Quarterly Report (10-q)

Date : 07/25/2019 @ 4:03PM
Source : Edgar (US Regulatory)
Stock : CARBO Ceramics Inc (CRR)
Quote : 2.8569  -0.0031 (-0.11%) @ 8:18PM
CARBO Ceramics share price Chart

Quarterly Report (10-q)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

For the quarterly period ended June 30, 2019

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 No. 001-15903

 

CARBO CERAMICS INC.

(Exact name of registrant as specified in its charter)

 

DELAWARE

72-1100013

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification Number)

575 North Dairy Ashford, Suite 300

Houston, TX 77079

(Address of principal executive offices)

(281) 921-6400

(Registrant's telephone number)

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, $0.01 par value

 

CRR

 

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      No  

Indicate by check mark whether the registrant has submitted electronically, if any, 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      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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  

As of July 19, 2019, 29,377,102 shares of the registrant's Common Stock, par value $0.01 per share, were outstanding.

 


CARBO CERAMICS INC.

Index to Quarterly Report on Form 10-Q

 

PART I.  FINANCIAL INFORMATION

PAGES

 

 

 

 

    Item 1.

 

Financial Statements

3

 

 

 

 

 

 

Consolidated Balance Sheets - March 31, 2019 (Unaudited) and December 31, 2018

3

 

 

 

 

 

 

Consolidated Statements of Operations (Unaudited) - Three and six months ended June 30, 2019 and 2018

4

 

 

 

 

 

 

Consolidated Statements of Shareholders' Equity (Unaudited) - Three and six months ended June 30, 2019 and 2018

5

 

 

 

 

 

 

Consolidated Statements of Cash Flows (Unaudited) - Six months ended June 30, 2019 and 201 8

6

 

 

 

 

 

 

Notes to Consolidated Financial Statements (Unaudited)

7-14

 

 

 

 

    Item 2.

 

Management's Discussion and Analysis of Financial Condition and Results of Operations

15-20

 

 

 

 

    Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

21

 

 

 

 

    Item 4.

 

Controls and Procedures

21

 

 

 

 

PART II.  OTHER INFORMATION

 

 

 

 

 

    Item 1.

 

Legal Proceedings

22

 

 

 

 

    Item 1A.

 

Risk Factors

22

 

 

 

 

    Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

22

 

 

 

 

    Item 3.

 

Defaults Upon Senior Securities

22

 

 

 

 

    Item 4.

 

Mine Safety Disclosure

22

 

 

 

 

    Item 5.

 

Other Information

22

 

 

 

 

    Item 6.

 

Exhibits

23

 

 

 

 

Exhibit Index

24

 

 

 

 

Signatures

25

 

2


PART I.  FINANCI AL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

CARBO CERAMICS INC.

CONSOLIDATED BALANCE SHEETS

($ in thousands, except per share data)

 

 

June 30,

 

 

December 31,

 

 

 

2019

 

 

2018

 

 

 

(Unaudited)

 

 

(Note 1)

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

40,813

 

 

$

72,752

 

Restricted cash

 

 

1,200

 

 

 

1,725

 

Trade accounts and other receivables, net

 

 

23,834

 

 

 

35,693

 

Inventories:

 

 

 

 

 

 

 

 

Finished goods

 

 

39,747

 

 

 

41,422

 

Raw materials and supplies

 

 

18,680

 

 

 

22,592

 

Total inventories

 

 

58,427

 

 

 

64,014

 

Prepaid expenses and other current assets

 

 

4,910

 

 

 

4,754

 

Income tax receivable

 

 

2,328

 

 

 

2,319

 

Total current assets

 

 

131,512

 

 

 

181,257

 

Restricted cash

 

 

8,853

 

 

 

8,840

 

Property, plant and equipment:

 

 

 

 

 

 

 

 

Land and land improvements

 

 

39,584

 

 

 

39,584

 

Land-use and mineral rights

 

 

20,264

 

 

 

19,696

 

Buildings

 

 

75,978

 

 

 

75,815

 

Machinery and equipment

 

 

425,378

 

 

 

432,906

 

Construction in progress

 

 

28,762

 

 

 

29,129

 

Total property, plant and equipment

 

 

589,966

 

 

 

597,130

 

Less accumulated depreciation and amortization

 

 

333,243

 

 

 

323,511

 

Net property, plant and equipment

 

 

256,723

 

 

 

273,619

 

Goodwill

 

 

3,500

 

 

 

3,500

 

Operating lease right-of-use assets

 

 

52,266

 

 

 

 

Intangible and other assets, net

 

 

11,391

 

 

 

7,150

 

Total assets

 

$

464,245

 

 

$

474,366

 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

13,910

 

 

$

12,174

 

Accrued payroll and benefits

 

 

4,048

 

 

 

6,950

 

Accrued freight

 

 

2,377

 

 

 

2,434

 

Accrued utilities

 

 

589

 

 

 

1,012

 

Other accrued expenses

 

 

7,810

 

 

 

14,020

 

Notes payable, related parties

 

 

 

 

 

27,040

 

Long-term debt, current portion

 

 

 

 

 

15,733

 

Operating lease liabilities

 

 

11,531

 

 

 

 

Other current liabilities

 

 

712

 

 

 

1,192

 

Total current liabilities

 

 

40,977

 

 

 

80,555

 

Deferred income taxes

 

 

1,114

 

 

 

1,114

 

Long-term debt, net

 

 

62,048

 

 

 

45,650

 

Noncurrent operating lease liabilities

 

 

49,866

 

 

 

 

Other long-term liabilities

 

 

4,209

 

 

 

10,764

 

Shareholders' equity:

 

 

 

 

 

 

 

 

Preferred stock, par value $0.01 per share, 5,000 shares authorized,

   none outstanding

 

 

 

 

 

 

Common stock, par value $0.01 per share, 80,000,000 shares authorized; 29,377,538

   and 27,710,861 shares issued and outstanding at June 30, 2019 and December 31,

   2018, respectively

 

 

294

 

 

 

277

 

Additional paid-in capital

 

 

138,288

 

 

 

132,080

 

Retained earnings

 

 

167,449

 

 

 

203,926

 

Total shareholders' equity

 

 

306,031

 

 

 

336,283

 

Total liabilities and shareholders' equity

 

$

464,245

 

 

$

474,366

 

 

The accompanying notes are an integral part of these statements .

3


CARBO CERAMICS INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

($ in thousands, except per share data)

(Unaudited)

 

 

 

Three months ended

 

 

Six months ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Revenues

 

$

43,099

 

 

$

57,989

 

 

$

90,557

 

 

$

107,356

 

Cost of sales (exclusive of depreciation and amortization shown below)

 

 

39,568

 

 

 

50,818

 

 

$

87,474

 

 

$

101,788

 

Depreciation and amortization

 

 

7,311

 

 

 

8,323

 

 

 

14,714

 

 

 

16,735

 

Gross loss

 

 

(3,780

)

 

 

(1,152

)

 

 

(11,631

)

 

 

(11,167

)

Selling, general and administrative expenses (exclusive of depreciation and amortization shown below)

 

 

9,784

 

 

 

10,685

 

 

 

19,816

 

 

 

20,292

 

Depreciation and amortization

 

 

398

 

 

 

620

 

 

 

796

 

 

 

1,234

 

Loss on sale of Russia proppant business

 

 

 

 

 

350

 

 

 

 

 

 

350

 

Other operating expenses (income)

 

 

89

 

 

 

(55

)

 

 

18

 

 

 

(59

)

Operating loss

 

 

(14,051

)

 

 

(12,752

)

 

 

(32,261

)

 

 

(32,984

)

Other expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

(2,286

)

 

 

(2,084

)

 

 

(4,363

)

 

 

(4,101

)

Other income, net

 

 

132

 

 

 

31

 

 

 

425

 

 

 

8

 

 

 

 

(2,154

)

 

 

(2,053

)

 

 

(3,938

)

 

 

(4,093

)

Loss before income taxes

 

 

(16,205

)

 

 

(14,805

)

 

 

(36,199

)

 

 

(37,077

)

Income tax expense

 

 

 

 

 

7

 

 

 

 

 

 

7

 

Net loss

 

$

(16,205

)

 

$

(14,812

)

 

$

(36,199

)

 

$

(37,084

)

Loss per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.57

)

 

$

(0.55

)

 

$

(1.29

)

 

$

(1.38

)

Diluted

 

$

(0.57

)

 

$

(0.55

)

 

$

(1.29

)

 

$

(1.38

)

Other information:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per common share

 

$

 

 

$

 

 

$

 

 

$

 

 

The accompanying notes are an integral part of these statements.

 

 

4


CARBO CERAMICS INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

($ in thousands)

(Unaudited)

 

 

 

 

 

Common

Stock

 

 

Additional

Paid-In

Capital

 

 

Retained

Earnings

 

 

Total

 

Balances at January 1, 2019

 

$

277

 

 

$

132,080

 

 

$

203,926

 

 

$

336,283

 

Net loss

 

 

 

 

 

 

 

 

(19,994

)

 

 

(19,994

)

Shares sold under ATM program

 

 

9

 

 

 

3,366

 

 

 

 

 

 

3,375

 

Stock granted under restricted stock plan, net

 

 

4

 

 

 

(4

)

 

 

 

 

 

 

Stock based compensation

 

 

 

 

 

710

 

 

 

 

 

 

710

 

Shares surrendered by employees to pay taxes

 

 

 

 

 

 

 

 

(278

)

 

 

(278

)

Balances at March 31, 2019

 

$

290

 

 

$

136,152

 

 

$

183,654

 

 

$

320,096

 

Net loss

 

 

 

 

 

 

 

 

(16,205

)

 

 

(16,205

)

Shares sold under ATM program

 

 

4

 

 

 

1,227

 

 

 

 

 

 

1,231

 

Modification of warrant

 

 

 

 

 

178

 

 

 

 

 

 

178

 

Stock granted under restricted stock plan, net

 

 

 

 

 

79

 

 

 

 

 

 

79

 

Stock based compensation

 

 

 

 

 

652

 

 

 

 

 

 

652

 

Balances at June 30, 2019

 

$

294

 

 

$

138,288

 

 

$

167,449

 

 

$

306,031

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common

Stock

 

 

Additional

Paid-In

Capital

 

 

Retained

Earnings

 

 

Total

 

Balances at January 1, 2018

 

$

271

 

 

$

125,715

 

 

$

279,779

 

 

$

405,765

 

Net loss

 

 

 

 

 

 

 

 

(22,272

)

 

 

(22,272

)

Stock granted under restricted stock plan, net

 

 

3

 

 

 

(3

)

 

 

 

 

 

 

Stock based compensation

 

 

 

 

 

903

 

 

 

 

 

 

903

 

Shares surrendered by employees to pay taxes

 

 

 

 

 

 

 

 

(421

)

 

 

(421

)

Balances at March 31, 2018

 

$

274

 

 

$

126,615

 

 

$

257,086

 

 

$

383,975

 

Net loss

 

 

 

 

 

 

 

 

(14,812

)

 

 

(14,812

)

Shares sold under ATM program

 

 

3

 

 

 

2,846

 

 

 

 

 

 

2,849

 

Stock granted under restricted stock plan, net

 

 

 

 

 

320

 

 

 

 

 

 

320

 

Stock based compensation

 

 

 

 

 

820

 

 

 

 

 

 

820

 

Other

 

 

 

 

 

 

 

 

1

 

 

 

1

 

Balances at June 30, 2018

 

$

277

 

 

$

130,601

 

 

$

242,275

 

 

$

373,153

 

 

The accompanying notes are an integral part of these statements.

 

 

5


CARBO CERAMICS INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

($ in thousands)

(Unaudited)

 

 

 

Six months ended

 

 

 

June 30,

 

 

 

2019

 

 

2018

 

Operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(36,199

)

 

$

(37,084

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

15,510

 

 

 

17,969

 

Amortization of debt issuance costs and original issue discount

 

 

1,061

 

 

 

340

 

Provision for doubtful accounts

 

 

183

 

 

 

81

 

Deferred income taxes

 

 

 

 

 

4

 

Loss (gain) on disposal or impairment of assets

 

 

18

 

 

 

(59

)

Loss on sale of Russian proppant business

 

 

 

 

 

350

 

Noncash lease expense

 

 

862

 

 

 

 

Stock compensation expense

 

 

1,586

 

 

 

2,254

 

PIK repayment on notes payable, related parties

 

 

(2,040

)

 

 

 

Change in fair value of derivative instruments

 

 

 

 

 

(1,348

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Trade accounts and other receivables

 

 

11,676

 

 

 

(3,777

)

Inventories

 

 

5,830

 

 

 

836

 

Prepaid expenses and other current assets

 

 

(194

)

 

 

(407

)

Accounts payable

 

 

1,293

 

 

 

(1,341

)

Accrued expenses

 

 

(7,938

)

 

 

(4,303

)

Income tax receivable, net

 

 

(9

)

 

 

97

 

Other, net

 

 

(169

)

 

 

2,126

 

Net cash used in operating activities

 

 

(8,530

)

 

 

(24,262

)

Investing activities

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(1,085

)

 

 

(1,179

)

Investment in PicOnyx

 

 

(684

)

 

 

 

Issuance of Note from PicOnyx

 

 

(500

)

 

 

 

Net proceeds from asset sales

 

 

113

 

 

 

74

 

Net cash used in investing activities

 

 

(2,156

)

 

 

(1,105

)

Financing activities

 

 

 

 

 

 

 

 

Repayments on notes payable

 

 

(874

)

 

 

(500

)

Repayments on long-term debt

 

 

(14,533

)

 

 

 

Repayments on notes payable, related parties

 

 

(25,000

)

 

 

 

Proceeds from long-term debt

 

 

14,533

 

 

 

 

Proceeds from issuance of common stock under ATM program

 

 

4,606

 

 

 

2,849

 

Payment of debt issuance costs

 

 

(218

)

 

 

 

Purchase of common stock

 

 

(279

)

 

 

(421

)

Net cash (used in) provided by financing activities

 

 

(21,765

)

 

 

1,928

 

Net decrease in cash and cash equivalents and restricted cash

 

 

(32,451

)

 

 

(23,439

)

Cash and cash equivalents and restricted cash at beginning of period

 

 

83,317

 

 

 

78,385

 

Cash and cash equivalents and restricted cash at end of period

 

$

50,866

 

 

$

54,946

 

Supplemental cash flow information

 

 

 

 

 

 

 

 

Interest paid

 

$

4,469

 

 

$

3,850

 

Income taxes paid

 

$

 

 

$

 

 

The accompanying notes are an integral part of these statements.

 

 

6


CARBO CERAMICS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

($ in thousands, except per share data)

(Unaudited)

 

1.

Basis of Presentation

The accompanying unaudited consolidated financial statements of CARBO Ceramics Inc. have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”) for interim financial information and with 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 for complete financial statements.  In the opinion of management, all adjustments, consisting only of normal recurring adjustments, considered necessary for a fair presentation have been included.  The results of the interim periods presented herein are not necessarily indicative of the results to be expected for any other interim period or the full year.  The consolidated balance sheet as of December 31, 2018 has been derived from the audited financial statements at that date.  These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2018 included in the annual report on Form 10-K of CARBO Ceramics Inc. for the year ended December 31, 2018.

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

The Company is currently producing ceramic technology proppants from its Eufaula, Alabama manufacturing facility, base ceramic proppants from its Toomsboro, Georgia manufacturing facility, and processing sand at its Marshfield, Wisconsin facility.  The Company also produces ceramic media at its McIntyre, Georgia and Eufaula, Alabama facilities.  The Company is also using its Toomsboro, Georgia facility for contract manufacturing.  In addition, the Company produces resin-coated ceramic proppants at its New Iberia, Louisiana facility.  The Company continues to assess liquidity needs and manage cash flows.  As a result of the steps the Company has taken to enhance its liquidity, the Company currently believes that cash on hand and cash flows from operations will enable the Company to meet its working capital, capital expenditure, debt service and other funding requirements for at least one year from the date this Form 10-Q is issued.  Our financial forecasts in recent periods have proven less reliable given customer demand, which is highly volatile in the current operating environment and no committed sales backlog exists with our customers.  As a result, there is no guarantee that our financial forecast, which projects sufficient cash will be available to meet planned operating expenses and other cash needs, will be accurate.  In the event that the Company experiences lower customer demand, lower prices for its products and services, or higher expenses than it forecasted, or if the Company underperforms relative to its forecast, the Company could experience negative cash flows from operations, as has been the case in prior years, which would reduce its cash balances and liquidity.    

The second phase of the retrofit of our Eufaula, Alabama plant with the new KRYPTOSPHERE ® technology has been suspended until such time that market conditions improve enough to warrant completion.  As of June 30, 2019, the value of the assets relating to this project totaled approximately 82% of the Company’s total construction in progress and the project is approximately 75% complete.  

On May 28, 2019, the Company entered into an agreement with PicOnyx, Inc. (“PicOnyx”) pursuant to which the Company agreed to provide certain services and contribute certain manufacturing assets to PicOnyx in exchange for 9.7 million shares of convertible preferred stock in PicOnyx.  At the Company’s election, the preferred stock can be converted into a pre-determined number of shares of common stock.  Additionally, the preferred stock has voting rights that give the Company approximately 22% of voting rights based on the number of outstanding shares of PicOnyx stock.  As part of its agreement with PicOnyx, the Company is also designated a seat on the PicOnyx Board of Directors.  The Company also holds a warrant to purchase additional shares from PicOnyx with a nominal exercise price in the event of certain qualified financings.   In addition, the Company entered into a Contract Manufacturing Services Agreement with PicOynx, pursuant to which the Company agreed to provide contract manufacturing services to PicOnyx for certain of its products.  Pursuant to the terms of the Subscription and Asset Contribution Agreement, the Company has agreed to lease certain property to PicOnyx.  The Company recorded its investment in PicOnyx at the fair value of the assets given up and liabilities assumed, which approximated the book value and which the Company believes represents the standalone selling price.  The fair value was estimated using equipment appraisals (Level 3 inputs as defined in ASC 820).  No gain or loss was recorded at inception.  Given that the Company’s investment in PicOnyx does not have a readily-determinable fair value, the Company measures the investment at cost, less any impairment, and will adjust the investment to fair value to the extent an observable price change for identical or similar investments of PicOnyx is identified.  No adjustments to the cost basis were recorded during the quarter ended June 30, 2019.  The net book value of the Company’s investment in PicOnyx is approximately $4,300 at June 30, 2019 and is recorded in Intangible and other assets, net on the consolidated balance sheet.  The transaction resulted in a non-cash change in Property, plant and equipment and Intangible and other assets, net of approximately $3,500 as well as a non-cash change in Accounts Payable and

7


Intangible and other assets, net of approximately $400. PicOnyx represents a variable interest entity for which the Com pany holds a variable interest.  The Company does not consolidate PicOnyx as the Company is not the primary beneficiary because the Company does not have the power to direct the activities that most significantly impact PicOnyx’s economic performance.   In addition, the Company provided PicOnyx $500 in exchange for a convertible promissory note.   The note will automatically be converted to equity shares if certain qualified financings occur.   The convertible promissory note bears interest at 7.5% per year.   The note matures on the earlier of August 1, 2021 or the termination of the Contract Manufacturing Services Agreement.    The note is collateralized by all of the manufacturing assets the Company contributed to PicOnyx.

Deferred Taxes – Valuation Allowance

Accounting Standards Codification (“ASC”) Topic 740, Income Taxes, provides the carrying value of deferred tax assets should be reduced by the amount not expected to be realized.  A company should reduce deferred tax assets by a valuation allowance if, based on the weight of all available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized.  The valuation allowance should be sufficient to reduce the deferred tax asset to the amount that is more likely than not to be realized.  ASC 740 requires all available evidence, both positive and negative, be considered to determine whether a valuation allowance for deferred tax assets is needed in the financial statements.  Additionally, there can be statutory limitations on the deferred tax assets should certain conditions arise.    As a result of the significant decline in oil and gas activities and net losses incurred over the past several years, we believe it is more likely than not that a portion of our deferred tax assets will not be realized in the future.  Our valuation allowance against a portion of our deferred tax assets as of June 30, 2019 was $80,311.  Our assessment of the realizability of our deferred tax assets is based on the weight of all available evidence, both positive and negative, including future reversals of deferred tax liabilities.

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, corporate cards and funds held in escrow relating to the sale of its Millen plant.  As of June 30, 2019 and December 31, 2018, total restricted cash was $10,053 and $10,565, respectively.

Lower of Cost and Net Realizable Value Adjustments

As of June 30, 2019, the Company reviewed the carrying values of all inventories and concluded that no adjustments were warranted for finished goods and raw materials intended for use in the Company’s manufacturing process.

Manufacturing Production Levels Below Normal Capacity

As a result of the Company substantially reducing manufacturing production levels, including by idling certain facilities, certain production costs have been 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 three months ended June 30, 2019 and 2018, the Company expensed $5,861 and $6,834, respectively, in production costs.  For the six months ended June 30, 2019 and 2018, the Company expensed $14,345 and $16,557, respectively, in production costs.

Long-lived and Other Noncurrent Assets Impairment

The Company has temporarily idled production at various manufacturing facilities.  The Company does not assess temporarily idled assets for impairment unless events or circumstances indicate that the carrying amounts of those assets may not be recoverable.  Short-term stoppages of production for less than one year do not generally significantly impact the long-term expected cash flows of the idled facility.   As of June 30, 2019, the Company concluded that there were no events or circumstances that would indicate that carrying amounts of long-lived and other noncurrent assets might be impaired.  However, the Company continues to monitor market conditions closely.  Further deterioration of market conditions could result in impairment charges being taken on the Company’s long-lived and other noncurrent assets, including the Company’s manufacturing plants, goodwill and intangible assets.  The Company will evaluate long-lived and other noncurrent assets for impairment at such time that events or circumstances indicate that carrying amounts might be impaired.

Reclassification of Prior Period Amounts

Certain prior period financial information has been reclassified to conform to current period presentation.

 

8


2.

Loss Per Share

The following table sets forth the computation of basic and diluted loss per share under the two-class method:

 

 

 

Three months ended

 

 

Six months ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Numerator for basic and diluted loss per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(16,205

)

 

$

(14,812

)

 

$

(36,199

)

 

$

(37,084

)

Effect of reallocating undistributed earnings

   of participating securities

 

 

 

 

 

 

 

 

 

 

 

 

Net loss available under the two-class method

 

$

(16,205

)

 

$

(14,812

)

 

$

(36,199

)

 

$

(37,084

)

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator for basic loss per share--weighted-average

   shares

 

 

28,615,006

 

 

 

26,930,914

 

 

 

28,043,040

 

 

 

26,860,146

 

Effect of dilutive potential common shares

 

 

 

 

 

 

 

 

 

 

 

 

Denominator for diluted loss per share--adjusted

   weighted-average shares

 

 

28,615,006

 

 

 

26,930,914

 

 

 

28,043,040

 

 

 

26,860,146

 

Basic loss per share

 

$

(0.57

)

 

$

(0.55

)

 

$

(1.29

)

 

$

(1.38

)

Diluted loss per share

 

$

(0.57

)

 

$

(0.55

)

 

$

(1.29

)

 

$

(1.38

)

 

 

3.

Natural Gas Derivative Instruments

Natural gas is used to fire the kilns at the Company’s manufacturing plants.   In an effort to mitigate volatility in the cost of natural gas purchases and reduce exposure to short term spikes in the price of this commodity, we previously contracted in advance for portions of our future natural gas requirements.  Due to the severe decline in industry activity beginning in early 2015, the Company significantly reduced production levels and consequently did not take delivery of all of the contracted natural gas quantities.  As a result, the Company had accounted for the relevant contracts as derivative instruments.  However, as of December 31, 2018, the last derivative contract expired and no future natural gas obligations existed.

During the three months ended June 30, 2019 and 2018, the Company recognized a gain on derivative instruments of $0 and $412, respectively, in cost of sales.  During the six months ended June 30, 2019 and 2018, the Company recognized a gain on derivative instruments of $0 and $630, respectively, in cost of sales.

 

 

4.

Leases

The Company leases certain property, plant and equipment under operating leases, primarily consisting of railroad equipment leases, certain distribution center assets and real estate.  Leases with an initial term of twelve months or less are not recorded on the balance sheet.

Most leases include one or more options to renew, with renewal terms that can extend the lease term from one to ten years or more. The exercise of lease renewal options is typically at the Company’s sole discretion. Certain leases also include options to purchase the leased property.

As a result of the underutilization of some of the Company’s assets, we rent or sublease certain assets to third parties, primarily consisting of a portion of our railroad equipment and distribution center assets.

We determine if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, operating lease liabilities, and noncurrent operating lease liabilities on our consolidated balance sheets.

Operating lease 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. As of June 30, 2019, it is not reasonably certain that we will exercise any of these options.  Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.  

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.

9


The components of lease cost were as follows:

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30, 2019

 

June 30, 2019

 

Operating lease cost

 

$

3,811

 

$

7,969

 

Short-term lease cost

 

 

536

 

 

1,255

 

Sublease income (a)

 

 

(1,009

)

 

(2,109

)

Net lease cost

 

$

3,338

 

$

7,115

 

( a ) As a result of the adoption of ASC 842, sublease income is classified within revenues for the three and six months ended June 30, 2019.  Prior to the adoption, sublease income was recorded as a reduction to cost of sales.  Sublease income for the three and six months ended June 30, 2019 excludes rental income from owned assets of $393 and $799, respectively, which is recorded within revenues.

Future minimum lease payments under non-cancellable leases as of June 30, 2019 were as follows:

2019

 

$

8,708

 

2020

 

 

16,881

 

2021

 

 

16,471

 

2022

 

 

12,554

 

2023

 

 

9,209

 

Thereafter

 

 

16,455

 

Total lease payments

 

$

80,278

 

Less: imputed interest

 

 

(18,881

)

Present value of lease liabilities

 

$

61,397

 

The adoption of ASC 842 resulted in the Company recording a right of use asset of $56,591 and a total lease liability of $64,877 on January 1, 2019.  The Company also reduced its other long-term liabilities by approximately $6,500 and accrued expenses by approximately $1,800 as of January 1, 2019 given that deferred rent is now included within the total lease liability.  These adjustments represented non-cash changes during the period ended March 31, 2019.

Other information related to leases was as follows:

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30, 2019

 

June 30, 2019

 

Cash paid for amounts included in the measurement of lease liabilities

 

 

 

 

 

 

 

   Operating cash flows from operating leases

 

$

3,379

 

$

6,358

 

Leased assets obtained in exchange for new operating lease liabilities

 

 

 

 

 

For the six months ended June 30, 2019, the weighted average remaining lease term was 5.9 years and the weighted average discount rate was 10.3%.

 

5.

Stock Based Compensation

On May 21, 2019, the shareholders approved the 2019 CARBO Ceramics Inc. Omnibus Incentive Plan (the “2019 Omnibus Incentive Plan”).  The 2019 Omnibus Incentive Plan replaces the Amended and Restated 2014 CARBO Ceramics Inc. Omnibus Incentive Plan (“A&R 2014 Plan”). Under the 2019 Omnibus Incentive Plan, the Company may grant cash-based awards, stock options (both non-qualified and incentive) and other equity-based awards (including stock appreciation rights, phantom stock, restricted stock, restricted stock units, performance shares, deferred share units or share-denominated performance units) to employees and non-employee directors.  The amount paid under the 2019 Omnibus Incentive Plan to any single participant in any calendar year with respect to any cash-based award shall not exceed $5,000.  Awards may be granted with respect to a number of shares of the Company’s Common Stock that in the aggregate does not exceed 2,500,000 shares prior to the fifth anniversary of the effective date of the 2019 Omnibus Incentive Plan, plus (i) the number of shares that are forfeited, cancelled or returned and (ii) the number of shares subject to awards that are withheld by the Company or tendered by the participant to the Company to satisfy exercise price or tax withholding obligations in connection with awards other than options or stock appreciation rights.  No more than 100,000 shares may be granted to any single participant in any calendar year.  Equity-based awards may be subject to performance-based and/or service-based conditions.  With respect to stock options and stock appreciation rights granted, the exercise price shall not be less than the market value of the underlying Common Stock on the date of grant.  The maximum term of an option is ten years.  Restricted stock awards granted generally vest (i.e., transfer and forfeiture restrictions on these shares are lifted) proportionately on each of the first three anniversaries of the grant date, but subject to certain limitations, awards may specify other vesting periods.  As of June 30,

10


2019 , 2,455,000 shares were available for issuance under the 201 9 Omnibus Incentive Plan.   Although the Company’s A&R 2014 Plan has been cancelled, unvested shares granted under that plan remain outstanding in acc ordance with its terms.

A summary of restricted stock activity and related information for the six months ended June 30, 2019 is presented below:

 

 

 

Shares

 

 

Weighted-Average

Grant-Date

Fair Value

Per Share

 

Nonvested at January 1, 2019

 

 

541,560

 

 

$

12.14

 

Granted

 

 

468,984

 

 

$

4.55

 

Vested

 

 

(246,675

)

 

$

12.74

 

Forfeited

 

 

(29,170

)

 

$

9.96

 

Nonvested at June 30, 2019

 

 

734,699

 

 

$

7.18

 

 

As of June 30, 2019, there was $4,127 of total unrecognized compensation cost related to restricted shares granted under the now-cancelled A&R 2014 Plan.  That cost is expected to be recognized over a weighted-average period of 2.1 years.  The total fair value of shares vested during the six months ended June 30, 2019 was $1,011.  For restricted stock awards granted to certain executives of the Company, there is a holding period requirement of two years after the vesting date.  For the portion of such awards that are not expected to be withheld to satisfy tax withholdings, the grant date fair value for the January 2019 awards was discounted for the restriction of liquidity by 20.6%, which was calculated using the Finnerty model.

The Company made market-based cash awards to certain executives of the Company pursuant to the now-cancelled A&R 2014 Plan.  As of June 30, 2019, the total target award outstanding was $3,019.  The payout of awards can range from 0% to 200% based on the Company’s Relative Total Shareholder Return calculated over a three year period beginning January 1 of the year each grant was made.  During the six months ended June 30, 2019, a total of $708 was paid relating to the 2016 grant, which was approximately 61% of the total target award. During the six months ended June 30, 2018, a total of $526 was paid relating to the 2015 grant, which was approximately 76% of the total target award.

The Company also granted phantom stock and cash-settled restricted stock units (collectively discussed as “phantom stock”) to certain key employees pursuant to the now-cancelled A&R 2014 Plan.  The units subject to a phantom stock award vest and cease to be forfeitable in equal annual installments over a three-year period.  Participants awarded units of phantom stock are entitled to a lump sum cash payment equal to the fair market value of a share of Common Stock on the vesting date.  In no event will Common Stock of the Company be issued with regard to outstanding phantom stock awards.  As of June 30, 2019, there were 319,892 units of phantom stock granted, of which 115,020 have vested and 27,862 have been forfeited.  As of June 30, 2019, nonvested units of phantom stock had a total value of $239, a portion of which is accrued as a liability within Accrued Payroll and Benefits.  Compensation expense for these units of phantom stock will be recognized over the three-year vesting period.  The amount of compensation expense recognized each period will be based on the fair value of the Company’s common stock at the end of each period.

 

 

6.

Long-Term Debt and Notes Payable

On March 2, 2017, the Company entered into an Amended and Restated Credit Agreement (the “Credit Agreement”), as last amended on June 20, 2019, with Wilks Brothers, LLC (the “Wilks”).  The Credit Agreement is a $65,000 facility maturing on December 31, 2022.  The Company’s obligations bear interest at 9.00% and are guaranteed by its two operating subsidiaries.  No principal repayments are required until maturity (except in certain circumstances), and there are no financial covenants. In May 2019, the Company repaid $14,533 to the Wilks as a result of the required prepayment relating to the net cash proceeds from the sale of its Millen, Georgia facility.  On June 20, 2019, the Company entered into the Second Amendment to Amended and Restated Credit Agreement and Joinder (the “Amended Credit Agreement”) with the Wilks and a promissory note (“Equify Note”) with Equify Financial LLC, an affiliate of the Wilks, (“Equify”). By amending the previous credit agreement, the Company was able to refinance the amount that was repaid in May 2019, such that the total outstanding principal remains at $65,000, but the Company’s repayment obligations are now split between the Wilks and Equify, at $33,000 and $32,000, respectively.  The interest rate of 9%, maturity on December 31, 2022, and the terms and conditions for both loans remain the same.

The loan cannot be prepaid before March 31, 2021 without making the lenders whole for interest that would have been payable over the entire remaining term of the loan.  The Company’s obligations under the Amended Credit Agreement are secured by: (i) a pledge of all accounts receivable and inventory, (ii) cash in certain accounts, (iii) domestic distribution assets residing on owned real property, (iv) the Company’s Marshfield, Wisconsin and Toomsboro, Georgia plant facilities and equipment, and (v) certain real property interests in mines and minerals.  

11


 

As of June 30, 2019, the Company’s combined outstanding debt to Wilks and Equify under the Amended Credit Agreement and Equify Note was $65,000.   As of June 30, 2019, the fair value of the Company’s long-term debt approximated the carrying value.

As of June 30, 2019, the Company had $677 of unamortized debt issuance costs relating to the Credit Agreement and Amended Credit Agreement that are presented as a direct reduction from the carrying amount of the long-term debt obligation.  As a result of the May 2019 repayment, the Company wrote off approximately $137 of unamortized debt issuance costs relating to the Credit Agreement.  As a result of the June 2019 refinancing, the Company added approximately $218 to debt issuance costs resulting from an amendment fee paid directly to Wilks.  The Company had $7,475 and $2,625 in standby letters of credit issued through its banks as of June 30, 2019 and December 31, 2018, respectively, primarily as collateral relating to railcar leases and other obligations.

On March 2, 2017, in connection with entry into the Credit Agreement, the Company issued a Warrant (the “Warrant”) to Wilks.  Subject to the terms of the Warrant, the Warrant entitled the holder thereof to purchase up to 523,022 shares of the Common Stock, at an exercise price of $14.91 per share, payable in cash.  The Warrant was amended in connection with the Amended Credit Agreement and June 2019 refinancing to revise the exercise price to $4.00 and to extend the expiration date to December 31, 2024.   Based on a Form 13D filing with the SEC on July 9, 2019 as of June 20, 2019, the Wilks owned approximately 10.5% of the Company’s outstanding common stock as of June 30, 2019, and should the Wilks fully exercise the Warrant to purchase an additional 523,022 shares, the Wilks would hold approximately 12.1% of the Company’s outstanding common stock.  Upon issuance of the Warrant, the Company recorded an increase to additional paid-in capital of $3,871.  Upon modification of the Warrant, the Company recorded an increase to additional paid-in capital of $178.  As a result of the May 2019 repayment, the Company wrote off approximately $609 of unamortized original issue discount.  As of June 30, 2019, the unamortized original issue discount was $2,276.

In May 2016, the Company received proceeds of $25,000 from the issuance of separate unsecured Promissory Notes (the “Notes”) to two of the Company’s Directors.  Each Note matured on April 1, 2019 and bore interest at 7.00%.  On March 2, 2017, in connection with the Credit Agreement, the Notes were amended to provide for payment-in-kind, or PIK, interest payments at 8.00% until the lenders under the New Credit Agreement receive two consecutive semi-annual cash interest payments.   On April 1, 2017, the Company made a $997 interest payment as PIK, and capitalized the resulting amount to the outstanding principal balance.  On October 1, 2017, the Company made a $1,043 interest payment as PIK, and capitalized the resulting amount to the outstanding principal balance.  On April 1, 2019, the Company made a $27,040 payment repaying the outstanding principal balance of the Notes.

Interest cost for the six months ended June 30, 2019 and 2018 was $4,401 and $4,137, respectively.  Interest cost primarily includes interest expense relating to the Company’s debts as well as amortization and the write-off of debt issuance costs and amortization of the original issue discount associated with the Amended Credit Agreement and Warrant.

 

 

7.

New Accounting Pronouncements

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 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.  As of June 30, 2019, the Company’s operating lease ROU asset was $52,266 and its total lease liability was $61,397.  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.  See Note 4 for additional information.

 

 

8.

Equity Offering

On July 28, 2016, the Company filed a prospectus supplement and associated sales agreement related to an at-the-market (“ATM”) equity offering program pursuant to which the Company may sell, from time to time, common stock with an aggregate offering price of up to $75,000 through Cowen and Company LLC, as sales agent, for general corporate purposes.  The Company’s Form S-3 Registration Statement filed on May 20, 2016 has since expired, and as a result, we cannot sell additional common stock

12


under t he ATM program until a new Form S-3 Registration Statement is effective During the three months ended June 30 , 2019, the Company sold a total of 356,350 shares of its common stock under the ATM program for $ 1,259 , or an average of $ 3. 53 per share, and re ceived proceeds of $ 1,231 , net of commissions of $ 2 8 .   During the six months ended June 30, 2019, the Company sold a total of 1,250,000 shares of its common stock under the ATM program for $ 4,713 , or an average of $ 3.77 per share, and received proceeds of $ 4,607 , net of commissions of $ 106 As of June 30 , 2019, the Company had sold a total of 4, 955,936 shares of its common stock under the ATM program for $ 54,240 , or an average of $ 1 0.94 per share, and received proceeds of $ 5 3,019 , net of commissions of $ 1, 220 .    The most recent sales under the ATM program occurred on April 4, 2019.

 

 

9.

Segment Information

The Company has two operating segments: 1) Oilfield and Industrial Technologies and Services and 2) Environmental Technologies and Services.  Discrete financial information is available for each operating segment.  Management of each operating segment reports to our Chief Executive Officer, the Company’s chief operating decision maker, who regularly evaluates income before income taxes as the measure to evaluate segment performance and to allocate resources.   The accounting policies of each segment are the same as those described in the summary of significant accounting policies in Note 1 of the consolidated financial statements included in the annual report on Form 10-K for the year ended December 31, 2018.

The Company’s Oilfield and Industrial Technologies and Services segment manufactures and sells ceramic technology products and services, base ceramic proppant and frac sand for both the oilfield and industrial sectors.  These products have different technology features and product characteristics, which vary based on the application for which they are intended to be used.  The various ceramic products’ manufacturing processes are similar.

Oilfield ceramic technology products, base ceramic proppant and frac sand proppant are manufactured and sold to pressure pumping companies and oil and gas operators for use in the hydraulic fracturing of natural gas and oil wells.   The Oilfield and Industrial Technologies and Services segment also promotes increased production and Estimated Ultimate Recovery (“EUR”) of oil and natural gas by providing industry-leading technology to  Design, Build, and Optimize the Frac ® .  Through our wholly-owned subsidiary StrataGen, Inc., we sell one of the most widely used fracture stimulation software under the brand FracPro and provide fracture design and consulting services to oil and natural gas E&P companies under the brand StrataGen.

The Company’s industrial ceramic technology products are manufactured at the same facilities and using the same machinery and equipment as the oilfield products, however they are sold to industrial companies.  These products are designed for use in various industrial technology applications, including, but not limited to, casting and milling.  The Company’s chief operating decision maker reviews discreet financial information as a whole for all of the Company’s manufacturing, consulting and software businesses.  Manufacturing includes the manufacture of technology products, base ceramics, industrial ceramics, sand and contract manufacturing, regardless of the industry the products are ultimately sold to.  See Note 10 for disaggregated revenue information.

The Company’s Environmental Technologies and Services segment designs, manufactures and sells products and services intended to protect clients’ assets, minimize environmental risks, and lower lease operating expense (“LOE”).  Asset Guard Products Inc. (“AGPI”), a wholly-owned subsidiary of the Company, provides spill prevention, containment and countermeasure systems for the oil and gas and other industries.  AGPI uses proprietary technology designed to enable its clients to extend the life of their storage assets, reduce the potential for spills and provide containment of stored materials.

13


Summarized financial information for the Company’s operating segments for the three and six months ended June 30 , 2019 and 2018 is shown in the following tables.  Intersegment sales a re not material.

 

 

 

Oilfield and Industrial Technologies and Services

 

 

Environmental Technologies and Services

 

 

Total

 

 

 

($ in thousands)

 

Three Months Ended June 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

Revenue from external customers

 

$

35,913

 

 

$

7,186

 

 

$

43,099

 

(Loss) income before income taxes

 

 

(16,502

)

 

 

297

 

 

 

(16,205

)

Depreciation and amortization

 

 

7,432

 

 

 

277

 

 

 

7,709

 

Three Months Ended June 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

Revenue from external customers

 

$

49,788

 

 

$

8,201