XML 27 R26.htm IDEA: XBRL DOCUMENT

Significant Accounting Policies (Policies)

12 Months Ended

Dec. 31, 2019

Voluntary Reorganization Under Chapter 11 of the Bankruptcy Code

On March 29, 2020 (the “Petition Date”), CARBO and its direct wholly owned subsidiaries Asset Guard Products Inc. (“AGPI”) and StrataGen, Inc. (“StrataGen,” and together with CARBO and AGPI, the “Debtors”) filed voluntary petitions (the “Bankruptcy Petitions”) for reorganization under Chapter 11 of Title 11 of the United States Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Southern District of Texas, Houston Division (the “Bankruptcy Court”). The Chapter 11 proceedings are being jointly administered under the caption In re CARBO Ceramics Inc, et al. (the “Chapter 11 Cases”).

On March 28, 2020, the Debtors entered into a restructuring support agreement (the “RSA”) with the holders of all of the loans outstanding under the Amended and Restated Credit Agreement, dated as of March 2, 2017 (as amended, the “Credit Agreement”), by and among CARBO, as borrower, AGPI and StrataGen, as guarantors, Wilks Brothers, LLC, as administrative agent and lender (“Wilks”), Equify Financial, LLC (“Equify”), as lender (together with Wilks, the “Supporting Lenders”) that sets forth the terms of a prenegotiated Chapter 11 plan of reorganization (the “Plan”) pursuant to which, among other things and subject to the terms and conditions of the RSA, each Supporting Lender will receive its pro rata share of 100% of the equity interests in a reorganized CARBO entity (“Reorganized CARBO” and such interests, the “Reorganized CARBO Interests”) in exchange for its secured claims under the Credit Facility and its claims under the DIP Facility described below, except to the extent such DIP Facility claims are converted into borrowings under an exit credit facility, with Reorganized CARBO retaining (i) 100% of the equity interests in a reorganized AGPI entity and (ii) 100% of the equity interests in a reorganized StrataGen entity. In addition, pursuant to the Plan, a liquidating trust (the “Liquidating Trust”) will be established for the benefit of general unsecured creditors. The Supporting Lenders will contribute $100 to fund the costs of administering the Liquidating Trust, and any avoidance actions that are not otherwise released under the Plan will be transferred to the Liquidating Trust. The Chapter 11 Cases and the restructuring transactions contemplated by the RSA and the Plan (collectively, the “Restructuring”) are expected to result in the cancellation of CARBO’s common stock.

Since the commencement of the Chapter 11 Cases, each of the Debtors has continued to operate its business as a “debtor-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.

The Bankruptcy Petitions constituted an event of default that accelerated the Debtors’ obligations under the Credit Agreement. However, under the Bankruptcy Code, the Supporting Lenders under the Credit Agreement are stayed from taking any action against the Debtors as a result of this event of default.

Debtor-in-Possession Financing

On March 30, 2020, the Debtors entered into a Superpriority Senior Secured Debtor-in-Possession Credit Agreement (the “DIP Credit Agreement”), by and among CARBO, as borrower, AGPI and StrataGen, as guarantors, Wilks, as lender, and the other guarantors and lenders from time to time party thereto (any such lenders, together with Wilks, the “DIP Facility Lenders”) providing for a $15 million senior secured superpriority multiple draw term loan facility (the “DIP Facility”). On March 30, 2020, the Bankruptcy Court granted interim approval of the Debtors’ motion to approve the DIP Facility, including the DIP Credit Agreement, and the borrowing by CARBO of up to $5 million of loans thereunder between March 30, 2020 and the Bankruptcy Court’s entry of a final order approving the DIP Facility and DIP Credit Agreement (the “Interim Period Borrowings”).

The Debtors’ obligations under the DIP Credit Agreement are secured by first priority priming liens on substantially all of the Debtors’ assets, subject to certain customary exclusions and carve-outs. Borrowings under the DIP Facility will mature August 29, 2020 (the “Maturity Date”) and will bear interest at a rate of 8.00% per annum. The DIP Credit Agreement also provides for the payment of certain fees, including an unused commitment fee and upfront fee, as well as a DIP fee to be paid to the DIP Facility Lenders in the event the Debtors enter into an alternative debtor-in-possession financing arrangement with financial institutions other than the DIP Facility Lenders in lieu of the DIP Facility. Interest and any other amounts that become due under the DIP Facility will be paid in cash. The proceeds of the DIP Facility, including the Interim Period Borrowings, will be used to pay fees, expenses and other expenditures of the Debtors to be set forth in rolling budgets prepared in connection with the Chapter 11 Cases, subject to the approval of the DIP Facility Lenders and certain stipulated exceptions.

The DIP Credit Agreement terminates on the earliest of: (a) the Maturity Date; (b) the effective date of any Acceptable Plan or any other Chapter 11 Plan (each as defined in the DIP Credit Agreement); (c) the entry of an order for the conversion of any of the Chapter 11 Cases to a case under Chapter 7 of the Bankruptcy Code; (d) the entry of an order for the dismissal of any of the Chapter 11 Cases; and (e) at the election of the Lenders, the date on which any event of default under the DIP Credit Agreement is continuing.

The DIP Credit Agreement contains usual and customary affirmative and negative covenants and events of default for transactions of this type. In addition, the Debtors are required to maintain a minimum liquidity of $2,500,000 as of the last day of any calendar month following the effective date. On March 29, 2020, in connection with the filing of the Chapter 11 Cases, the Debtors entered into a commitment letter with Wilks (the “Commitment Letter”).

On April 8, 2020, the Debtors filed the Plan and a Disclosure Statement for the Debtors’ Joint Chapter 11 Plan of Reorganization (the “Disclosure Statement”).

Going Concern and Financial Reporting in Reorganization

As a result of our financial condition, the defaults under our Credit Agreement and the risk and uncertainties surrounding the Chapter 11 Cases, substantial doubt exists regarding our ability to continue as a going concern. Accordingly, the audit report issued by our independent registered public accounting firm on our financial statements as of and for the year ended December 31, 2019 contains an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern. The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, which contemplate our continuation as a going concern. As such, the accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of assets and their carrying amounts, or the amount and classification of liabilities that may result should the Company be unable to continue as a going concern.

Principles of Consolidation

The consolidated financial statements include the accounts of CARBO Ceramics Inc. and its operating subsidiaries. All significant intercompany transactions have been eliminated.

Concentration of Credit Risk, Accounts Receivable and Other Receivables

The Company performs periodic credit evaluations of its customers’ financial condition and generally does not require collateral. Receivables are generally due within 30 days. The majority of the Company’s receivables are from customers in the petroleum pressure pumping industry, as well as industrial and environmental industries. The Company establishes an allowance for doubtful accounts based on its assessment of collectability risk and periodically evaluates the balance in the allowance based on a review of trade accounts receivable. Trade accounts receivable are periodically reviewed for collectability based on customers’ past credit history and current financial condition, and the allowance is adjusted if necessary. Credit losses historically have been insignificant. The allowance for doubtful accounts at December 31, 2019 and 2018 was $2,216 and $1,279, respectively. Other receivables were $155 and $442 as of December 31, 2019 and 2018, respectively, of which related mainly to miscellaneous receivables in the United States.

Cash Equivalents

The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. The carrying amounts reported in the balance sheet for cash equivalents approximate fair value.

Restricted Cash

A portion of the Company’s cash balance is restricted to its use in order to provide collateral primarily for letters of credit and funds held in escrow relating to the sale of its Millen plant. As of December 31, 2019 and 2018, total restricted cash was $9,729 and $10,565, respectively. As a result of the Company’s non-payment of certain obligations and the Chapter 11 cases, certain beneficiaries to some of our standby letters of credit requested draws that are in progress, and such draws and any additional draws on our standby letters of credit will reduce our restricted cash balance.

Inventories

Inventories are stated at the lower of net realizable value or cost. Finished goods inventories include costs of materials, plant labor and overhead incurred in the production of the Company’s products and costs to transfer finished goods to distribution centers.

The Company evaluated the carrying values of its inventories as of December 31, 2019 and concluded that for certain inventories net realizable value had fallen below carrying costs. Consequently, the Company recognized $4,268 lower of cost or net realizable value adjustments in cost of sales to adjust inventory to the lower net realizable value. No such adjustments were required in 2018. The Company evaluates inventory on a per product and location basis.

Property, Plant and Equipment

Property, plant and equipment are stated at cost. Repair and maintenance costs are expensed as incurred. Depreciation is computed on the straight-line method for financial reporting purposes using the following estimated useful lives:

Buildings and improvements		15 to 30 years
Machinery and equipment		3 to 30 years
Land-use rights		30 years

The Company holds approximately 2,288 acres of land and leasehold interests containing kaolin reserves near its plants in Georgia and Alabama. The Company also holds approximately 313 acres of land and leasehold interests containing sand reserves near its sand processing facility in Marshfield, Wisconsin. The capitalized costs of land and mineral rights as well as costs incurred to develop such property are amortized using the units-of-production method based on estimated total tons of these reserves.

Impairment of Long-Lived Assets and Intangible Assets

Long-lived assets to be held and used and intangible assets that are subject to amortization are reviewed for impairment whenever events or circumstances indicate their carrying amounts might not be recoverable. Recoverability is assessed by comparing the undiscounted expected future cash flows from the assets with their carrying amount. If the carrying amount exceeds the sum of the undiscounted future cash flows an impairment loss is recorded. The impairment loss is measured by comparing the fair value of the assets with their carrying amounts. Intangible assets that are not subject to amortization are tested for impairment at least annually by comparing their fair value with the carrying amount and recording an impairment loss for any excess of carrying amount over fair value. Fair values are generally determined based on discounted expected future cash flows or appraised values, as appropriate. For additional information on the Company’s long-lived assets and intangible assets impairment assessment, please refer to Note 5 – Other Operating Expense (Income).

Manufacturing Production Levels Below Normal Capacity

As a result of the Company substantially reducing manufacturing production levels, including by idling and mothballing certain facilities, the component of the Company’s accounting policy for inventory relating to operating at production levels below normal capacity was triggered and resulted in certain production costs being expensed instead of being capitalized into inventory. The Company expenses fixed production overhead amounts in excess of amounts that would have been allocated to each unit of production at normal production levels. For the years ended December 31, 2019 and 2018, the Company expensed $31,218 and $32,509, respectively, in production costs.

Capitalized Software

The Company capitalizes certain software costs, after technological feasibility has been established, which are amortized utilizing the straight-line method over the economic lives of the related products, generally not to exceed five years.

Goodwill

Goodwill represents the excess of the cost of companies acquired over the fair value of their net assets at the date of acquisition. Goodwill relating to each of the Company’s reporting units is tested for impairment annually, during the fourth quarter, as well as when an event, or change in circumstances, indicates an impairment is more likely than not to have occurred. For additional information on the Company’s goodwill impairment assessment, please refer to Note 5 – Other Operating Expense (Income).

Revenue Recognition

Revenue from proppant sales is recognized when title passes to the customer, generally upon delivery. Revenue from consulting and contract manufacturing is recognized at the time service is performed. Revenue from the sale of fracture simulation software is recognized when title passes to the customer at time of shipment. Revenue from the sale of spill prevention services is recognized at the time service is performed. Revenue from the sale of containment goods is recognized at the time goods are delivered.

Shipping and Handling Costs

Shipping and handling costs are classified as cost of sales. Shipping costs consist of transportation costs to deliver products to customers. Handling costs include labor and overhead to maintain finished goods inventory and operate distribution facilities.

Cost of Start-Up Activities

Start-up activities, including organization costs, are expensed as incurred. There were no start-up costs for 2019 and 2018.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Research and Development Costs

Research and development costs are charged to operations when incurred and are included in Selling, General and Administrative expenses. The amounts incurred in 2019 and 2018 were $3,351 and $3,823, respectively.

Leases

The Company accounts for its leases in accordance with the requirements of ASC 842, Leases. We determine if an arrangement is a lease at inception. Leases with an initial term of twelve months or less are not recorded on the balance sheet. Operating lease right-of-use (“ROU”) assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives and initial direct costs incurred. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. We have lease agreements with lease and non-lease components, which are accounted for as a single lease component, primarily related to railroad equipment leases. Operating leases are included in operating lease ROU assets, operating lease liabilities, and noncurrent operating lease liabilities on our consolidated balance sheets. Sublease and rental income are recognized as revenue on the consolidated statement of operations.

New Accounting Pronouncements

In June 2016, FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires the Company to measure and recognize expected credit losses for financial assets held and not accounted for at fair value through net income. In November 2018, April 2019 May 2019 and November 2019, the FASB issued ASU No. 2018-19, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, ASU No. 2019-05, Financial Instruments - Credit Losses (Topic 326): Targeted Transition Relief, and ASU No. 2019-11, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, respectively, which provided additional implementation guidance on the previously issued ASU. The updated guidance is effective for the Company on January 1, 2020, and requires a modified retrospective adoption method. Early adoption is permitted. The Company is currently assessing the potential impact of adopting this new guidance on its consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-04, “Intangibles – Intangibles and Other (Topic 350): Simplifying the Test for Goodwill Impairment,” which removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. ASU 2017-04 will be effective for the interim and annual periods beginning after December 15, 2019, with early adoption permitted, and will be applied on a prospective basis. The Company early adopted this ASU during 2019 which eliminated Step 2 of the goodwill impairment test. The Company recorded a goodwill impairment during the fourth quarter of 2019 in accordance with the new guidance. See Note 5 for additional information.

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842),” which amends current lease guidance. This guidance requires, among other things, that lessees recognize the following for all leases (with the exception of short-term leases) at the commencement date: (1) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Lessees and lessors must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. In July 2018, the FASB issued ASU No. 2018-11, “Leases (Topic 842): Targeted Improvements”, which simplifies the implementation by allowing entities the option to instead apply the provisions of the new guidance at the effective date, without adjusting the comparative periods presented. The new lease guidance is effective for the interim and annual periods beginning after December 15, 2018 with early adoption permitted. The Company adopted this guidance effective January 1, 2019 without adjusting the comparative periods. In addition, the Company elected the package of practical expedients permitted under the guidance, which among other things, allowed the Company to carry forward the historical lease classification. Upon adoption, the Company’s operating lease ROU asset was approximately $54,668 and its total lease liability was approximately $64,421. As of December 31, 2019, the Company’s operating lease ROU asset was $9,185 and its total lease liability was $55,700. In addition, upon implementation, the Company’s deferred rent balances, recorded primarily within other long-term liabilities and accrued expenses as of December 31, 2018, of approximately $8,300 were removed and recorded to the lease liability. The Company has implemented a lease accounting system for accounting for leases under the new standard. There were no significant impacts to the consolidated statement of operations and consolidated statement of cash flows upon adoption; however, during 2019, the Company recorded an impairment charge of $39,080 associated with its right of use assets. Refer to Note 5 for additional information.