSBC short term banking facility.

On February 21, 2017, TMM amended its short term banking facility with RHB Bank Berhad (“RHB”) to extend the maturity date from August 10, 2016 to August 11, 2017.  The RHB facility includes the following: (1) a multi-trade line of RM 3,500,000 ($791,000 at 3/31/2017); (2) a bank guarantee of RM 1,200,000 ($271,000 at 3/31/2017); and (3) a foreign exchange contract line of RM 2,500,000 ($565,000 at 3/31/2017). At March 31, 2017, no funds were outstanding on the RHB short term banking facility.

The interest rate was 5.9% at March 31, 2017.  No funds were outstanding on TMM’s credit facility for the ECR.  TMM was in compliance with all covenants at March 31, 2017.

The banking facilities with both HSBC and RHB bear an interest rate on the respective overdraft facilities at 1.25% over bank prime, and the respective ECR facilities bear interest at 1.0% above the funding rate stipulated by the Export-Import Bank of Malaysia Berhad.  The ECR facilities, which are a government supported financing arrangement specifically for exporters, are used by TMM for short-term financing of up to 180 days against customers’ and inter-company shipments.

The borrowings under both the HSBC and the RHB short term credit facility are subject to certain subjective acceleration covenants based on the judgment of the banks and a demand provision that provides that the banks may demand repayment at any time.  A demand provision is customary in Malaysia for such facilities.  The loan agreements are secured by TMM’s property, plant and equipment.  However, if demand is made by HSBC or RHB, we may be unable to refinance the demanded indebtedness, in which case, the lenders could foreclose on the assets of TMM.  While repatriation is allowed in the form of dividends, the credit facilities prohibit TMM from paying dividends, and the HSBC facility further prohibits loans to related parties without the prior consent of HSBC.

The following table summarizes the valuation of our financial instruments recorded on a fair value basis as of March 31, 2017 and December 31, 2016.  The Company did not hold any non-financial assets and/or non-financial liabilities subject to fair value measurements at March 31, 2017 or at December 31, 2016.  In addition, the Company did not hold any foreign currency forward contracts at March 31, 2017.

Our foreign currency derivative financial instruments mitigate foreign currency exchange risks and include forward contracts.  The forward contracts are marked-to-market at each balance sheet date with any resulting gain or loss recognized in income as part of the gain or loss on foreign currency exchange rates included under “Other Expense” on the Company’s consolidated statement of operations.  The fair value of the currency forward contracts is determined using Level 2 inputs based on the currency rate in effect at the end of the reporting period.

The fair value of the Company’s debt is based on estimates using standard pricing models and Level 2 inputs, including the Company’s estimated borrowing rate, that take into account the present value of future cash flows as of the consolidated balance sheet date.  The computation of the fair value of these instruments is performed by the Company.  The carrying amounts and estimated fair values of the Company’s long-term debt, including current maturities, are summarized below:

The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, trade receivables, payables and accrued liabilities, accrued income taxes and short-term borrowings approximate fair values due to the short term nature of these instruments, accordingly, these items have been excluded from the above table.

Following is a summary of inventory at March 31, 2017 and December 31, 2016, in thousands:

The following table sets forth the computation of basic and diluted earnings per share:

For the three month period ended March 31, 2017, approximately 173,000 employee stock options were excluded from the calculation of diluted earnings per share as the effect would be anti-dilutive due to the net loss for the period.

For the three month period ended March 31, 2016, approximately 359,000 employee stock options were excluded from the calculation of diluted earnings per share as the exercise price was greater than the market price of the common shares and, therefore, the effect would be anti-dilutive.

The Company and its subsidiaries operate in the business of pigment manufacturing and related products in three geographic segments – United States, European and Asian.

Product sales of inventory between the U.S., European and Asian operations are based on inter-company pricing, which includes an inter-company profit margin.  The segment profit (loss) included in the table below from each location is reflective of these inter-company prices, as is inventory at the Corpus Christi location prior to elimination adjustments.  Such presentation is consistent with the internal reporting reviewed by the Company’s chief operating decision maker.  The elimination entries include an adjustment to the cost of sales resulting from the adjustment to ending inventory to eliminate inter-company profit, and the reversal of a similar adjustment from a prior period.  To the extent there are net increases/declines period over period in Corpus Christi inventories that include an inter-company component, the net effect of these adjustments can decrease/increase location profit.

Sales from the subsidiary to the parent company are based upon profit margins which represent competitive pricing of similar products.  Intercompany sales consist primarily of ALUPREM®, Synthetic Rutile, HITOX® and TIOPREM®.

A summary of the Company’s manufacturing operations by geographic segment is presented below:

For the three month periods ended March 31, 2017 and 2016, the Company recorded stock-based employee compensation expense of approximately $46,000 and $49,000, respectively.  This compensation expense is included in “selling, general and administrative expenses” in the accompanying consolidated statements of operations.

The Company granted 215,000 stock options during the three month period ended March 31, 2016.  No options were granted during the same three month period of 2017.

As of March 31, 2017, there was approximately $160,000 of compensation expense related to non-vested awards.  This expense is expected to be recognized over a weighted average period of 0.75 years.

The Company has exposure to certain risks relating to its ongoing business operations, including financial, market, political and economic risks.  The following discussion provides information regarding our exposure to the risks of changing foreign currency exchange rates.  The Company has not entered into these contracts for trading or speculative purposes in the past, nor do we currently anticipate entering into such contracts for trading or speculative purposes in the future.  The foreign exchange contracts are used to mitigate uncertainty and volatility and to cover underlying exposures.

Foreign Currency Forward Contracts

We manage the risk of changes in foreign currency exchange rates, primarily at our Malaysian operation, through the use of foreign currency contracts.  Foreign currency exchange contracts are used to protect the Company from the risk that the eventual cash flows resulting from transactions in foreign currencies, including sales and purchases transacted in a currency other than the functional currency, will be adversely affected by changes in exchange rates.  We report the fair value of the derivatives on our consolidated balance sheets and changes in the fair value are recognized in earnings in the period of the change.

The Company did not hold any foreign currency forward contracts at March 31, 2017.

The following table summarizes the gross fair market value of all derivative instruments, which are not designated as hedging instruments and their location in our consolidated balance sheets at March 31, 2017 and December 31, 2016, in thousands:

For the three month periods ended March 31, 2017 and 2016, we did not incur a gain or loss on these contracts.

Company Overview

We are a global producer of high performance, specialty mineral products focused on product innovation and technical support.  Our specialty mineral products, which include flame retardant and smoke suppressant fillers, engineered fillers, and TiO₂-color hybrid pigments, are designed for use in plastics, coatings and paints applications, as well as a wide range of other industrial applications. With operations in the United States, Europe and Asia, our mission is to bring high value products and superior levels of service to our customers to help ensure their success.

Our U.S. operation, located in Corpus Christi, Texas, is also the global headquarters for the Company.  The U.S. operation manufactures HITOX, BARTEX, HALTEX/OPTILOAD and TIOPREM.  TPT, our European operation, located in Hattem, The Netherlands, manufactures Alumina based products and BARYPREM and our Asian operation, located in Ipoh, Malaysia, manufactures HITOX and TIOPREM.

Operating expenses in the foreign locations are primarily in local currencies.  Accordingly, we have exposure to fluctuation in foreign currency exchange rates.  These fluctuations impact the translation of sales, earnings, assets and liabilities from local currency to the U.S. Dollar.

Our business is closely correlated with the construction industry and its demand for materials that use pigments, such as paints and plastics.  This has generally led to higher sales in our second and third quarters due to increases in construction and maintenance during warmer weather.  Also, pigment consumption is closely correlated with general economic conditions.  When the economy is in an expansionary state, there is typically an increase in pigment consumption while a slowdown in the economy typically results in decreased pigment consumption.  When the construction industry or the economy is in a period of decline, TOR's sales and profits are likely to be adversely affected.

We manage our business in three geographical segments – United States, European and Asia (See Note 6 to our condensed consolidated financial statements).  The accounting policies of the segments are the same as those described in the Summary of Significant Policies (See Note 1 to our condensed consolidated financial statements).  Product sales of inventory between the U.S., European and Asian operations are based on inter-company pricing, which include an inter-company profit margin.  The segment profit (loss), included in Note 6, from each location is reflective of these inter-company prices, as is inventory at the segment location prior to elimination adjustments.  The elimination entries include an adjustment to the cost of sales resulting from the adjustment to ending inventory to eliminate inter-company profit, and the reversal of a similar adjustment from a prior period.  To the extent there are net increases/declines period over period in segment inventories that include an inter-company component, the net effect of these adjustments can decrease/increase location profit.

Such presentation is consistent with the internal reporting reviewed by the Company’s chief operating decision maker (“CODM”).  Our CODM regularly reviews financial information about our segments in order to allocate resources and evaluate performance.  Our CODM assesses segment performance based on segment sales and segment net income (loss) before depreciation and amortization, interest expense, income taxes, and other items which management does not believe reflect the underlying performance of the segment.

Below are our results for the three month periods ended March 31, 2017 and 2016.

Results of Operations

The Company and its subsidiaries operate in three geographic segments.  Product sales between the U.S., European and Asian and operations are based on inter-company pricing which includes an inter-company profit margin.  The inter-company sales are excluded from our consolidated sales and from the sales of each of our three geographic segments.

Net Sales:  Consolidated net sales increased approximately 12% for the three month period ended March 31, 2017, as compared to the same three month period of 2016.  The increase was primarily due to an increase in volume at each of our three operations.

Below is a summary of our consolidated products sales for the three month periods ended March 31, 2017 and 2016 (in thousands).

ALUPREM sales increased 17% for the three month period ended March 31, 2017, primarily related to an increase in volume of 14% and change in product mix of 3%.  ALUPREM volume increased in both the U.S. and European markets and the change in product mix relates primarily to U.S. customers.  The U.S. and European markets represented 53% and 47%, respectively, of our ALUPREM sales during the three month period ended March 31, 2017.

HITOX sales increased 13% for the three month period ended March 31, 2017, primarily due to an increase in volume of 22%, which was partially offset by a decrease in selling price of 9%.  The increase in volume at our European and Asian operations was partially offset by a decrease in volume at our U.S. operation.  The decrease in selling price was primarily related to the U.S. and European markets.  The increase in sales volume of HITOX was primarily related to an increase in volume related to both existing and new customers.  While the global TiO2 market has faced significant challenges related to aggressive pricing pressure from producers of white TiO2 in China over the last several years, there have been recent signs of the market improving.  As a result, we anticipate the global conditions in the TiO2 market to gain strength over the next year.

BARTEX®/BARYPREM® sales increased 2% during the three month period ended March 31, 2017, primarily due to an increase in volume of 4% and a decrease in revenue related to product mix of 2%.  The increase in volume relates to BARYPREM sales in Europe, which are primarily the result of sales to a major customer.  The increase in volume was partially offset by a shift in product mix for BARTEX sales in the U.S.

HALTEX®/OPTILOAD® sales increased 27% for the three month period ended March 31, 2017, due to an increase in volume of 28%, which was partially offset by a change in product mix of 1%.  The increase in volume was primarily due to an increase in our U.S. customer base, as well as an increase in requirements for existing customers.

TIOPREM sales decreased 36% for the three month period ended March 31, 2017, primarily due to a reduction in volume and selling price of 29% and 7%, respectively.

Other Product sales decreased 24% for the three month period ended March 31, 2017, primarily due to a decrease in volume and selling price in the U.S. of 18% and 6%, respectively.

U.S. Operations

Below is a summary of net sales for our U.S. operation for the three month periods ended March 31, 2017 and 2016 (in thousands).  All inter-company sales have been eliminated.

ALUPREM sales increased 26% for the three month period ended March 31, 2017, primarily related to an increase in volume 22% and an increase related to product mix of 4%.  The increase in volume primarily related to a significant U.S. customer; however, we have increased our U.S. customer base for ALUPREM products which had a positive impact on sales revenue recognized during the first three months of 2017.

HITOX sales decreased 8% for the three month period ended March 31, 2017, primarily due to a reduction in volume of 4% and selling price of 4%.  The decrease in sales volume and selling price primarily relates to the continued weakness in the U.S. TiO2 market.  While the global TiO2 market has faced significant challenges related to aggressive pricing pressure from producers of white TiO2 in China over the last several years, there have been recent signs of the market improving.  As a result, we anticipate the global conditions in the TiO2 market to gain strength over the next year.

BARTEX sales decreased 3% for the three month period ended March 31, 2017, primarily due to a decrease in volume and shift in product mix of 1% and 2%, respectively.  The change in demand primarily relates to timing of orders of both our current and new customers.

HALTEX/OPTILOAD sales increased 27% for the three month period ended March 31, 2017, due to an increase in volume of 28%, which was partially offset by a change in product mix of 1%.  The increase in volume was primarily due to an increase in our U.S. customer base, as well as an increase in requirements for existing customers.

TIOPREM sales decreased 30% for the three month period ended March 31, 2017, primarily due to a decrease in volume and selling price of 21% and 9%, respectively.

Other Product sales decreased 24% for the three month period ended March 31, 2017, primarily due to a decrease in volume and selling price in the U.S. of 18% and 6%, respectively.

European Operations

TPT manufactures and sells ALUPREM to third party customers, as well as to our U.S. operations for distribution to our North American customers.  TPT purchases HITOX from our Asian operation and TIOPREM from our U.S. operation for distribution in Europe.  The following table represents TPT’s sales (in thousands) for the three month periods ended March 31, 2017 and 2016 to third-party customers.  All inter-company sales have been eliminated.

ALUPREM sales in Europe increased 8% for the three month period ended March 31, 2017, primarily due to an increase in volume and a change in product mix of 7% and 1%, respectively.  The increase in ALUPREM volume relates to demand in the European markets by both our current and new customers.

BARYPREM sales in Europe increased 32% for the three month period ended March 31, 2017, due to an increase in volume of 35%, which was partially offset by a change in product mix of 3%.  The increase in BARYPREM sales primarily relates to sales demand of a major customer.

HITOX sales in Europe increased 61% during the three month period ended March 31, 2017, primarily due to an increase in volume in volume of 72%, which was partially offset by a decrease in selling price of 11%.  The European HITOX sales volumes have seen a significant increase during the three month period ended March 31, 2017; however, the selling price continues to be impacted by the overall weakness in the global TiO2 market.

TIOPREM sales in Europe decreased 100% during the three month period ended March 31, 2017, due to a decrease in demand from our current customers.

Asian Operations

TMM manufactures and sells HITOX to third party customers, as well as to our U.S. and European operations.  The following table represents TMM’s sales (in thousands) for the three month periods ended March 31, 2017 and 2016 to third-party customers.  All inter-company sales have been eliminated.

HITOX sales in Asia increased 43% for the three month period ended March 31, 2017, primarily due to an increase in volume of 45%, which was partially offset by a decrease in selling price of 2%.  The increase in volume is primarily related to an increase in demand by both current and new customers.  While the global TiO2 market has faced significant challenges related to aggressive pricing pressure from producers of white TiO2 in China over the last several years, there have been recent signs of the market improving.  As a result, we anticipate the global conditions in the TiO2 market to gain strength over the next year.

TIOPREM sales in Asia decreased in volume 100% for the three month period ended March 31, 2017, primarily due to a decrease in volume.

Other Consolidated Results

Gross Margin:  The following table represents our net sales, cost of sales and gross margin for the three month periods ended March 31, 2017 and 2016, in thousands.

For the three month period ended March 31, 2017, gross margin decreased 3.3%.  A decrease in efficiencies decreased gross margin 3.7%, which was partially offset by a decrease in raw materials of 0.8%

Selling, General, Administrative and Expenses (“SG&A”):  For the three month period ended March 31, 2017, SG&A expense increased approximately 41.7%.  The primarily factor increasing the current period SG&A relates to the reversal in the first quarter of 2016 of a customer’s account which was deemed uncollectable in 2015.  Collection on this account resulted in a reversal to bad debt expense in the first quarter of 2016 and accounts for 31.0% of the current period increase of 41.7%.  The remaining 10.7% consists of an increase in salaries of 8.0% and sales commissions of 6.0%, which were partially offset by a reduction of legal fees of 3.2%.

Interest Expense:  Net interest expense decreased approximately 42% for the three month period ended March 31, 2017, due to a decrease in our average long-term and short-term financing at each of our three segments.

Income Taxes: Income taxes consisted of federal income tax benefit of approximately $54,000, state income tax expense of approximately $4,000 and foreign tax expense of approximately $12,000 for the three month period ended March 31, 2017, as compared to a federal income tax benefit of approximately $81,000, state income tax expense of approximately $5,000 and foreign tax expense of approximately $151,000 for the same three month period in 2016.  The variance between income taxes for the three month period ended March 31, 2017 and 2016, primarily relates to the current period resulting in a net loss as compared to a net income during the same period of 2016.

Liquidity

Long-term Debt – Financial Institutions

A schedule of our long-term debt to financial institutions as of March 31, 2017 and December 31, 2016, is included in Note 2 to the consolidated financial statements on page 8.

Our current maturities of long-term debt, as well as other current maturities, will be paid with current cash and cash generated from operations.

Short-term Debt

U.S. Operations

On December 31, 2010, the Company entered into a credit agreement with American Bank, N.A. (the “Lender”) which established a $1,000,000 line of credit (the “Line”), and on March 1, 2012, the Line was increased from $1,000,000 to $2,000,000.  On March 17, 2017, the Lender increased the minimum interest rate floor from 4.75% to 5.0%.

On June 23, 2016, the Company and the Lender amended and restated the credit agreement (the “Amended Agreement”). Under the terms of the Amended Agreement, the Lender extended the maturity date on the Line from October 15, 2016 to October 15, 2017. In addition, the Company requested that the Lender reduce the Line from $2,000,000 to $1,000,000. Under the terms of the Amended Agreement, the Company is required to maintain positive net earnings before taxes, interest, depreciation, amortization and all other non-cash charges on a rolling four-quarter basis. The Company was in compliance with all covenants at March 31, 2017.

Under the terms of the Amended Agreement, the amount the Company is entitled to borrow under the Line is subject to a borrowing base, which is based on the loan value of the collateral pledged to the Lender to secure the indebtedness owing to the Lender by the Company.  Amounts advanced under the Line bear interest at a variable rate equal to one percent per annum above the Wall Street Journal Prime Rate as such prime rate changes from time to time, with a minimum floor rate of 5.0%.  At March 31, 2017, no funds were outstanding on the Line.

European Operations

On July 13, 2015, TPT amended the short term banking facility (the “TPT Amended Agreement”) with Rabobank.  Under the terms of the TPT Amended Agreement, the TPT line of credit was reduced from €1,100,000 to €500,000 ($1,175,000 to $534,000 at March 31, 2017) and interest was changed from a variable interest rate of bank prime plus 2.8% to the average 1-month EURIBOR plus the bank margin of 3.3%.  The interest rate was 2.93% at March 31, 2017.  No funds were outstanding on the TPT line of credit at March 31, 2017.  TPT was in compliance with all covenants at March 31, 2017.

Asian Operations

On August 24, 2015, TMM amended its short term banking facility with HSBC to extend the maturity date from June 30, 2015 to June 30, 2016.  TMM is currently negotiating with HSBC to extend the maturity date to June 30, 2017.  The HSBC facility includes the following in RM:  (1) overdraft of RM 500,000 ($113,000 at 3/31/2017); (2) an import/export line (“ECR”) of RM 10,460,000 ($2,364,000 at 3/31/2017); and (3) a foreign exchange contract limit of RM 5,000,000 ($1,130,000 at 3/31/2017).  At March 31, 2017, no funds were outstanding on the HSBC short term banking facility.

On February 21, 2017, TMM amended its short term banking facility with RHB Bank Berhad (“RHB”) to extend the maturity date from August 10, 2016 to August 11, 2017.  The RHB facility includes the following: (1) a multi-trade line of RM 3,500,000 ($791,000 at 3/31/2017); (2) a bank guarantee of RM 1,200,000 ($271,000 at 3/31/2017); and (3) a foreign exchange contract line of RM 2,500,000 ($565,000 at 3/31/2017).  At March 31, 2017, no funds were outstanding on the RHB short term banking facility.

The interest rate was 5.9% at March 31, 2017.  No funds were outstanding on TMM’s credit facility for the ECR.  TMM was in compliance with all covenants at March 31, 2017.