Business and Summary of Significant Accounting Policies

3 Months Ended

Mar. 31, 2020

Business and Summary of Significant Accounting Policies

1.	Business and Summary of Significant Accounting Policies

Nature of Operations

Covia Holdings Corporation, including its consolidated subsidiaries (collectively, “we,” “us,” “our,” “Covia,” and “Company”), is a leading provider of diversified mineral-based and material solutions for the Industrial and Energy markets. We provide a wide range of specialized silica sand, nepheline syenite, feldspar, calcium carbonate, clay, and kaolin products for use in the glass, ceramics, coatings, foundry, polymers, construction, water filtration, sports and recreation, and oil and gas markets in North America and around the world. Our Industrial segment provides raw, value-added and custom-blended products to the glass, ceramics, metals, coatings, polymers, construction, foundry, filtration, sports and recreation and various other industries, primarily in North America. Our Energy segment offers the oil and gas industry a comprehensive portfolio of raw frac sand, value-added-proppants, well-cementing additives, gravel-packing media and drilling mud additives. Our products serve hydraulic fracturing operations in the U.S., Canada, Argentina, Mexico, China, and northern Europe.

Covia began operating in its current form following a business combination between Fairmount Santrol Holdings Inc. (“Fairmont Santrol”) and Unimin Corporation (“Unimin”) pursuant to which Fairmount Santrol was merged into a wholly-owned subsidiary of Unimin, Bison Merger Sub, LLC (“Merger Sub”), with Merger Sub as the surviving entity following the merger (the “Merger”). The Merger was completed on June 1, 2018 (the “Merger Date”), after which Unimin changed its name to Covia Holdings Corporation. Covia began trading on the New York Stock Exchange (“NYSE”) under the ticker symbol “CVIA” on June 1, 2018. See Note 21 for further detail on Covia’s listing on the NYSE.

Reclassifications

Certain reclassifications of prior period presentations have been made to conform to the current period presentation.

Basis of Presentation

Our unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, the unaudited condensed consolidated financial statements reflect all adjustments (which are of a normal, recurring nature) and disclosures necessary for a fair statement of the financial position, results of operations, comprehensive income, and cash flows of the reported interim periods. The Condensed Consolidated Balance Sheet as of December 31, 2019 was derived from audited consolidated financial statements, but does not include all disclosures required by GAAP. Interim results are not necessarily indicative of the results to be expected for the full year or any other interim period. These unaudited condensed consolidated financial statements should be read in conjunction with our consolidated financial statements and notes thereto and for each of the three years in the period ended December 31, 2019, which are included in our Annual Report on Form 10-K, as filed with the Securities and Exchange Commission (“SEC”) on March 16, 2020 (“Form 10-K”), and information included elsewhere in this Quarterly Report on Form 10-Q (“Report”).

Going Concern

The Company’s financial statements have been prepared under the assumption that it will continue as a going concern, which contemplates continuity of operations, realization of assets, and satisfaction of liabilities in the normal course of business. In connection with the preparation of our condensed consolidated financial statements, we conducted an evaluation as to whether there were conditions and events, considered in the aggregate, that raised substantial doubt as to the Company’s ability to continue as a going concern.

On June 29, 2020, the Company and certain of its direct and indirect U.S. subsidiaries filed a petition for reorganization under Chapter 11 of the Bankruptcy Code, and in connection therewith, entered into a Restructuring Support Agreement (as defined below) as part of a prearranged plan of reorganization (see further description below).

In light of the Company’s Chapter 11 proceedings, our ability to continue as a going concern is contingent upon, among other things, our ability to, subject to the approval by the Bankruptcy Court (as defined below), implement a business plan of reorganization, emerge from the Chapter 11 proceedings and generate sufficient liquidity following the reorganization to meet our contractual obligations and operating needs. As a result of risks and uncertainties related to, among other things, (i) the Company’s ability to obtain requisite support for the business plan of reorganization from various stakeholders, and (ii) the disruptive effects of the Chapter 11 proceedings on our business making it potentially more difficult to maintain business, financing and operational relationships,

together with the Company’s recurring losses and accumulated deficit, substantial doubt exists regarding our ability to continue as a going concern.

Although management believes that the reorganization of the Company through the Chapter 11 Cases (as defined below) will position the Company for sustainable growth opportunities, the Chapter 11 filing caused an event of default under certain instruments governing the Company’s indebtedness, which is stayed during the pendency of the Company’s bankruptcy proceeding. Further, there are several risks and uncertainties associated with the Company’s bankruptcy, including, among others: (a) the Company’s prearranged plan of reorganization may never be confirmed or become effective, (b) the Restructuring Support Agreement (as defined below) may be terminated by one or more of the parties thereto, (c) the Bankruptcy Court may grant or deny motions in a manner that is adverse to the Company and its subsidiaries, and (d) the Company’s Chapter 11 Cases may be converted into a Chapter 7 liquidation.

Voluntary Reorganization under Chapter 11 (Subsequent Event)

On June 29, 2020 (the “Petition Date”), Covia Holdings Corporation and certain of its direct and indirect U.S. subsidiaries (collectively, the “Company Parties”) filed voluntary petitions for relief (the “Chapter 11 Cases”) under Chapter 11 of the United States Bankruptcy Code (the “Bankruptcy Code”) with the Bankruptcy Court for the Southern District of Texas, Houston Division (the “Bankruptcy Court”). The Chapter 11 Cases are being jointly administered under the caption In re: Covia Holdings Corporation, et al.

The Company Parties continue to operate their businesses as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. To ensure ordinary course operations, the Debtors have sought, and expect to obtain, approval from the Bankruptcy Court for certain “first day” motions, including motions to obtain customary relief intended to continue ordinary course operations after the Petition Date.

The Company’s filing of the Chapter 11 Cases constituted an event of default under the Term Loan, the Industrial Revenue Bond and the Receivables Facility (in each case, as defined herein). Due to the Chapter 11 Cases, however, the lenders’ ability to exercise remedies under the Company’s respective debt instruments was stayed as of the date of the Chapter 11 petition and continues to be stayed.

On June 29, 2020, and in connection with the filing of the Chapter 11 Cases, the Company Parties entered into a Restructuring Support Agreement (the “Restructuring Support Agreement”) with the lenders who represent at least a majority of the aggregate principal amount of the lenders under the Term Loan Agreement (the “Consenting Stakeholders”). The Restructuring Support Agreement contemplates that the restructuring and recapitalization of the Company Parties will occur through a prearranged plan of reorganization in the Chapter 11 Cases (the “Plan”).

Under the Restructuring Support Agreement, the Plan must be confirmed and declared effective by the Bankruptcy Court no later than 150 days after the Petition Date. Under the Bankruptcy Code, a majority in number and two-thirds in amount of each impaired class of claims must approve the Plan. The Restructuring Support Agreement requires the Consenting Stakeholders to vote in favor of and support the Plan, and the Consenting Stakeholders represent the requisite number of votes for the Term Loan’s class of creditors entitled to vote on the Plan. See Note 21 for further detail on the terms of the Restructuring Support Agreement.

The Company cannot predict the ultimate outcome of the Chapter 11 Cases. Although the Company expects the Chapter 11 Cases to proceed in accordance with the milestones set forth in the Restructuring Support Agreement, third parties may propose alternative plans of reorganization. Further, the Restructuring Support Agreement may be terminated upon the occurrence of certain events set forth in the Definitive Documents (as defined in the Restructuring Support Agreement), including the failure to meet specified milestones specified in the Restructuring Term Sheet. In the event the Plan is not confirmed or the Restructuring Support Agreement is terminated, the duration of the Chapter 11 Cases will be extended which will increase the Company’s expenses and reduce the Company’s capital resources. Further, even if the Plan is confirmed, although the Company expects the exit financing provided for in the Plan will be sufficient to make all payments required by the Plan, the Company faces many risks and uncertainties that it cannot predict and consequently, there is no guarantee that the exit financing provided for in the Plan will be sufficient to accomplish the Company’s reorganization strategy.

For periods occurring after the Petition Date, the Company began accounting and reporting according to Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 852 – Reorganizations, which specifies the accounting and financial reporting requirements for entities reorganizing through chapter 11 bankruptcy proceedings. These requirements include distinguishing transactions associated with the reorganization separate from activities related to the ongoing operations of the business.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. The more significant areas requiring the use of management estimates and assumptions relate to: the useful life of definite-lived intangible assets; asset retirement obligations; estimates of allowance for doubtful accounts; estimates of fair value for reporting units and asset impairments (including impairments of goodwill and other long-lived assets); adjustments of inventories to net realizable value; post-employment, post-retirement and other employee benefit liabilities; valuation allowances for deferred tax assets; and reserves for contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, including the use of valuation experts. Accordingly, actual results may differ significantly from these estimates under different assumptions or conditions.

Recent Accounting Pronouncements

Recently Adopted Accounting Pronouncements

Allowance for Doubtful Accounts

On January 1, 2020, we adopted ASU No. 2016-13 – Financial Instruments – Credit Losses (Topic 326) (“ASU 2016-13”). ASU 2016-13 replaced the incurred loss impairment methodology with a methodology that applies a forward-looking “expected loss” model to receivables, loans and other instruments. The impact of the adoption did not have a material impact on our condensed consolidation financial statements and disclosures. The allowance for doubtful accounts at December 31, 2019 was $2.2 million. For the three months ended March 31, 2020 we recorded $0.2 million of bad debt expense and had a balance in allowance for doubtful accounts at March 31, 2020 of $2.1 million.

Recently Issued Accounting Pronouncements

In August 2018, the FASB issued ASU No. 2018-14 – Compensation – Retirement Benefits – Defined Benefit Plans – General (Subtopic 715-20): Disclosure Framework – Changes to the Disclosure Requirements for Defined Benefit Plans (“ASU 2018-14”). The amendments in ASU 2018-14 remove various disclosures that no longer are considered cost-beneficial, namely amounts in accumulated other comprehensive loss expected to be recognized as components of net periodic benefit cost over the next fiscal year. Further, ASU 2018-14 requires disclosure or clarification of the reasons for significant gains or losses related to changes in the benefit obligation for the period, as well as projected and accumulated benefit obligations in excess of plan assets. ASU 2018-14 is effective for fiscal years ending after December 15, 2020 and is required to be applied on a retrospective basis, with early adoption permitted. We are currently evaluating the impact of this new standard on our condensed consolidated financial statements and disclosures.

In December 2019, the FASB issued ASU No. 2019-12 – Income Taxes (Topic 740) – Simplifying the Accounting for Income Taxes (“ASU 2019-12”). The amendments in ASU 2019-12 simplify the accounting for income taxes by removing certain exceptions regarding the incremental approach for intra-period tax allocations, deferred tax liabilities for equity method investments, and general methodology calculations when a year-to-date loss exceeds the anticipated loss. Additionally, ASU 2019-12 further simplifies accounting for income taxes by: (1) requiring certain franchise taxes to be accounted for as income-based tax or non-income-based tax; (2) requiring evaluation of the tax basis of goodwill in business combinations; (3) specifying the requirements and elections for allocating consolidated current and deferred tax expense to legal entities not subject to tax separately; and (4) requiring reflection of the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020, with early adoption permitted. The various amendments can be applied on a retrospective, modified retrospective, or prospective basis, depending on the amendment. We are in the process of evaluating the impact of this new guidance on our consolidated financial statements and disclosures.

Covia Holdings Corp 10-Q/A