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


FORM 10-Q
(Mark One)

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

For the quarterly period ended June 30, 2020
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
trecoralogoa02.jpg
TRECORA RESOURCES
(Exact name of registrant as specified in its charter)

Delaware
75-1256622
(State or other jurisdiction of
(I.R.S. Employer Identification No.)
incorporation or organization)
 
1650 Hwy 6 South
Suite 190
77478
Sugar Land
Texas
(Address of principal executive offices)
(Zip code)

Registrant's telephone number, including area code: (281) 980-5522

N/A
(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $0.10 per share
TREC
New York Stock Exchange

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 every Interactive Data File required to be submitted 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 such files). Yes   X    No      
 



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

Large accelerated filer     Accelerated filer

Non-accelerated filer    Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.____

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

Number of shares of the Registrant's Common Stock (par value $0.10 per share) outstanding at July 31, 2020: 24,714,980.





TABLE OF CONTENTS

Item Number and Description
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 






PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.
TRECORA RESOURCES AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
 
 
June 30,
2020
(Unaudited)
 
December 31,
2019
ASSETS
 
(thousands of dollars, except par value)
 Current Assets
 
 
 
 
Cash
 
$
29,877

 
$
6,145

Trade receivables, net
 
20,240

 
26,320

Inventories
 
7,595

 
13,624

Investment in AMAK (held-for-sale)
 
29,175

 
32,872

Prepaid expenses and other assets
 
3,233

 
4,947

Taxes receivable
 
16,229

 
182

Total current assets
 
106,349

 
84,090

 
 
 
 
 
Plant, pipeline and equipment, net
 
189,237

 
188,919

 
 
 
 
 
Intangible assets, net
 
13,814

 
14,736

Lease right-of-use assets, net
 
11,915

 
13,512

Mineral properties in the United States
 
562

 
562

 
 
 
 
 
TOTAL ASSETS
 
$
321,877

 
$
301,819

LIABILITIES
 
 
 
 
Current Liabilities
 
 
 
 
Accounts payable
 
$
11,027

 
$
14,603

Accrued liabilities
 
7,801

 
5,740

Current portion of long-term debt
 
4,194

 
4,194

Current portion of lease liabilities
 
3,142

 
3,174

Current portion of other liabilities
 
955

 
924

Total current liabilities
 
27,119

 
28,635

 
 
 
 
 
  CARES Act, PPP Loans
 
6,123

 

  Long-term debt, net of current portion
 
73,998

 
79,095

  Post-retirement benefit, net of current portion
 
327

 
338

Lease liabilities, net of current portion
 
8,773

 
10,338

  Other liabilities, net of current portion
 
512

 
595

Deferred income taxes
 
23,860

 
11,375

Total liabilities
 
140,712

 
130,376

 
 
 
 
 
EQUITY
 
 
 
 
Common stock‑authorized 40 million shares of $0.10 par value; issued and outstanding 24.8 million and 24.8 million in 2020 and 2019, respectively
 
2,482

 
2,475

Additional paid-in capital
 
60,386

 
59,530

Retained earnings
 
118,008

 
109,149

Total Trecora Resources Stockholders' Equity
 
180,876

 
171,154

Noncontrolling Interest
 
289

 
289

Total equity
 
181,165

 
171,443

 
 
 
 
 
TOTAL LIABILITIES AND EQUITY
 
$
321,877

 
$
301,819


See notes to consolidated financial statements.

 
 
 
1
 




TRECORA RESOURCES AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
 
 
THREE MONTHS ENDED
JUNE 30,
 
SIX MONTHS ENDED
JUNE 30,
 
 
2020
 
2019
 
2020
 
2019
 
 
(thousands of dollars, except per share amounts)
REVENUES
 
 
 
 
 
 
 
 
Product sales
 
$
36,707

 
$
65,329

 
$
93,890

 
$
126,822

Processing fees
 
3,967

 
4,042

 
8,851

 
7,704

 
 
40,674

 
69,371

 
102,741

 
134,526

 
 
 
 
 
 
 
 
 
OPERATING COSTS AND EXPENSES
 
 
 
 
 
 
 
 
Cost of sales and processing
 
 
 
 
 
 
 
 
(including depreciation and amortization of $3,750, $4,128, $7,486 and $8,357, respectively)
 
34,507

 
58,806

 
88,496

 
113,888

 
 
 
 
 
 
 
 
 
    GROSS PROFIT
 
6,167

 
10,565

 
14,245

 
20,638

 
 
 
 
 
 
 
 
 
GENERAL AND ADMINISTRATIVE EXPENSES
 
 
 
 
 
 
 
 
General and administrative
 
6,289

 
6,042

 
12,963

 
12,076

Depreciation
 
212

 
208

 
428

 
421

 
 
6,501

 
6,250

 
13,391

 
12,497

 
 
 
 
 
 
 
 
 
OPERATING INCOME (LOSS)
 
(334
)
 
4,315

 
854

 
8,141

 
 
 
 
 
 
 
 
 
OTHER INCOME (EXPENSE)
 
 
 
 
 
 
 
 
Interest income
 

 

 

 
5

Interest expense
 
(735
)
 
(1,401
)
 
(1,651
)
 
(2,900
)
Miscellaneous income, net
 
68

 
284

 
6

 
256

 
 
(667
)
 
(1,117
)
 
(1,645
)
 
(2,639
)
 
 
 
 
 
 
 
 
 
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
 
(1,001
)
 
3,198

 
(791
)
 
5,502

 
 
 
 
 
 
 
 
 
INCOME TAX EXPENSE (BENEFIT)
 
858

 
691

 
(4,795
)
 
1,185

 
 
 
 
 
 
 
 
 
INCOME (LOSS) FROM CONTINUING OPERATIONS
 
(1,859
)
 
2,507

 
4,004

 
4,317

 
 
 
 
 
 
 
 
 
INCOME (LOSS) FROM DISCONTINUED OPERATIONS, NET OF TAX
 
(2
)
 
(103
)
 
4,855

 
(162
)
 
 
 
 
 
 
 
 
 
NET INCOME (LOSS)
 
$
(1,861
)
 
$
2,404

 
$
8,859

 
$
4,155

 
 
 
 
 
 
 
 
 
Basic Earnings per Common Share
 
 
 
 
 
 
 
 
Net income (loss) from continuing operations (dollars)
 
$
(0.07
)
 
$
0.10

 
$
0.16

 
$
0.17

Net income (loss) from discontinued operations, net of tax (dollars)
 

 

 
0.20

 
(0.01
)
Net income (loss) (dollars)
 
$
(0.07
)
 
$
0.10

 
$
0.36

 
$
0.16

 
 
 
 
 
 
 
 
 
Basic weighted average number of common shares outstanding
 
24,802

 
24,696

 
24,784

 
24,675

 
 
 
 
 
 
 
 
 
Diluted Earnings per Common Share
 
 
 
 
 
 
 
 
Net income (loss) from continuing operations (dollars)
 
$
(0.07
)
 
$
0.10

 
$
0.16

 
$
0.17

Net income (loss) from discontinued operations, net of tax (dollars)
 

 

 
0.19

 
(0.01
)
Net income (loss) (dollars)
 
$
(0.07
)
 
$
0.10

 
$
0.35

 
$
0.16

 
 
 
 
 
 
 
 
 
Diluted weighted average number of common shares outstanding
 
24,802

 
25,091

 
25,360

 
25,089


See notes to consolidated financial statements.

 
 
 
2
 




TRECORA RESOURCES AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
THREE MONTHS ENDED JUNE 30
 
 
TRECORA RESOURCES STOCKHOLDERS
 
 
 
 
 
 
COMMON STOCK
 
ADDITIONAL
PAID-IN
 
TREASURY
 
RETAINED
 
 
 
NON-
CONTROLLING
 
TOTAL
 
 
SHARES
 
AMOUNT
 
CAPITAL
 
STOCK
 
EARNINGS
 
TOTAL
 
INTEREST
 
EQUITY
 
 
(thousands)

 
(thousands of dollars)
March 31, 2020
 
24,780

 
$
2,478

 
$
59,880

 
$

 
$
119,869

 
$
182,227

 
$
289

 
$
182,516

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Restricted Stock Units
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Issued to Directors
 

 

 
101

 

 

 
101

 

 
101

Issued to Employees
 

 

 
409

 

 

 
409

 

 
409

Common Stock
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Issued to Directors
 
28

 
3

 
(3
)
 

 

 

 

 

Issued to Employees
 
9

 
1

 
(1
)
 

 

 

 

 

Net Income
 

 

 

 

 
(1,861
)
 
(1,861
)
 

 
(1,861
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2020
 
24,817

 
$
2,482

 
$
60,386

 
$

 
$
118,008

 
$
180,876

 
$
289

 
$
181,165

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
March 31, 2019
 
24,687

 
$
2,469

 
$
58,565

 
$
(8
)
 
$
125,874

 
$
186,900

 
$
289

 
$
187,189

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Restricted Stock Units
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Issued to Directors
 

 

 
146

 

 

 
146

 

 
146

Issued to Employees
 

 

 
209

 

 

 
209

 

 
209

Common Stock
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Issued to Directors
 
10

 
1

 

 
6

 

 
7

 

 
7

Issued to Employees
 
18

 
2

 

 

 

 
2

 

 
2

Net Income
 

 

 

 

 
2,404

 
2,404

 

 
2,404

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2019
 
24,715

 
$
2,472

 
$
58,920

 
$
(2
)
 
$
128,278

 
$
189,668

 
$
289

 
$
189,957


See notes to consolidated financial statements.

 
 
 
3
 




TRECORA RESOURCES AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
SIX MONTHS ENDED JUNE 30
 
 
TRECORA RESOURCES STOCKHOLDERS
 
 
 
 
 
 
COMMON STOCK
 
ADDITIONAL
PAID-IN
 
TREASURY
 
RETAINED
 
 
 
NON-
CONTROLLING
 
TOTAL
 
 
SHARES
 
AMOUNT
 
CAPITAL
 
STOCK
 
EARNINGS
 
TOTAL
 
INTEREST
 
EQUITY
 
 
(thousands)

 
(thousands of dollars)
January 1, 2020
 
24,750

 
$
2,475

 
$
59,530

 
$

 
$
109,149

 
$
171,154

 
$
289

 
$
171,443

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Restricted Stock Units
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Issued to Directors
 

 

 
195

 

 

 
195

 

 
195

Issued to Employees
 

 

 
668

 

 

 
668

 

 
668

Common Stock
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Issued to Directors
 
28

 
3

 
(3
)
 

 

 

 

 

Issued to Employees
 
39

 
4

 
(4
)
 

 

 

 

 

Net Income
 

 

 

 

 
8,859

 
8,859

 

 
8,859

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2020
 
24,817

 
$
2,482

 
$
60,386

 
$

 
$
118,008

 
$
180,876

 
$
289

 
$
181,165

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
January 1, 2019
 
24,626

 
$
2,463

 
$
58,294

 
$
(8
)
 
$
124,123

 
$
184,872

 
$
289

 
$
185,161

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Restricted Stock Units
 
 
 
 
 
 
 
 
 
 
 


 
 
 


Issued to Directors
 

 

 
168

 

 

 
168

 

 
168

Issued to Employees
 

 

 
458

 

 

 
458

 

 
458

Common Stock
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Issued to Directors
 
10

 
1

 

 
6

 

 
7

 

 
7

Issued to Employees
 
79

 
8

 

 

 

 
8

 

 
8

Net Income
 

 

 

 

 
4,155

 
4,155

 

 
4,155

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2019
 
24,715

 
$
2,472

 
$
58,920

 
$
(2
)
 
$
128,278

 
$
189,668

 
$
289

 
$
189,957



 
 
 
4
 




TRECORA RESOURCES AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
 
SIX MONTHS ENDED
JUNE 30,
 
 
2020
 
2019
 
 
(thousands of dollars)
OPERATING ACTIVITIES
 
 
 
 
Net Income
 
$
8,859

 
$
4,155

Income (Loss) from Discontinued Operations
 
4,855

 
(162
)
Income from Continuing Operations
 
$
4,004

 
$
4,317

Adjustments to Reconcile Income from Continuing Operations To Net Cash Provided by Operating Activities:
 
 
 
 
Depreciation and Amortization
 
6,993

 
7,880

Amortization of Intangible Assets
 
921

 
931

Stock-based Compensation
 
933

 
558

Deferred Income Taxes
 
11,109

 
978

Postretirement Obligation
 
5

 
(18
)
Amortization of Loan Fees
 
91

 
91

Loss on Disposal of Assets
 
18

 

Changes in Operating Assets and Liabilities:
 
 
 
 
Decrease (Increase) in Trade Receivables
 
6,080

 
(3,393
)
Decrease in Insurance Receivables
 
1,148

 

Increase in Taxes Receivable
 
(15,726
)
 

Decrease in Inventories
 
6,029

 
1,244

Decrease in Prepaid Expenses and Other Assets
 
536

 
16

Decrease in Accounts Payable and Accrued Liabilities
 
(1,765
)
 
(6,767
)
Decrease in Other Liabilities
 
456

 
54

Net Cash Provided by Operating Activities - Continuing Operations
 
20,831

 
5,891

Net Cash Used in Operating Activities - Discontinued Operations
 
(276
)
 
(43
)
Net Cash Provided by Operating Activities
 
20,555

 
5,848

INVESTING ACTIVITIES
 
 
 
 
Additions to Plant, Pipeline and Equipment
 
(7,851
)
 
(4,286
)
Proceeds from PEVM
 

 
30

Net Cash Used in Investing Activities - Continuing Operations
 
(7,851
)
 
(4,256
)
Net Cash Provided by Investing Activities - Discontinued Operations
 
10,163

 
414

Net Cash Provided by (Used in) Investing Activities
 
2,312

 
(3,842
)
FINANCING ACTIVITIES
 
 
 
 
Net Cash Paid Related to Stock-Based Compensation
 
(71
)
 
(228
)
Additions to CARES Act, PPP Loans
 
6,123

 

Additions to Long-Term Debt
 
20,000

 
2,000

Repayments of Long-Term Debt
 
(25,187
)
 
(6,188
)
Net Cash Provided by (Used in) Financing Activities - Continuing Operations
 
865

 
(4,416
)
NET INCREASE (DECREASE) IN CASH
 
23,732

 
(2,410
)
CASH AT BEGINNING OF PERIOD
 
6,145

 
6,735

CASH AT END OF PERIOD
 
$
29,877

 
$
4,325

Supplemental disclosure of cash flow information:
 
 
Cash payments for interest
 
$
1,560

 
$
1,355

Cash payments for taxes, net of refunds
 
$

 
$
80

Supplemental disclosure of non-cash items:
 
 
 
 
Capital expansion amortized to depreciation expense
 
$
521

 
$
244

Foreign taxes paid by AMAK
 
$

 
$
891


See notes to consolidated financial statements.

 
 
 
5
 




TRECORA RESOURCES AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. GENERAL

Organization

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

This document includes the following abbreviations:
(1)
TOCCO – Texas Oil & Chemical Co. II, Inc. – Wholly owned subsidiary of TREC and parent of SHR and TC
(2)
SHR – South Hampton Resources, Inc. – Specialty Petrochemicals segment and parent of GSPL
(3)
GSPL – Gulf State Pipe Line Co, Inc. – Pipeline support for the Specialty Petrochemicals segment
(4)
TC – Trecora Chemical, Inc. – Specialty Waxes segment
(5)
AMAK – Al Masane Al Kobra Mining Company – Held-for-sale mining equity investment – 28.3% ownership
(6)
PEVM – Pioche Ely Valley Mines, Inc. – Inactive mine – 55% ownership

Basis of Presentation

The accompanying unaudited condensed 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, 2019.

The unaudited condensed consolidated financial statements included in this document have been prepared on the same basis as the annual 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 six months ended June 30, 2020 are not necessarily indicative of results for the year ending December 31, 2020.

We currently operate in two segments, Specialty Petrochemicals and Specialty Waxes. All revenue originates from sources in the United States, and all long-lived assets owned are located in the United States.

In addition, we own a 28.3% interest in AMAK, a Saudi Arabian closed joint stock company, which owns, operates and is developing mining assets in Saudi Arabia. Our investment is classified as held-for-sale and and the equity in earnings (losses) are recorded in discontinued operations. See Note 5.

2. RECENT ACCOUNTING PRONOUNCEMENTS

Recently Adopted Accounting Pronouncements

Effective January 1, 2020, we adopted Financial Accounting Standard Board ("FASB") Accounting Standards Update ("ASU") 2016-13, Measurement of Credit Losses on Financial Instruments, which changed the way entities recognize impairment of most financial assets. Short-term and long-term financial assets, as defined by the standard, are impacted by immediate recognition of estimated credit losses in the financial statements, reflecting the net amount expected to be collected. The adoption of this standard did not have a material impact on our condensed consolidated financial statements.


 
 
 
6
 




Recent Accounting Pronouncements Not Yet Adopted

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (ASU 2019-12), which simplifies the accounting for income taxes. This guidance will be effective for us in the first quarter of 2021 on a prospective basis, and early adoption is permitted. We are currently evaluating the impact of the new guidance on our condensed consolidated financial statements.

In March 2020, the FASB issued ASU No. 2020–04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (ASU 2020-04), which provides guidance to alleviate the burden in accounting for reference rate reform by allowing certain expedients and exceptions in applying generally accepted accounting principles to contracts, hedging relationships, and other transactions impacted by reference rate reform. The provisions of ASU 2020-04 apply only to those transactions that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform. Adoption of the provisions of ASU 2020-04 are optional and are effective from March 12, 2020 through December 31, 2022. We are currently evaluating the impact of ASU 2020-04 on our condensed consolidated financial statements.

3. TRADE RECEIVABLES

Trade receivables, net, consisted of the following:
 
 
June 30, 2020

 
December 31, 2019

 
 
(thousands of dollars)
Trade receivables
 
$
20,668

 
$
26,749

Less allowance for doubtful accounts
 
(428
)
 
(429
)
Trade receivables, net
 
$
20,240

 
$
26,320



Trade receivables serve as collateral for our amended and restated credit agreement. See Note 11.

4. INVENTORIES

Inventories included the following:
 
 
June 30, 2020

 
December 31, 2019

 
 
(thousands of dollars)
Raw material
 
$
738

 
$
2,100

Work in process
 
244

 
142

Finished products
 
6,613

 
11,382

Total inventory
 
$
7,595

 
$
13,624



Inventory serves as collateral for our amended and restated credit agreement. See Note 11.

Inventory included Specialty Petrochemicals products in transit valued at approximately $1.4 million and $2.9 million at June 30, 2020 and December 31, 2019, respectively.

5. INVESTMENT IN AMAK (Held-for-Sale)

As of June 30, 2020 and December 31, 2019, the Company had a non-controlling equity interest of 28.3% and 33.3% in AMAK of approximately $29.2 million and $32.9 million, respectively. This investment is accounted for under the equity method. There were no events or changes in circumstances that had an adverse effect on the fair value of our investment in AMAK at June 30, 2020.

The Company committed to a plan to sell our investment in AMAK during the third quarter of 2019. Management engaged in a comprehensive process to market the investment to numerous potential buyers. The process resulted in an agreement with certain AMAK stockholders in September 2019 to purchase our investment. Pursuant to a Share Sale and Purchase Agreement (as amended, the "Purchase Agreement") that was effective as of October 2, 2019, the Company agreed to sell its entire equity interest in AMAK, to AMAK and certain other existing stockholders of AMAK (collectively, the "Purchasers")

 
 
 
7
 




for an aggregate gross purchase price (before taxes and transaction expenses) of Saudi Riyals ("SAR") 264.7 million (or approximately US$70 million), which will be payable in US Dollars (collectively, the "Share Sale"). The Purchasers advanced 5% of the purchase price (or approximately $3.5 million) in the form of a non-refundable deposit, which was a condition to the effectiveness of the Purchase Agreement. The Purchase Agreement contained various representations, warranties and indemnity obligations of the Company and the Purchasers, including the release of the Company's guarantee as described in Note 12.

On January 16, 2020, the Company and the Purchasers entered into a letter agreement (the “January 2020 Amendment”) providing certain amendments to the Purchase Agreement. Pursuant to the January 2020 Amendment, the Long Stop Date (as defined in the Purchase Agreement) for completion of the Share Sale was extended to March 31, 2020 to allow additional time for the parties to obtain certain required governmental approvals. Under the Purchase Agreement, the Company had certain termination rights if closing of the Share Sale did not occur on or before the Long Stop Date. The January 2020 Amendment also provided that, if closing of the Share Sale does not occur on or before the extended Long Stop Date, and the Company determined in its sole discretion to further extend such date, then an amount equal to 50% of the approximately $3.5 million non-refundable deposit made by the Purchasers under the Purchase Agreement would be forfeited to the Company as liquidated damages and would not be applied to the purchase price at closing of the Share Sale.

Effective as of March 26, 2020, the Company and the Purchasers entered into a letter agreement, dated March 23, 2020 (the “March 2020 Amendment”), providing for certain additional amendments to the Purchase Agreement.

Pursuant to the March 2020 Amendment, the Company and the Purchasers agreed that the Share Sale may be completed with the respective Purchasers in multiple closings, in each case, subject to the completion of any remaining conditions precedent. To the extent that a Purchaser completed the purchase of all or a portion of the ordinary shares allotted to it under the Purchase Agreement on or before March 31, 2020, the non-refundable deposit paid by such Purchaser (or a portion of such deposit for a partial closing) was credited toward the purchase price of the ordinary shares being purchased. Purchasers that complete the purchase of all or a portion of their allotted ordinary shares after March 31, 2020 but on or before September 28, 2020 (the “New Long Stop Date”), will forfeit an amount equal to 50% of the non-refundable deposit paid by such Purchasers to the Company as liquidated damages and such amount shall not be applied to the purchase price paid by the applicable Purchaser. With respect to any Purchaser that has not completed the purchase of 100% of its allocated ordinary shares on or prior to the New Long Stop Date, (i) any remaining amount of non-refundable deposit paid by such Purchaser will be forfeited to the Company as liquidated damages as of September 29, 2020 and (ii) the Company may terminate the Purchase Agreement in accordance with its terms unless the Company elects, in its sole discretion, to further extend the New Long Stop Date.

On March 26, 2020, the Company and one Purchaser, Arab Mining Company, completed the first closing of the Share Sale (the “First Closing”). In connection with the First Closing, the Company sold 4,000,000 ordinary shares for an aggregate gross purchase price (before taxes and transaction expenses) of SAR 40 million (or approximately US$10.7 million) (inclusive of the credited amount of the Purchaser’s non-refundable deposit previously paid of US$0.5 million). The First Closing also included indemnification provisions which effectively reduced our portion of the loan guarantee (as discussed in Note 12). We recorded a foreign tax payable of approximately $0.3 million related to this transaction. Upon payment, this amount will be a foreign tax credit used to offset U.S. taxes.

Pursuant to the March 2020 Amendment, the remaining Purchasers have agreed to use their best efforts to close the purchase of 100% of their respective allotments of ordinary shares as soon as possible. The March 2020 Amendment also provides that the Company will continue to have the right to appoint three directors of the board of directors of AMAK, and will enjoy all other governance rights it currently has, until the Share Sale has been completed in full. As no other transactions closed through March 31, 2020, approximately $1.5 million of the initial deposits were forfeited to the Company as liquidated damages and will not be applied to the purchase price at closing. This amount was recorded as an increase to our investment in AMAK and a gain on sale of equity interest in discontinued operations.

As all the required criteria for held-for-sale classification was met in third quarter of 2019, the investment in AMAK is classified as held-for-sale in the Consolidated Balance Sheets and reflected as discontinued operations in the Consolidated Statements of Operations for all periods presented. The assets held-for-sale are disclosed by the Company in the Corporate segment. The Company expects to have no continuing involvement with the discontinued operations after the closing date.  The gain (loss) from discontinued operations, net of tax, includes our portion of the equity in earnings (losses) in AMAK, forfeited deposits, other administrative expenses incurred in Saudi Arabia and transaction costs.


 
 
 
8
 




Included in discontinued operations are the following:
 
 
Three Months Ended June 30,
 
Six Months Ended
June 30,
 
 
2020

 
2019

 
2020

 
2019

 
 
(thousands of dollars)
 
(thousands of dollars)
Saudi administration (income) expenses
 
$
(97
)
 
$
39

 
$
(114
)
 
$
55

Equity in (earnings) losses of AMAK
 
(306
)
 
91

 
226

 
150

Gain on sale of equity interest
 

 

 
(6,663
)
 

(Income) loss from discontinued operations before taxes
 
(403
)
 
130

 
(6,551
)
 
205

Tax expense (benefit)
 
405

 
(27
)
 
1,696

 
(43
)
(Income) loss from discontinued operations (net of tax)
 
$
2

 
$
103

 
$
(4,855
)
 
$
162



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

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

Results of Operations
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2020

 
2019

 
2020

 
2019

 
 
(thousands of dollars)
 
(thousands of dollars)
Sales
 
$
20,752

 
$
20,566

 
$
38,689

 
$
41,230

Cost of sales
 
17,829

 
18,162

 
34,650

 
36,732

Gross profit
 
2,923

 
2,404

 
4,039

 
4,498

Selling, general, and administrative
 
2,362

 
2,807

 
5,042

 
5,545

Operating income (loss)
 
561

 
(403
)
 
(1,003
)
 
(1,047
)
Other income (expense)
 

 
(75
)
 
17

 
353

Finance and interest expense
 
(103
)
 
(448
)
 
(634
)
 
(893
)
Income (loss) before Zakat and income taxes
 
458

 
(926
)
 
(1,620
)
 
(1,587
)
Zakat and income taxes
 
566

 
366

 
1,099

 
888

Net Loss
 
$
(108
)
 
$
(1,292
)
 
$
(2,719
)
 
$
(