Quarterly Report (10-q)

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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 September 30, 2020

☐	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 001-38510

COVIA HOLDINGS CORPORATION

(Exact name of registrant as specified in its charter)

Delaware		13-2656671
(State or Other Jurisdiction		(I.R.S. Employer
of Incorporation or Organization)		Identification No.)

3 Summit Park Drive, Suite 700

Independence, Ohio 44131

(Address of Principal Executive Offices) (Zip Code)

(800) 255-7263

(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act: None

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 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, 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 ☒

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ☒ No ☐

Number of shares of Common Stock outstanding, par value $0.01 per share, as of November 6, 2020: 158,195,156

Covia Holdings Corporation and Subsidiaries

Quarterly Report on Form 10-Q

For the Quarter Ended September 30, 2020

Table of Contents

	Page
Part I – Financial Information	3

Item 1 – Financial Statements (Unaudited)	3

Condensed Consolidated Statements of Income (Loss)	3

Condensed Consolidated Statements of Comprehensive Income (Loss)	4

Condensed Consolidated Balance Sheets	5

Condensed Consolidated Statements of Equity (Deficit)	6

Condensed Consolidated Statements of Cash Flows	8

Notes to Condensed Consolidated Financial Statements	9

Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations	38

Item 3 – Quantitative and Qualitative Disclosures about Market Risk	58

Item 4 – Controls and Procedures	59

Part II – Other Information	59

Item 1 – Legal Proceedings	59

Item 1A – Risk Factors	60

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds	64

Item 3 – Defaults upon Senior Securities	64

Item 4 – Mine Safety Disclosures	64

Item 5 – Other Information	65

Item 6 – Exhibits	65

Exhibit Index	65

Signatures	67

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

Covia Holdings Corporation and Subsidiaries

(Debtor-in-Possession)

Condensed Consolidated Statements of Income (Loss)

(Unaudited)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2020			2019			2020			2019
	(in thousands, except per share amounts)						(in thousands, except per share amounts)
Revenues	$	229,360		$	408,957		$	771,553		$	1,282,139
Cost of goods sold (excluding depreciation, depletion, and amortization shown separately)		165,835			332,234			600,943			1,039,763

Operating expenses
Selling, general and administrative expenses		28,093			35,628			91,284			116,232
Depreciation, depletion and amortization expense		27,730			51,920			93,769			169,219
Asset impairments		-			7,761			298,299			7,761
Restructuring and other charges		1,086			3,378			35,999			14,915
Loss (gain) on sale of subsidiaries		(67	)		(127,195	)		897			(127,195	)
Other operating expense (income), net		(883	)		18			(3,786	)		(4,704	)
Income (loss) from operations		7,566			105,213			(345,852	)		66,148

Interest expense, net (contractual interest for the three months ended September 30, 2020, $32,144)		1,714			26,894			84,637			79,896
Reorganization items, net		214,340			-			238,656			-
Other non-operating expense, net		670			1,924			6,265			5,682
Income (loss) before provision (benefit) for income taxes		(209,158	)		76,395			(675,410	)		(19,430	)

Provision (benefit) for income taxes		(3,278	)		22,471			(32,937	)		13,281
Net income (loss)		(205,880	)		53,924			(642,473	)		(32,711	)
Less: Net income (loss) attributable to the non-controlling interest		(34	)		152			(64	)		156
Net income (loss) attributable to Covia Holdings Corporation	$	(205,846	)	$	53,772		$	(642,409	)	$	(32,867	)

Earnings (loss) per share
Basic	$	(1.57	)	$	0.41		$	(4.88	)	$	(0.25	)
Diluted	$	(1.57	)	$	0.41		$	(4.88	)	$	(0.25	)

Weighted average number of shares outstanding
Basic		130,950			131,562			131,617			131,437
Diluted		130,950			131,745			131,617			131,437

The accompanying notes are an integral part of these condensed consolidated financial statements.

Covia Holdings Corporation and Subsidiaries

(Debtor-in-Possession)

Condensed Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2020			2019			2020			2019
	(in thousands)						(in thousands)
Net income (loss)	$	(205,880	)	$	53,924		$	(642,473	)	$	(32,711	)
Other comprehensive income (loss), before tax
Foreign currency translation adjustments		3,665			(3,055	)		(19,875	)		152
Employee benefit obligations		40			3,056			3,912			8,073
Amortization and change in fair value of derivative instruments		-			(3,831	)		22,500			(21,103	)
Total other comprehensive income (loss), before tax		3,705			(3,830	)		6,537			(12,878	)
Provision (benefit) for income taxes related to items of other comprehensive income (loss)		(22	)		985			4,900			(3,001	)
Comprehensive income (loss), net of tax		(202,153	)		49,109			(640,836	)		(42,588	)
Comprehensive income (loss) attributable to the non-controlling interest		(34	)		152			(64	)		156
Comprehensive income (loss) attributable to Covia Holdings Corporation	$	(202,119	)	$	48,957		$	(640,772	)	$	(42,744	)

The accompanying notes are an integral part of these condensed consolidated financial statements.

Covia Holdings Corporation and Subsidiaries

(Debtor-in-Possession)

Condensed Consolidated Balance Sheets

(Unaudited)

	September 30, 2020			December 31, 2019
	(in thousands, except par value)
Assets
Current assets
Cash and cash equivalents	$	246,888		$	319,484
Restricted cash		39,604			-
Accounts receivable, net of allowance for doubtful accounts of $4,566 and $2,211 at September 30, 2020 and December 31, 2019, respectively		132,364			199,027
Inventories, net		106,089			121,790
Other receivables		53,370			15,879
Prepaid expenses and other current assets		27,835			20,843
Total current assets		606,150			677,023

Property, plant and equipment, net		1,050,887			1,419,982
Operating right-of-use assets, net		68,699			158,489
Deferred tax assets, net		9,646			13,725
Goodwill		119,822			119,822
Intangibles, net		28,384			33,630
Other non-current assets		26,746			23,847
Total assets	$	1,910,334		$	2,446,518

Liabilities and Equity
Current liabilities
Current portion of long-term debt	$	544		$	18,633
Operating lease liabilities, current		3,493			63,773
Accounts payable		41,756			97,313
Accrued expenses		64,063			126,895
Deferred revenue		9,148			7,815
Total current liabilities		119,004			314,429

Long-term debt		864			1,539,073
Operating lease liabilities, non-current		15,098			272,378
Employee benefit obligations		64,436			66,073
Deferred tax liabilities, net		131			131
Other non-current liabilities		67,699			77,270
Total liabilities not subject to compromise		267,232			2,269,354

Liabilities subject to compromise		2,104,796			-
Total liabilities		2,372,028			2,269,354

Commitments and contingent liabilities (Note 16)
Equity (deficit)
Preferred stock: $0.01 par value, 15,000 authorized shares at September 30, 2020 and December 31, 2019
Shares outstanding: 0 at September 30, 2020 and December 31, 2019		-			-
Common stock: $0.01 par value, 750,000 authorized shares at September 30, 2020 and December 31, 2019
Shares issued: 158,195 at September 30, 2020 and December 31, 2019
Shares outstanding: 132,098 and 131,743 at September 30, 2020 and December 31, 2019, respectively		1,777			1,777
Additional paid-in capital		395,609			400,047
Retained earnings (deficit)		(284,552	)		357,857
Accumulated other comprehensive loss		(103,449	)		(105,086	)
Total equity attributable to Covia Holdings Corporation before treasury stock		9,385			654,595
Less: Treasury stock at cost
Shares in treasury: 26,097 and 26,452 at September 30, 2020 and December 31, 2019, respectively		(471,694	)		(478,110	)
Total equity (deficit) attributable to Covia Holdings Corporation		(462,309	)		176,485
Non-controlling interest		615			679
Total equity (deficit)		(461,694	)		177,164
Total liabilities and equity	$	1,910,334		$	2,446,518

The accompanying notes are an integral part of these condensed consolidated financial statements.

Covia Holdings Corporation and Subsidiaries

(Debtor-in-Possession)

Condensed Consolidated Statements of Equity (Deficit)

(Unaudited)

	Equity (deficit) attributable to Covia Holdings Corporation
	Common Stock		Shares of Common Stock		Additional Paid-in Capital			Retained Earnings (Deficit)			Accumulated Other Comprehensive Loss			Treasury Stock			Shares of Treasury Stock			Subtotal			Non- Controlling Interest			Total
	(in thousands)
Three Months Ended
September 30, 2019
Beginning balance	$	1,777		131,472	$	389,000		$	1,561,320		$	(100,287	)	$	(483,018	)		26,723		$	1,368,792		$	561		$	1,369,353
Net income		-		-		-			53,772			-			-			-			53,772			152			53,924
Other comprehensive loss		-		-		-			-			(4,815	)		-			-			(4,815	)		-			(4,815	)
Share-based awards exercised or distributed		-		260		(4,696	)		-			-			4,696			(260	)		-			-			-
Stock compensation expense		-		-		2,296			-			-			-			-			2,296			-			2,296
Transactions with non-controlling interest		-		-		-			-			-			-			-			-			(1	)		(1	)
Ending balance	$	1,777		131,732	$	386,600		$	1,615,092		$	(105,102	)	$	(478,322	)		26,463		$	1,420,045		$	712		$	1,420,757

Three Months Ended
September 30, 2020
Beginning balance	$	1,777		132,098	$	395,461		$	(78,706	)	$	(107,176	)	$	(471,694	)		26,097		$	(260,338	)	$	649		$	(259,689	)
Net loss		-		-		-			(205,846	)		-			-			-			(205,846	)		(34	)		(205,880	)
Other comprehensive income		-		-		-			-			3,727			-			-			3,727			-			3,727
Stock compensation expense		-		-		148			-			-			-			-			148			-			148
Ending balance	$	1,777		132,098	$	395,609		$	(284,552	)	$	(103,449	)	$	(471,694	)		26,097		$	(462,309	)	$	615		$	(461,694	)

The accompanying notes are an integral part of these condensed consolidated financial statements.

Covia Holdings Corporation and Subsidiaries

(Debtor-in-Possession)

Condensed Consolidated Statements of Equity (Deficit)

(Unaudited)

	Equity (deficit) attributable to Covia Holdings Corporation
	Common Stock		Shares of Common Stock		Additional Paid-in Capital			Retained Earnings (Deficit)			Accumulated Other Comprehensive Loss			Treasury Stock			Shares of Treasury Stock			Subtotal			Non- Controlling Interest			Total
	(in thousands)
Nine Months Ended
September 30, 2019
Beginning balance	$	1,777		131,188	$	388,027		$	1,647,959		$	(95,225	)	$	(488,141	)		27,007		$	1,454,397		$	556		$	1,454,953
Net loss		-		-		-			(32,867	)		-			-			-			(32,867	)		156			(32,711	)
Other comprehensive loss		-		-		-			-			(9,877	)		-			-			(9,877	)		-			(9,877	)
Share-based awards exercised or distributed		-		544		(9,805	)		-			-			9,819			(544	)		14			-			14
Stock compensation expense		-		-		8,378			-			-			-			-			8,378			-			8,378
Ending balance	$	1,777		131,732	$	386,600		$	1,615,092		$	(105,102	)	$	(478,322	)		26,463		$	1,420,045		$	712		$	1,420,757

Nine Months Ended
September 30, 2020
Beginning balance	$	1,777		131,743	$	400,047		$	357,857		$	(105,086	)	$	(478,110	)		26,452		$	176,485		$	679		$	177,164
Net loss		-		-		-			(642,409	)		-			-			-			(642,409	)		(64	)		(642,473	)
Other comprehensive loss		-		-		-			-			1,637			-			-			1,637			-			1,637
Share-based awards exercised or distributed		-		355		(6,416	)		-			-			6,416			(355	)		-			-			-
Stock compensation expense		-		-		1,978			-			-			-			-			1,978			-			1,978
Ending balance	$	1,777		132,098	$	395,609		$	(284,552	)	$	(103,449	)	$	(471,694	)		26,097		$	(462,309	)	$	615		$	(461,694	)

The accompanying notes are an integral part of these condensed consolidated financial statements.

Covia Holdings Corporation and Subsidiaries

(Debtor-in-Possession)

Condensed Consolidated Statements of Cash Flows

(Unaudited)

	Nine Months Ended September 30,
	2020			2019
	(in thousands)
Net loss attributable to Covia Holdings Corporation	$	(642,409	)	$	(32,867	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation, depletion, and amortization		93,769			169,219
Amortization of deferred financing costs		2,483			4,626
Asset impairments		298,299			7,761
(Gain) loss on disposal of fixed assets		(2,376	)		2,255
Gain on sale of subsidiaries		-			(127,195	)
Deferred income tax provision (benefit)		(2,182	)		6,414
Stock compensation expense		1,978			8,378
Non-cash loss on derivatives		35,820			-
Non-cash reorganization items, net		224,466			-
Net income (loss) from non-controlling interest		(64	)		156
Other, net		(26,171	)		5,037
Change in operating assets and liabilities:
Accounts receivable		63,796			13,303
Inventories		13,057			19,768
Prepaid expenses and other assets		(46,415	)		6,078
Accounts payable		9,106			(22,950	)
Accrued expenses		(18,495	)		8,812
Net cash provided by operating activities		4,662			68,795

Cash flows from investing activities
Capital expenditures		(28,773	)		(75,063	)
Capitalized interest		(966	)		(6,772	)
Proceeds from sale of fixed assets		4,867			2,998
Proceeds from sale of subsidiaries		-			234,014
Net cash provided by (used in) investing activities		(24,872	)		155,177

Cash flows from financing activities
Payments on Term Loan		(7,931	)		(12,375	)
Payments on other long-term debt		(66	)		(1,664	)
Payments on finance lease liabilities		(2,339	)		(3,460	)
Tax payments for withholdings on share-based awards exercised or distributed		(187	)		(602	)
Net cash used in financing activities		(10,523	)		(18,101	)

Effect of foreign currency exchange rate changes		(2,259	)		125
Increase (decrease) in cash, cash equivalents and restricted cash		(32,992	)		205,996

Cash, cash equivalents and restricted cash
Beginning of period		319,484			134,130
End of period	$	286,492		$	340,126

Supplemental disclosure of cash flow information:
Interest paid, net of capitalized interest	$	(50,636	)	$	(49,966	)
Income taxes paid		(10,364	)		(11,522	)
Non-cash increase in asset retirement obligations		6,514			-
Cash paid for reorganization items, net		(3,289	)		-
Non-cash investing activities:
Capital expenditures and capitalized interest in accounts payable and accrued expenses		2,722			1,272
Right-of-use assets obtained (terminated) in exchange for lease liabilities	$	(72,893	)	$	419,157

The accompanying notes are an integral part of these condensed consolidated financial statements.

Covia Holdings Corporation and Subsidiaries

(Debtor-in-Possession)

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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. (“Fairmount 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.

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 loss, 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 the September 30, 2020 Form 10-Q does not include all disclosures required by GAAP for complete financial statements. 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.

Covia Holdings Corporation and Subsidiaries

(Debtor-in-Possession)

Notes to Condensed Consolidated Financial Statements

(Unaudited)

On June 29, 2020 (“Petition Date”), Covia Holdings Corporation and certain of its direct and indirect U.S. subsidiaries (the “Company Parties”) filed petitions for reorganization under Chapter 11 of Title 11 of the United States Code (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. The Chapter 11 proceedings create certain 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.

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. These factors, together with the Company’s recurring losses and accumulated deficit, create substantial doubt regarding our ability to continue as a going concern. See those risk factors discussed under “Risk Factors” in Part II, Item 1A of this Report.

Voluntary Reorganization under Chapter 11

On June 29, 2020, the Company Parties filed voluntary petitions for relief (the “Chapter 11 Cases”) under Chapter 11 of the Bankruptcy Code (“Chapter 11”) 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. As discussed further below, to ensure ordinary course operations, the Company Parties obtained 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.

However, the Chapter 11 process can be unpredictable and involves significant risks and uncertainties. As a result of these risks and uncertainties, the amount and composition of the Company’s assets, liabilities, officers and/or directors could be significantly different following the outcome of the Chapter 11 cases, and the description of the Company’s operations, properties and liquidity and capital resources included in this Report may not accurately reflect its operations, properties and liquidity and capital resources following the Chapter 11 process.

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 “Original Agreement”) with certain creditors (the “Consenting Stakeholders”) under its Credit and Guaranty Agreement, dated as of June 1, 2018 (as amended or otherwise modified from time to time, the “Term Loan Agreement”), by and among the Company, as borrower, certain subsidiaries of the Company, as guarantors, Barclays Bank plc, as administrative agent, and the lenders party thereto from time to time (the “Term Loan Lenders”). The Original Agreement contemplates agreed-upon terms between the Company Parties and Consenting Stakeholders for a prearranged plan of reorganization.

Covia Holdings Corporation and Subsidiaries

(Debtor-in-Possession)

Notes to Condensed Consolidated Financial Statements

(Unaudited)

On July 7, 2020, the Consenting Stakeholders and the Company Parties entered into an Amended and Restated Restructuring Support Agreement (the “Restructuring Support Agreement”) to (a) revise the defined term “Required Consenting Stakeholders” to mean those Consenting Stakeholders holding 60.01% instead of 50.01% of the aggregate outstanding principal amount of the term loans under the Term Loan Agreement that are held by the Consenting Stakeholders and (b) provide that the Bankruptcy Court must enter, instead of enforce, an order setting the general claims bar date in the Chapter 11 Cases within 60 days of the petition date, which was June 29, 2020.

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 Agreement’s class of creditors entitled to vote on the Plan.

On September 25, 2020, the Company Parties filed a proposed Joint Chapter 11 Plan of Reorganization of Covia Holdings Corporation and Its Debtor Affiliates (as may be amended, supplemented, or modified from time to time, the “Plan”) and a related Disclosure Statement (the “Disclosure Statement”) describing, among other things, the Plan; the Company Parties’ anticipated financial restructuring; the events leading to the Chapter 11 Cases; certain events that have occurred or are anticipated to occur during the Chapter 11 Cases, including the anticipated solicitation of votes to approve the Plan from certain of the Company Parties’ creditors; projected recoveries with respect to claims against and equity interests in the Company Parties under the Plan; and certain other aspects of the anticipated financial restructuring. Unless otherwise defined herein or the context otherwise requires, the capitalized terms below in this Note 1 have the meanings set forth in the Plan. The material terms of the Plan and Restructuring Support Agreement are as follows:

•

Each Holder of an Allowed Secured Tax Claim shall receive at the option of the Reorganized Debtors: (1) payment in full in Cash of such Holder’s Allowed Secured Tax Claim; or (2) equal semi-annual Cash payments commencing as of the Effective Date or as soon as reasonably practicable thereafter and continuing for five years, in an aggregate amount equal to such Allowed Secured Tax Claim, together with interest at the applicable non-default rate under applicable non-bankruptcy law, subject to the option of the applicable Reorganized Debtor to prepay the entire amount of such Allowed Secured Tax Claim during such time period.

•

Each Holder of an Allowed Other Secured Claim shall receive at the option of the Reorganized Debtors (1) payment in full in Cash; (2) Reinstatement of such Allowed Other Secured Claim, notwithstanding any contractual provision or applicable non-bankruptcy law that entitles the holder of such claim to demand or to receive payment prior to the stated maturity of such Allowed Other Secured Claim from and after the occurrence of default; (3) delivery of the collateral securing such Allowed Other Secured Claim; or (4) such other treatment rendering such Allowed Other Secured Claim Unimpaired.

•

Each Holder of an Allowed Other Priority Claim shall receive at the option of the Reorganized Debtors: (1) Cash in an amount equal to such Allowed Other Priority Claim; or (2) such other treatment rendering such Allowed Other Priority Claim Unimpaired.

•

Each Holder of an Allowed Secured Term Loan Claim or an Allowed Secured Swap Agreements Claim, respectively, shall receive its Pro Rata share of (1) the Excess Cash; (2) the New Term Loan; and (3) the Financing Claims Equity Pool.

•

Each Holder of a Claim against Covia that is an Allowed General Unsecured Claim, Term Loan Deficiency Claim, or Swap Agreements Deficiency Claim shall receive, in full and final satisfaction of such Allowed Claim, its Pro Rata share of the Parent Unsecured Claims Equity Pool.

•

Each Holder of a Claim against one or more Debtors other than Covia that is an Allowed General Unsecured Claim, Term Loan Deficiency Claim, or Swap Agreements Deficiency Claim shall receive, in full and final satisfaction of such Allowed Claim, its Pro Rata share of the Non-Parent Unsecured Claims Equity Pool.

•

All Intercompany Claims shall be, at the option of the Reorganized Debtors with the consent of the Required Consenting Stakeholders, (1) Reinstated or (2) distributed, contributed, set off, settled, cancelled, released, or otherwise addressed.

Covia Holdings Corporation and Subsidiaries

(Debtor-in-Possession)

Notes to Condensed Consolidated Financial Statements

(Unaudited)

•

All Intercompany Interests shall be, at the option of the Reorganized Debtors with the consent of the Required Consenting Stakeholders, (1) Reinstated in accordance with Article III.G of the Plan, distributed, contributed, or (2) cancelled, released, or otherwise addressed.

•

On the Effective Date, Covia Interests will be cancelled, released, and extinguished without any distribution on account of such Existing Equity Interests.

All Section 510(b) Claims, if any, will be discharged, cancelled, released, and extinguished as of the Effective Date, and will be of no further force or effect, and Holders of Allowed Section 510(b) Claims will not receive any distribution on account of such Allowed Section 510(b) Claims.

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 the 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. See “Risk Factors” in Part II, Item 1A of this Report for additional information.

NYSE Delisting and Deregistration under Section 12(b) of the Exchange Act

On July 21, 2020, NYSE Regulation, Inc. filed a Form 25 with the SEC to delist Covia Holdings Corporation’s common stock (the “common stock”) from the New York Stock Exchange at the opening of business on August 3, 2020. The deregistration of the common stock under Section 12(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), was effective on October 19, 2020. After the delisting on August 3, 2020, the common stock began trading on the OTC Pink Market maintained by the OTC Markets Group, Inc. under the symbol “CVIAQ”.

Bankruptcy Accounting

For the periods following the Petition Date, the Company has applied Accounting Standards Codification 852 - Reorganizations (“ASC 852”) in preparing the consolidated financial statements. ASC 852 requires the financial statements, for periods subsequent to the commencement of the Chapter 11 Cases, to distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. Accordingly, certain charges incurred during the three and nine months ended September 30, 2020 related to the bankruptcy proceedings, including unamortized long-term debt issuance costs associated with debt classified as liabilities subject to compromise, are recorded as “Reorganization items, net.” In addition, the Company Parties’ pre-petition obligations that may be impacted by the Chapter 11 Cases have been classified on the Condensed Consolidated Balance Sheets at September 30, 2020 as “Liabilities subject to compromise.” These liabilities are reported at the amounts the Company anticipates will be allowed by the Bankruptcy Court, even if they may ultimately be settled for lesser amounts. See below for more information regarding Reorganization items.

ASC 852 requires certain additional reporting for financial statements prepared between the bankruptcy filing date and the date of emergence from bankruptcy, including:

•

Reclassification of Company Parties pre-petition liabilities that are unsecured, under-secured or where it cannot be determined that the liabilities are fully secured, to a separate line item in the Condensed Consolidated Balance Sheets called, “Liabilities subject to compromise”; and

•

Segregation of “Reorganization items, net” as a separate line in the Condensed Consolidated Statements of Loss, outside of loss from operations.

Covia Holdings Corporation and Subsidiaries

(Debtor-in-Possession)

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Debtor-In-Possession

The Company Parties are currently operating as debtors-in-possession in accordance with the applicable provisions of the Bankruptcy Code. The Bankruptcy Court has approved motions filed by the Company Parties that were designed primarily to mitigate the impact of the Chapter 11 Cases on the Company’s operations, customers and employees. In general, as debtors-in-possession under the Bankruptcy Code, the Company Parties are authorized to continue to operate as an ongoing business, but may not engage in transactions outside the ordinary course of business without the prior approval of the Bankruptcy Court. Pursuant to first day motions filed with the Bankruptcy Court, the Bankruptcy Court authorized the Company Parties to conduct their business activities in the ordinary course, including, among other things and subject to the terms and conditions of such orders, authorizing the Company Parties to: (i) pay employees’ wages and related obligations; (ii) continue to operate their cash management system in the ordinary course of business consistent with pre-petition practice; (iii) use cash collateral on a final basis; (iv) pay taxes in the ordinary course; and (v) maintain their insurance program in the ordinary course.

Automatic Stay

Subject to certain specific exceptions under the Bankruptcy Code, the filing of the petitions for the Chapter 11 Cases on the Petition Date automatically stayed most judicial or administrative actions against the Company Parties and efforts by creditors to collect on or otherwise exercise rights or remedies with respect to pre-petition claims. Absent an order from the Bankruptcy Court, substantially all of the Company Parties’ pre-petition liabilities are subject to settlement under the Bankruptcy Code. See Note 24, Condensed Combined Debtor-In-Possession Financial Information for additional information.

Executory Contracts

Subject to certain exceptions, under the Bankruptcy Code, the Company Parties may assume, amend or reject certain executory contracts and unexpired leases subject to the approval of the Bankruptcy Court and certain other conditions. Generally, the rejection of an executory contract or unexpired lease is treated as a pre-petition breach of such executory contract or unexpired lease and, subject to certain exceptions, relieves the Company Parties from performing their future obligations under such executory contract or unexpired lease but entitles the contract counterparty or lessor to a pre-petition general unsecured claim for damages caused by such deemed breach. Generally, the assumption of an executory contract or unexpired lease requires the Company Parties to cure existing monetary defaults under such executory contract or unexpired lease and provide adequate assurance of future performance. Accordingly, any description of an executory contract or unexpired lease with the Company Parties in this Report, including where applicable a quantification of the Company’s obligations under any such executory contract or unexpired lease of the Company Parties, is qualified by any overriding rights the Company has under the Bankruptcy Code.

Potential Claims

The Company Parties filed schedules and statements (the “Schedules and Statements”) and reports required under Federal Rule of Bankruptcy Procedure 2015.3 (the “2015.3 Reports”) on August 12, 2020, and August 13, 2020, respectively. The Schedules and Statements set forth, among other things, the assets and liabilities of each of the Company Parties, subject to the assumptions filed in connection therewith. The 2015.3 Reports set forth, among other things, financial information of entities in which a Chapter 11 estate holds a controlling or substantial interest. The Schedules and Statements and 2015.3 Reports may be subject to further amendment or modification after filing.

The Bankruptcy Court entered an order on August 3, 2020, setting claim bar dates for certain types of claims. Certain holders of pre-petition claims that are not governmental units are required to file proofs of claim by September 18, 2020 (the “Bar Date”). These claims will be reconciled to amounts recorded in the Company’s accounting records. Differences in amounts recorded and claims filed by creditors will be investigated and resolved, including through the filing of objections with the Bankruptcy Court, where appropriate. The Company may ask the Bankruptcy Court to disallow claims that the Company believes are duplicative, have been later amended or superseded, are without merit, are overstated or should be disallowed for other reasons. In addition, as a result of this process, the Company may identify additional liabilities that will need to be recorded or reclassified to Liabilities subject to compromise. In light of the substantial number of claims expected to be filed, the claims resolution process may take considerable time to complete and likely will continue after the Company Parties emerge from bankruptcy.

Covia Holdings Corporation and Subsidiaries

(Debtor-in-Possession)

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Reorganization Items, Net

The Company Parties have incurred and will continue to incur significant costs associated with the reorganization, primarily legal, investment banking, financial advisory and other professional fees, the write-off of deferred long-term debt fees on debt subject to compromise and the net expenses incurred due to the termination and modification of lease agreements. The amount of these costs, which since the Petition Date are being expensed as incurred, are expected to significantly affect the Company’s results of operations. Professional fees incurred prior to the Petition Date but related to the bankruptcy filing have been recorded as Restructuring and other charges on the Income Statement. In accordance with applicable guidance, costs associated with the bankruptcy proceedings subsequent to the Petition Date have been recorded as Reorganization items, net within the Company’s accompanying Condensed Consolidated Statement of Loss for the three and nine months ended September 30, 2020. See Note 23, Reorganization Items, Net.

Financial Statement Classification of Liabilities Subject to Compromise

The accompanying Condensed Consolidated Balance Sheets as of September 30, 2020 includes amounts classified as “Liabilities subject to compromise,” which represent liabilities the Company anticipates will be allowed as claims in the Chapter 11 Cases. These amounts represent the Company Parties’ current estimate of known or potential obligations to be resolved in connection with the Chapter 11 Cases, and may differ from actual future settlement amounts paid. Differences between liabilities estimated and claims filed, or to be filed, will be investigated and resolved in connection with the claims resolution process. The Company will continue to evaluate these liabilities throughout the Chapter 11 process and adjust amounts as necessary. Such adjustments may be material. See Note 22, Liabilities Subject to Compromise.

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.

Cash, Cash Equivalents and Restricted Cash

Cash and cash equivalents consist of cash on hand and highly liquid investments with original maturities of three months or less, which are generally time deposits with banks and money market funds. The carrying amount of these investments approximates fair value. Restricted cash primarily represents legally restricted amounts being held as a compensating balance for certain outstanding letters of credit.

Covia Holdings Corporation and Subsidiaries

(Debtor-in-Possession)

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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 adoption did not have a material impact on our condensed consolidated financial statements and disclosures. The allowance for doubtful accounts at December 31, 2019 was $2.2 million. For the nine months ended September 30, 2020 we recorded $2.7 million of bad debt expense and had a balance in allowance for doubtful accounts at September 30, 2020 of $4.6 million. No bad debt expense was recorded for the three months ended September 30, 2020.

Income Taxes

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. We elected to early adopt this standard effective April 1, 2020 on a prospective basis. The adoption did not have a material impact on our condensed consolidated financial statements and disclosures.

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.

2.Inventories, net

At September 30, 2020 and December 31, 2019, inventories consisted of the following:

	September 30, 2020		December 31, 2019
	(in thousands)
Raw materials	$	43,916	$	44,218
Work-in-process		2,650		2,809
Finished goods		26,720		42,766
Spare parts		32,803		31,997
Inventories, net	$	106,089	$	121,790

Covia Holdings Corporation and Subsidiaries

(Debtor-in-Possession)

Notes to Condensed Consolidated Financial Statements

(Unaudited)

3.Asset Impairments

We are required to evaluate the recoverability of the carrying amount of our long-lived asset groups whenever events or changes in circumstances indicate that the carrying amount of the asset groups may not be recoverable. We performed an analysis of impairment indicators of the asset groups, and the precipitous decline in oil and gas markets required a review of the assets of our Energy segment for recoverability.

Throughout 2020, our Energy segment has been impacted by sequentially slower proppant demand, resulting in a surplus of proppant supply and significantly lower proppant pricing. In response to changing market demands, we idled operations at certain mines, terminals and resin-coating facilities, rationalized our railcar fleet and reduced production capacity at certain of our production facilities sand plants.

We reviewed the recoverability of our long-lived asset groups and, based upon our assessments, determined the carrying amount of certain long-lived asset groups within the Energy segment exceeded their respective fair values. In the second quarter of 2020, we recorded a total impairment charge of $288.2 million, which was allocated to the long-lived assets in the asset groups based on the relative carrying amounts of those assets. We determined the fair value of our long-lived asset groups based on the present value of the future cash flows that the underlying assets are expected to generate. Such estimates included unobservable inputs that required significant judgement utilizing a number of Level 3 inputs.

Certain mineral rights at the idled facilities were determined to no longer be recoverable. We recorded an impairment charge of $10.1 million in the second quarter of 2020 to adjust these mineral rights to their estimated fair value.

We recorded a total of $298.3 million of asset impairments for the nine months ended September 30, 2020, which were primarily related to our regional sand assets groups and all of which were within our Energy segment. These impairment charges are classified as Asset impairments in the Condensed Consolidated Statements of Income (Loss).

In September 2019, we discontinued sales and marketing efforts related to our Propel SSP^® self-suspending proppant in the Energy segment and recorded an impairment charge of $7.8 million, which included $7.0 million to adjust the carrying amount of long-lived assets specific to the technology to their salvage value, if any. The expense is recorded in asset impairments in the Condensed Consolidated Statements of Income (Loss) in the three and nine months ended September 30, 2019.

4.Property, Plant, and Equipment, net

At September 30, 2020 and December 31, 2019, property, plant, and equipment consisted of the following:

	September 30, 2020			December 31, 2019
	(in thousands)
Land and improvements	$	224,920		$	230,300
Mineral rights properties		544,016			677,238
Machinery and equipment		1,172,622			1,338,411
Buildings and improvements		299,430			327,314
Railroad equipment		62,922			59,761
Furniture, fixtures, and other		5,086			5,382
Assets under construction		103,830			103,715
		2,412,826			2,742,121
Accumulated depletion and depreciation		(1,361,939	)		(1,322,139	)
Property, plant, and equipment, net	$	1,050,887		$	1,419,982

Finance right-of-use assets are included within machinery and equipment.

Covia Holdings Corporation and Subsidiaries

(Debtor-in-Possession)

Notes to Condensed Consolidated Financial Statements

(Unaudited)

5.Long-Term Debt

At September 30, 2020 and December 31, 2019, long-term debt consisted of the following:

	September 30, 2020				December 31, 2019
		(in thousands)
Term Loan	$		-		$	1,566,440
Finance lease liabilities			1,408			6,875
Industrial Revenue Bond			-			10,000
Other borrowings			-			145
Term Loan deferred financing costs, net¹			-			(25,754	)
Long-term debt, net subject to compromise²			1,571,545			-
Total debt, prior to reclassification to Liabilities subject to compromise			1,572,953			1,557,706
Less: current portion			(544	)		(18,633	)
Less: Amounts reclassified to Liabilities subject to compromise			(1,571,545	)		-
Total long-term debt including finance leases	$		864		$	1,539,073

(1)

As a result of the Company's Chapter 11 Cases, the Company expensed $24.3 million of Term Loan (as defined below) deferred financing costs, net, recorded in Reorganization items, net in the Condensed Consolidated Statements of Loss for the nine months ended September 30, 2020.

(2)

In connection with the Company’s Chapter 11 Cases, $1.6 billion outstanding under the Term Loan, $10.0 million outstanding under the Industrial Revenue Bond, $3.0 million outstanding on finance leases and $0.1 million outstanding on Other borrowings have been reclassified to Liabilities subject to compromise in our Condensed Consolidated Balance Sheets as of September 30, 2020. Up to the Petition Date, we continued to accrue interest expense in relation to the Term Loan reclassified as Liabilities subject to compromise.

As discussed in Note 1, the Company Parties filed voluntary petitions under Chapter 11 on June 29, 2020, which constitutes an event of default under the $1.65 billion senior secured term loan and the $10.0 million Industrial Revenue Bond. As such, at September 30, 2020, all outstanding debt has been classified as Liabilities subject to compromise in the accompanying Condensed Consolidated Balance Sheets at September 30, 2020. See Note 1 for further detail on the Company Parties’ voluntary reorganization under Chapter 11.

Term Loan

On June 1, 2018, in connection with the Merger, we completed a debt refinancing transaction with Barclays Bank PLC as administrative agent by entering into a $1.65 billion senior secured term loan (the “Term Loan”) that was issued at par with a maturity date of June 1, 2025. The Term Loan requires quarterly principal payments of $4.1 million, reduced to $4.0 million after the December 2019 repurchases, and quarterly interest payments from September 30, 2018 through March 31, 2025 with the balance payable at the maturity date. Interest accrues at the rate of the three-month LIBOR plus 325 to 400 basis points depending on Total Net Leverage (as hereinafter defined) with a LIBOR floor of 1.0% or the Base Rate (as hereinafter defined). Total Net Leverage is defined as total debt net of up to $150.0 million of non-restricted cash, divided by EBITDA. The Term Loan is guaranteed by all of our wholly-owned, material, domestic, restricted subsidiaries (including Merger Sub as successor to Fairmount Santrol, and all of the wholly-owned material restricted subsidiaries of Fairmount Santrol), subject to certain exceptions. In addition, subject to various exceptions, the Term Loan is secured by substantially all of our assets and those of each guarantor, including, but not limited to (a) a perfected first-priority pledge of all of the capital stock held by us or any guarantor of each existing or subsequently acquired or organized wholly-owned restricted subsidiary (no more than 65% of the voting stock of any foreign subsidiary) and (b) perfected first priority security interests in substantially all of our tangible and intangible assets and those of each guarantor. The Term Loan is not guaranteed by certain foreign subsidiaries, including our Mexican and Canadian subsidiaries. We have the option to prepay the Term Loan without premium or penalty other than customary breakage costs with respect to LIBOR borrowings. There are no financial covenants governing the Term Loan. The Term Loan places certain restrictions on our ability to pay dividends on our common stock.

At September 30, 2020, the Term Loan had an interest rate of 8.25%. The filing of the Chapter 11 Cases constituted an event of default under the Term Loan and stayed the interest expense on the Term Loan. See Note 1 for further details.

Covia Holdings Corporation and Subsidiaries

(Debtor-in-Possession)

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Revolver

In addition to the Term Loan, on June 1, 2018, in connection with the Merger, we entered into a $200 million revolving credit facility (as amended, the “Revolver”) to replace a previous credit facility. There were no borrowings under the Revolver at December 31, 2019. We voluntarily cancelled the Revolver, effective December 31, 2019, in connection with receiving a commitment from PNC Bank, National Association, for a new, three-year credit facility for up to $75.0 million.

Receivables Facility

On March 31, 2020, we entered into a Receivables Financing Agreement (“RFA”) by and among (i) Covia Holdings Corporation, as initial servicer, (ii) Covia Financing LLC, a wholly-owned subsidiary of Covia, as borrower (“Covia Financing”), (iii) the persons from time to time party thereto, as lenders, (iv) PNC Bank, National Association, as LC bank and as administrative agent (“PNC”), and (v) PNC Capital Markets LLC, as structuring agent (“Structuring Agent”). In connection with the RFA, on March 31, 2020, Covia, as originator and servicer, and Covia Financing, as the buyer, entered into a Purchase and Sale Agreement (“PSA”), and various of Covia’s subsidiaries, as sub-originators (“Sub-Originators”), and Covia, as the buyer and servicer, entered into the Sub-Originator Purchase and Sale Agreement (“Sub-PSA”). Together, the RFA, the PSA, and the Sub-PSA (“Agreements”) established the primary terms and conditions of an accounts receivable securitization program (the “Receivables Facility”).

Amounts outstanding under the Receivables Facility accrued interest based on LIBOR Market Index Rate, provided that Covia Financing could select adjusted LIBOR for a tranche period. The Receivables Facility was scheduled to terminate on March 31, 2023. The filing of the Chapter 11 Cases constituted an event of default under the Receivables Facility.

On July 1, 2020, as part of the Plan and with the approval of the Bankruptcy Court, the Company terminated the Receivables Facility. In connection with the termination of the Receivables Facility, the Company repaid all of the outstanding obligations in respect of principal, interest and fees under the Receivables Facility and terminated and released all security interests and liens in the assigned receivables granted in connection therewith. With the approval of the Bankruptcy Court, the Receivables Facility was replaced with a letter of credit facility pursuant to a final order of the Bankruptcy Court authorizing, among other things, (i) the Company’s funding of a new letter of credit collateral account held at Covia Financing, (ii) entry into the Payoff and Reassignment Agreement (the “Payoff Agreement”), among the Company, Covia Financing, the Sub-Originators, PNC, and PNC Capital, (iii) the Company’s, Covia Financing’s and the Sub-Originators’ entry into, and performance of, their respective obligations under the Payoff Agreement and, as applicable, the Reimbursement Agreement for Cash-Collateralized Standby Letters of Credit among PNC, Covia Financing, and the Company (the “Reimbursement Agreement” and, together with the Payoff Agreement, the “Letter of Credit Agreements”) and (iv) execution of the transactions contemplated by the Letter of Credit Agreements.

In July 2020, we cash collateralized approximately $37.0 million of our outstanding standby letters of credit. As of September 30, 2020 the Company had $37.0 million of letters of credit issued under the Letter of Credit Agreements. As of September 30, 2020 there were no borrowings outstanding under the Letter of Credit Agreements. At December 31, 2019, we had $11.3 million of outstanding standby letters of credit held outside of a credit facility.

Industrial Revenue Bond

We hold a $10.0 million Industrial Revenue Bond related to the construction of a mining facility in Wisconsin. The bond bears interest, which is payable monthly at a variable rate. The rate was 0.16% at September 30, 2020. The bond matures on September 1, 2027 and is collateralized by a letter of credit of $10.0 million. The filing of the Chapter 11 Cases constituted an event of default under the Industrial Revenue Bond. See Note 1 for further details.

Covia Holdings Corporation and Subsidiaries

(Debtor-in-Possession)

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Other Borrowings

Other borrowings at September 30, 2020 and December 31, 2019 were comprised of a promissory note with three unrelated third parties. Two of these unrelated parties had interest rates of 1.0% and 4.11%, respectively, at both September 30, 2020 and December 31, 2019. The third unrelated party was repaid with proceeds from the sale of the Winchester & Western Railroad from September 10, 2019 and did not require any interest payments.

As of December 31, 2019, one of our subsidiaries had a C$2.0 million Canadian dollar overdraft facility with the Bank of Montreal. We had previously guaranteed the obligations of the subsidiary under the overdraft facility. On June 25, 2020, we amended the terms of the facility, reducing the amount to C$500,000 and removing the guarantee obligations. As of September 30, 2020 and December 31, 2019, there were no borrowings outstanding under the overdraft facility. The rates of the overdraft facility were 3.45% at September 30, 2020 and 4.95% at December 31, 2019.

6.Accrued Expenses

At September 30, 2020 and December 31, 2019, accrued expenses consisted of the following:

	September 30, 2020		December 31, 2019
	(in thousands)
Accrued bonus & other benefits	$	9,317	$	9,220
Accrued restructuring and other charges		2,856		8,212
Accrued interest		-		24,480
Accrued insurance		5,759		8,770
Accrued property taxes		9,040		11,741
Other accrued expenses		37,091		64,472
Accrued expenses	$	64,063	$	126,895

7.Earnings (Loss) per Share

The table below shows the computation of basic and diluted loss per share for the three and nine months ended September 30, 2020 and 2019:

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2020			2019		2020			2019
	(in thousands, except per share data)
Numerators:
Net income (loss) attributable to Covia Holdings Corporation	$	(205,846	)	$	53,772	$	(642,409	)	$	(32,867	)
Denominator:
Basic weighted average shares outstanding		130,950			131,562		131,617			131,437
Dilutive effect of employee stock options and RSUs		-			183		-			-
Diluted weighted average shares outstanding		130,950			131,745		131,617			131,437

Earnings (loss) per share – basic	$	(1.57	)	$	0.41	$	(4.88	)	$	(0.25	)
Earnings (loss) per share – diluted	$	(1.57	)	$	0.41	$	(4.88	)	$	(0.25	)

The calculation of diluted weighted average shares outstanding for the three months ended September 30, 2020 and 2019 excludes 3.3 million and 5.2 million potential shares of common stock, respectively. The calculation of diluted weighted average shares outstanding for the nine months ended September 30, 2020 and 2019 excludes 3.7 million and 4.3 million potential shares of common stock, respectively. These potential shares of common stock are excluded from the calculations of diluted weighted average shares outstanding because the effect of including these potential shares of common stock would be antidilutive.

Covia Holdings Corporation and Subsidiaries

(Debtor-in-Possession)

Notes to Condensed Consolidated Financial Statements

(Unaudited)

The dilutive effect of 0.1 million and 0.1 million shares in the three and nine months ended September 30, 2020, respectively, and 0.3 million shares in the nine months ended September 30, 2019 was omitted from the calculation of diluted weighted average shares outstanding and diluted loss per share because we were in a loss position in those periods.

8.Derivative Instruments

Due to our variable-rate indebtedness, we are exposed to fluctuations in interest rates. We have historically used fixed interest rate swaps to manage a portion of this exposure. No components of our cash flow hedging instruments were excluded from the assessment of hedge effectiveness. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for making fixed-rate payments over the life of the agreements without exchange of the underlying notional value. The gain or loss on the interest rate swap is recorded in accumulated other comprehensive loss and subsequently reclassified into interest expense in the same period during which the hedged transaction affects earnings.

The filing of the Chapter 11 Cases constituted an event of default under the agreements governing the interest rate swaps, resulting in the acceleration of our outstanding indebtedness thereunder and our derivative financial instruments to no longer be designated as cash flow hedging instruments. Further, on July 2, 2020 and July 7, 2020, these financial instruments were terminated with the counterparties due to the aforementioned event of default on June 29, 2020. See Note 1 to our condensed consolidated financial statements for further discussion.

The following table summarizes our interest rate swap agreements at December 31, 2019:

Interest Rate Swap Agreements	Maturity Date	Rate	Notional Value (in thousands)		Debt Instrument Hedged	Percentage of Term Loan Outstanding
December 31, 2019
Designated as cash flow hedge	June 1, 2023	2.81%	$	100,000	Term Loan	6%
Designated as cash flow hedge	June 1, 2025	2.87%		200,000	Term Loan	13%
Designated as cash flow hedge	June 1, 2024	2.81%		50,000	Term Loan	3%
Designated as cash flow hedge	June 1, 2025	2.87%		50,000	Term Loan	3%
Designated as cash flow hedge	June 1, 2025	2.85%		50,000	Term Loan	3%
			$	450,000		28%

The following table summarizes the fair values and the respective classification in the Condensed Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019. The net amount of derivative liabilities can be reconciled to the tabular disclosure of fair value in Note 9:

		Liabilities
		September 30, 2020			December 31, 2019
Interest Rate Swap Agreements	Balance Sheet Classification	(in thousands)
Designated as cash flow hedges	Other non-current liabilities	$	-		$	(13,420	)
Designated as cash flow hedges	Accrued expenses		-			(7,827	)
Not designated as cash flow hedges	Liabilities subject to compromise		(35,925	)		-
		$	(35,925	)	$	(21,247	)

The table below presents the effect of cash flow hedge accounting on accumulated other comprehensive loss for the three and nine months ended September 30, 2020 and 2019:

	Amount of Loss Recognized in Other Comprehensive Loss
	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Derivatives in Hedging Relationships	(in thousands)
Designated as Cash Flow Hedges
Interest rate swap agreements	$	-	$	4,542	$	16,285	$	22,406

Covia Holdings Corporation and Subsidiaries

(Debtor-in-Possession)

Notes to Condensed Consolidated Financial Statements

(Unaudited)

		Amount of Loss Reclassified from Accumulated Other Comprehensive Loss
Derivatives in	Location of Loss	Three Months Ended September 30,				Nine Months Ended September 30,
Hedging	Recognized on	2020		2019		2020		2019
Relationships	Derivative	(in thousands)
Designated as Cash Flow Hedges
Interest rate swap agreements	Interest expense, net	$	-	$	712	$	38,785	$	1,303

The table below presents the effect of our derivative financial instruments on the Condensed Consolidated Statements of Loss in the three and nine months ended September 30, 2020 and 2019:

	Location of Loss on Derivative
	Interest expense, net
	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
	(in thousands)
Total Interest Expense presented in the Statements of Loss in which the effects of cash flow hedges are recorded	$	1,714	$	26,894	$	84,637	$	79,896
Effects of cash flow hedging:
Loss on Hedging Relationships
Interest rate swap agreements
Amount of loss reclassified from accumulated other comprehensive loss to earnings	$	-	$	712	$	38,785	$	1,303

We reclassified $35.8 million of interest expense from accumulated other comprehensive loss for the nine months ended September 30, 2020 due to the de-designation of our cash flow hedging instruments.

All of our derivative financial instruments were designated as cash flow hedging instruments through June 29, 2020. All of our derivative financial instruments are designated as cash flow hedging instruments for the three and nine months ended September 30, 2019.

The table below presents the effect of our derivative financial instruments that were not designated as cash flow hedging instruments in the three and nine months ended September 30, 2020 and 2019.

		Three Months Ended				Nine Months Ended
		September 30,				September 30,
		2020		2019		2020		2019
Derivatives Not Designated as ASC 815-20 Cash Flow Hedging Relationships	Location of (Gain) Loss Recognized	(in thousands)
Interest rate swap agreements	Interest expense, net	$	1,307	$	-	$	1,247	$	-

9.Fair Value Measurements

Financial instruments held by us include cash equivalents, accounts receivable, accounts payable, long-term debt (including the current portion thereof) and interest rate swaps.

Fair value is defined as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. In determining fair value, we utilize certain assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and/or the risks inherent in the inputs to the valuation technique.

Covia Holdings Corporation and Subsidiaries

(Debtor-in-Possession)

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Based on the examination of the inputs used in the valuation techniques, we are required to provide the following information according to the fair value hierarchy. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values. Financial assets and liabilities at fair value will be classified and disclosed in one of the following three categories:


Level 1	Quoted market prices in active markets for identical assets or liabilities
Level 2	Observable market based inputs or unobservable inputs that are corroborated by market data
Level 3	Unobservable inputs that are not corroborated by market data

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

The carrying value of cash equivalents, accounts receivable and accounts payable are considered to be representative of their fair values because of their short maturities. The carrying value of our long-term debt (including the current portion thereof) is recognized at amortized cost. The fair value of the Term Loan differs from amortized cost and is valued at prices obtained from a readily-available source for trading non-public debt, which represents quoted prices for identical or similar assets in markets that are not active, and therefore is considered Level 2. See Note 5 for further details on our long-term debt. The following table presents the fair value as of September 30, 2020 and December 31, 2019, respectively, for our long-term debt:

	Quoted Prices		Other
	in Active		Observable		Unobservable
	Markets		Inputs		Inputs
	(Level 1)		(Level 2)		(Level 3)		Total
Long-Term Debt Fair Value Measurements	(in thousands)
September 30, 2020
Term Loan	$	-	$	1,153,296	$	-	$	1,153,296
Industrial Revenue Bond		-		10,000		-		10,000
	$	-	$	1,163,296	$	-	$	1,163,296

December 31, 2019
Term Loan	$	-	$	1,210,075	$	-	$	1,210,075
Industrial Revenue Bond		-		10,000		-		10,000
	$	-	$	1,220,075	$	-	$	1,220,075

The following table presents the amounts carried at fair value as of September 30, 2020 and December 31, 2019 for our other financial instruments.

	Quoted Prices		Other
	in Active		Observable		Unobservable
	Markets		Inputs		Inputs
	(Level 1)		(Level 2)		(Level 3)		Total
Recurring Fair Value Measurements	(in thousands)
September 30, 2020
Interest rate swap agreements liability	$	-	$	35,925	$	-	$	35,925

December 31, 2019
Interest rate swap agreements liability	$	-	$	21,247	$	-	$	21,247

Fair value of interest rate swap agreements is based on the present value of the expected future cash flows, considering the risks involved, and using discount rates appropriate for the maturity date. These are determined using Level 2 inputs.

Covia Holdings Corporation and Subsidiaries

(Debtor-in-Possession)

Notes to Condensed Consolidated Financial Statements

(Unaudited)

10.Stock-Based Compensation

Stock-based compensation includes time-based restricted stock units (“RSUs”), performance-based restricted stock units (“PSUs”), and nonqualified stock options (“Options” and, together with the RSUs and PSUs, the “Awards”). These Awards are governed by various plans: the FMSA Holdings Inc. Long Term Incentive Compensation Plan (“2006 Plan”), the FMSA Holdings, Inc. Stock Option Plan (“2010 Plan”), the FMSA Holdings Inc. Amended and Restated 2014 Long Term Incentive Plan (“2014 Plan”), and the Covia Holdings Corporation 2018 Omnibus Incentive Plan (“2018 Plan”). Options may be exercised, in whole or in part, at any time after becoming exercisable, but not later than the date the Option expires, which is typically ten years from the grant date. All Options granted under the 2006 Plan and 2010 Plan became fully vested as part of the Merger, and no Options have been granted since the Merger Date. PSUs granted under the 2014 Plan were converted to RSUs as part of the Merger. All Awards granted since the Merger Date have been made under the 2018 Plan and have been limited to RSUs and PSUs.

The fair values of the RSUs granted as PSUs under the 2014 Plan and the Options granted under the 2006 Plan and 2010 Plan were estimated at the Merger Date. The fair value of such RSUs was determined to be the opening share price of Covia’s common stock on the NYSE at the Merger Date. The fair value of such Options was estimated at the Merger Date using the Black Scholes-Merton option pricing model.

All Awards activity during the nine months ended September 30, 2020 was as follows:

	Options			Weighted Average Exercise Price, Options		RSUs			Weighted Average Price at RSU Issue Date		PSUs			Weighted Average Price at PSU Issue Date
	(in thousands, except per share data)
Outstanding at December 31, 2019		1,704			36.01		2,069			6.10		1,051			4.74
Exercised or distributed		-			-		(491	)		8.11		-			-
Forfeited		(3	)		44.36		(201	)		9.27		(171	)		4.74
Expired		(606	)		38.57		-			-		-			-
Outstanding at September 30, 2020		1,095			34.57		1,377			4.92		880			4.74

We recorded stock compensation expense of $0.1 million and $2.3 million in the three months ended September 30, 2020 and 2019, respectively, and $2.0 million and $8.4 million in the nine months ended September 30, 2020 and 2019, respectively. Stock compensation expense is included in Selling, general, and administrative expenses on the Condensed Consolidated Statements of Loss and in Additional paid-in capital on the Condensed Consolidated Balance Sheets.

11.Income Taxes

We compute and apply to ordinary income an estimated annual effective tax rate on a quarterly basis based on current and forecasted business levels and activities, including the mix of domestic and foreign results and enacted tax laws. The estimated annual effective tax rate is updated quarterly based on actual results and updated operating forecasts. Ordinary income refers to income from continuing operations before income tax expense excluding significant, unusual, or infrequently occurring items. The tax effect of an unusual or infrequently occurring item is recorded in the interim period in which it occurs as a discrete item of tax.

For the three months ended September 30, 2020, we recorded a tax benefit of $3.3 million on a loss before income taxes of $209.2 million resulting in an effective tax rate of 1.6%, compared to tax expense of $22.5 million on income before income taxes of $76.4 million resulting in an effective tax rate of 29.4% for the same period of 2019. The decrease in the effective tax rate is primarily attributable to a valuation allowance recorded against deferred taxes. The effective tax rate differs from the U.S. federal statutory rate primarily due to depletion, the impact of foreign taxes, tax provisions requiring U.S. income inclusion of foreign income, and changes to a valuation allowance recorded against deferred taxes.

Covia Holdings Corporation and Subsidiaries

(Debtor-in-Possession)

Notes to Condensed Consolidated Financial Statements

(Unaudited)

For the nine months ended September 30, 2020, we recorded a tax benefit of $32.9 million on a loss before income taxes of $675.4 million resulting in an effective tax rate of 4.9%, compared to a tax expense of $13.3 million on a loss before income taxes of $19.4 million resulting in an effective tax rate of negative 68.4% for the same period of 2019. The increase in tax benefit is primarily attributable to a discrete benefit resulting from provisions of the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act allowing for increased carryback and utilization of net operating losses. The decrease in the effective tax rate is primarily attributable to a valuation allowance recorded against deferred taxes offset by a discrete benefit resulting from provisions of the CARES Act allowing for increased carryback and utilization of net operating losses (see additional explanation below). The effective tax rate differs from the U.S. federal statutory rate primarily due to depletion, the impact of foreign taxes, tax provisions requiring U.S. income inclusion of foreign income, and changes to a valuation allowance recorded against deferred taxes.

In response to the economic impact of the coronavirus (COVID-19) pandemic, on March 27, 2020, President Trump signed into law the CARES Act. The CARES Act enacts a number of economic relief measures, including the infusion of various tax cash benefits into negatively affected companies to ease the impact of the pandemic. The CARES Act specifically includes provisions allowing net operating losses arising in tax years beginning after December 31, 2017, and before January 1, 2021 to be carried back to each of the five tax years preceding the tax year of such loss. In addition, the CARES Act removed the limitation that net operating losses generated after 2017 could only offset 80% of taxable income. For the nine months ended September 30, 2020, we recorded discrete benefits of $29.7 million resulting from this change as losses now eligible for utilization were estimated as not realizable prior to the CARES Act.

12.	Pension and Other Post-Employment Benefits

We maintain retirement, post-retirement medical and long-term benefit plans in several countries.

In the U.S., we sponsor the Covia Holdings Corporation Pension Plan, formerly known as the Unimin Corporation Pension Plan (the “Pension Plan”), a defined benefit plan for hourly and salaried employees, and the Covia Holdings Corporation Restoration Plan, formerly known as the Unimin Corporation Pension Restoration Plan (the “Restoration Plan”), a non-qualified supplemental benefit plan. The Pension Plan is a funded plan. Minimum funding and maximum tax-deductible contribution limits for the Pension Plan are defined by the Internal Revenue Service. The Restoration Plan is unfunded. Under the Restoration Plan, salaried participants accrue benefits based on service and final average pay. The benefits of hourly participants are based on service and a benefit formula. The Pension Plan was closed to new entrants effective January 1, 2008, and union employee participation in the Pension Plan at the last three unionized locations participating in the Pension Plan was closed to new entrants effective November 1, 2017. Until the Restoration Plan was amended to exclude new entrants on August 15, 2017, all salaried participants eligible for the Pension Plan were also eligible for the Restoration Plan. The Pension Plan was frozen as of December 31, 2018 for all non-union employees, and the Restoration Plan was frozen for all participants as of December 31, 2018.

An independent trustee has been appointed for the Pension Plan whose responsibilities include custody of plan assets as well as recordkeeping. A pension committee consisting of members of senior management provides oversight of the Pension Plan. In addition, an independent advisor has been engaged for the Pension Plan to provide advice on the management of the plan assets. The primary risk of the Pension Plan is the volatility of the funded status. Liabilities are exposed to interest rate risk and demographic risk (e.g., mortality, turnover, etc.). Assets are exposed to interest rate risk, market risk, and credit risk.

In addition to the Restoration Plan and the Pension Plan in the U.S., we offer a retiree medical plan in the U.S. to certain union employees that is exposed to risk of increases in health care costs. The retiree medical plan previously covered certain salaried employees and certain groups of hourly employees, but effective December 31, 2018, the retiree medical plan was terminated for salaried employees. The retiree medical plan remains open to certain groups of union employees.

Covia Holdings Corporation and Subsidiaries

(Debtor-in-Possession)

Notes to Condensed Consolidated Financial Statements

(Unaudited)

In Canada, we sponsor three defined benefit retirement plans. Two of the plans are for hourly employees and one is for salaried employees. Salaried employees were eligible to participate in a plan consisting of a defined benefit portion that has been closed to new entrants since January 1, 2008 and a defined contribution portion for employees hired after January 1, 2018. Minimum funding is required under the provincial Pension Benefits Act (Ontario) and related regulations and maximum funding is set in the Federal Income Tax Act of Canada and regulations. The defined benefit retirement plans are administered by Covia Canada Ltd., a wholly-owned subsidiary of Covia Holdings Corporation (“Covia Canada”). A pension committee exists to ensure proper administration, management and investment review with respect to the benefits of the defined benefit retirement plans through implementation of governance procedures. In addition, there are two post-retirement medical plans in Canada. The medical plans are administered by an insurance company with Covia Canada having the ultimate responsibility for all decisions.

In Mexico, we sponsor four retirement plans, two of which are seniority premium plans as defined by Mexican labor law. The remaining plans are defined benefit plans with a minimum benefit equal to the severance payment that would have been paid in the event of termination for other than just cause, required by Mexican labor law. Minimum funding is not required, and maximum funding is defined according to the actuarial cost method registered with the Mexican Tax Authority. Investment decisions are made by an administrative committee of Grupo Materias Primas de Mexico S. de R. L. de C.V., a wholly-owned indirect subsidiary of Covia Holdings Corporation. All plans in Mexico pay lump sums on retirement and pension plans pay benefits through five annual payments conditioned on compliance with non-compete covenants.

As part of the Merger, we assumed the two defined benefit pension plans of Fairmount Santrol, the Wedron Silica Company Hourly Employees’ Pension Plan (the “Wedron Pension Plan”) and the Pension Plan for Hourly Bargaining Unit of Technisand – Troy Grove (the “Troy Grove Pension Plan”). These plans cover union employees at certain facilities and provide benefit units based upon years of service. Benefits under the Wedron Pension Plan were frozen effective December 31, 2012. Benefits under the Troy Grove Pension Plan were frozen effective December 31, 2016.

The Pension Plan, Restoration Plan, Wedron Pension Plan and Troy Grove Pension Plan were merged into one plan, effective December 31, 2019 (the “Covia Pension Plan”). The post-retirement medical plans in the United States and Canada are collectively referred to as the “Postretirement Medical Plans.”

We have applied settlement accounting in the nine months ended September 30, 2020 and 2019 due to distributions exceeding the current period service and interest costs. These amounts are included in other non-operating expense, net on the Condensed Consolidated Statements of Income (Loss). As a result of the distributions, we re-measured our obligations under the Covia Pension Plan and the discount rate was increased from 3.15% at January 1, 2020 to 3.35% at March 31, 2020 and decreased to 2.55% at June 30, 2020. There were no other changes to the assumptions used to calculate the obligation at September 30, 2020.

The following tables summarize the components of net periodic benefit costs. Service costs incurred for plant personnel are included in cost of goods sold. Service costs incurred for corporate personnel and retirees are included in selling, general, and administrative expenses. All other components of net period benefit cost are included in other non-operating expense, net on the Condensed Consolidated Statements of Loss, for the three and nine months ended September 30, 2020 and 2019 as follows:

	Covia Pension Plan
	Three Months Ended September 30,						Nine Months Ended September 30,
	2020			2019			2020			2019
	(in thousands)
Components of net periodic benefit cost
Service cost	$	135		$	551		$	387		$	1,653
Interest cost		798			2,084			2,747			6,252
Expected return on plan assets		(1,233	)		(2,308	)		(3,629	)		(6,924	)
Amortization of prior service cost		28			82			82			246
Amortization of net actuarial loss		497			522			1,509			1,566
Settlement loss		-			1,417			3,460			4,161
Net periodic benefit cost	$	225		$	2,348		$	4,556		$	6,954

Covia Holdings Corporation and Subsidiaries

(Debtor-in-Possession)

Notes to Condensed Consolidated Financial Statements

(Unaudited)

	Postretirement Medical Plans
	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
	(in thousands)
Components of net periodic benefit cost
Service cost	$	80	$	73	$	237	$	219
Interest cost		34		120		105		360
Amortization of net actuarial loss		16		40		45		120
Net periodic benefit cost	$	130	$	233	$	387	$	699

We contributed $3.1 million and $1.0 million to the Covia Pension Plan for the nine months ended September 30, 2020 and 2019, respectively. Contributions into the Covia Pension Plans for the year ended December 31, 2020 are expected to be $3.5 million.

We have received authorization from the Bankruptcy Court to continue making our contributions to plans for employees located in the United States in the ordinary course during our Chapter 11 Cases. The Company will continue making contributions to plans for employees located outside of the United States in the ordinary course of business.

13.Accumulated Other Comprehensive Loss

Accumulated other comprehensive loss is a separate line within the Condensed Consolidated Statements of Equity that reports our cumulative loss that has not been reported as part of net loss. The components of accumulated other comprehensive loss attributable to Covia at September 30, 2020 and December 31, 2019 were as follows:

	September 30, 2020
	Gross			Tax Effect		Net Amount
	(in thousands)
Foreign currency translation adjustments	$	(67,459	)	$	-	$	(67,459	)
Amounts related to employee benefit obligations		(50,738	)		14,748		(35,990	)
	$	(118,197	)	$	14,748	$	(103,449	)

	December 31, 2019
	Gross			Tax Effect		Net Amount
	(in thousands)
Foreign currency translation adjustments	$	(47,584	)	$	-	$	(47,584	)
Amounts related to employee benefit obligations		(54,650	)		14,882		(39,768	)
Unrealized gain (loss) on interest rate hedges		(22,500	)		4,766		(17,734	)
	$	(124,734	)	$	19,648	$	(105,086	)

Covia Holdings Corporation and Subsidiaries

(Debtor-in-Possession)

Notes to Condensed Consolidated Financial Statements

(Unaudited)

The following table presents the changes in accumulated other comprehensive loss, net of taxes, by component for the nine months ended September 30, 2020:

	Nine Months Ended September 30, 2020
	Foreign currency translation adjustments			Amounts related to employee benefit obligations			Unrealized gain (loss) on interest rate hedges			Total
	(in thousands)
Beginning balance	$	(47,584	)	$	(39,768	)	$	(17,734	)	$	(105,086	)
Other comprehensive loss before reclassifications		(19,875	)		(1,325	)		(16,285	)		(37,485	)
Amounts reclassified from accumulated other comprehensive loss		-			5,103			34,019			39,122
Ending balance	$	(67,459	)	$	(35,990	)	$	-		$	(103,449	)

14.Leases

Operating leases and finance leases are included in the Condensed Consolidated Balance Sheets as follows:

	Classification	September 30, 2020		December 31, 2019
		(in thousands)
Lease assets
Operating right-of-use assets, net	Assets	$	68,699	$	158,489
Finance right-of-use assets, net	Property, plant, and equipment, net		4,336		11,083
Total lease assets		$	73,035	$	169,572
Lease liabilities
Operating lease liabilities, current	Current liabilities	$	3,493	$	63,773
Operating lease liabilities, non-current	Liabilities		15,098		272,378
Finance lease liabilities, current	Current portion of long-term debt		544		3,496
Finance lease liabilities, non-current	Long-term debt		864		3,379
Total lease liabilities		$	19,999	$	343,026

See Note 22 for operating lease liabilities and finance lease liabilities that were reclassified to Liabilities subject to compromise in the Consolidated Balance Sheets at September 30, 2020.

Operating lease costs are recorded on a straight-line basis over the lease term. The change in operating lease costs for the nine months ended September 30, 2020 when compared to the nine months ended September 30, 2019 is due to the impairment on operating right-of-use assets recognized during the three months ended December 31, 2019. For operating leases that have been impaired, the lease liability continues to amortize using the same effective interest method as before the impairment charge and the operating right-of-use asset is amortized on a straight-line basis. Finance lease costs include amortization of the right-of-use assets and interest on lease liabilities. The components of lease costs, which were included in loss from operations in our Condensed Consolidated Statements of Loss, were as follows:

Covia Holdings Corporation and Subsidiaries

(Debtor-in-Possession)

Notes to Condensed Consolidated Financial Statements

(Unaudited)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
	(in thousands)
Operating leases
Operating lease costs	$	7,523	$	25,482	$	28,876	$	78,441
Variable lease costs		187		195		482		1,001
Short-term lease costs		2,449		4,891		9,249		14,096
Total operating lease costs	$	10,159	$	30,568	$	38,607	$	93,538
Financing leases
Amortization of right-of-use asset	$	387	$	666	$	1,390	$	1,929
Interest on finance lease liabilities		84		90		214		200
Total finance lease costs	$	471	$	756	$	1,604	$	2,129

Additional information related to leases is presented as follows:

	September 30, 2020		September 30, 2019
	(in thousands)
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows used for operating leases	$	28,321	$	74,160
Financing cash flows used for finance leases		3,155		3,471
Total cash paid	$	31,476	$	77,631

15.Asset Retirement Obligations

Asset retirement obligations are recorded in Other non-current liabilities in the Condensed Consolidated Balance Sheets. Changes in the asset retirement obligations during the nine months ended September 30, 2020 and 2019 were as follows:

	September 30, 2020		September 30, 2019
	(in thousands)
Beginning balance	$	46,510	$	31,199
Accretion		1,670		1,160
Additions and revisions of prior estimates		6,514		(222	)
Ending balance	$	54,694	$	32,137

Asset retirement obligations increased from September 30, 2019 to September 30, 2020 primarily due to shortened mines lives and renewed estimates recorded in the fourth quarter of 2019 and through the nine months ended September 30, 2020.

16.Commitments and Contingent Liabilities

Contingencies

We are involved in various legal proceedings, including as a defendant in a number of lawsuits. Although the outcomes of these proceedings and lawsuits cannot be predicted with certainty, we do not believe that any of the pending legal proceedings and lawsuits are reasonably likely to have a material adverse effect on our financial position, results of operations or cash flows. In addition, we believe that our insurance coverage will mitigate many of these claims.

Covia Holdings Corporation and Subsidiaries

(Debtor-in-Possession)

Notes to Condensed Consolidated Financial Statements

(Unaudited)

On March 18, 2019, in connection with a non-public SEC investigation, we received a subpoena seeking information relating to certain value-added proppants used in the Energy segment. Since the issuance of that subpoena, the SEC has requested additional information and subpoenaed certain former employees to testify regarding certain value-added proppants marketed and sold by Fairmount Santrol prior to the Merger. On July 7, 2020, we received a written Wells Notice from the SEC staff indicating the staff’s preliminary determination to recommend to the SEC that it file an action against the Company relating to the subject of this investigation. A Wells Notice is neither a formal charge of wrongdoing nor a finding that the Company violated any law. Rather, the Wells Notice provides the Company an opportunity to respond to issues raised by the SEC staff and offer its perspective prior to any SEC decision. The Company made a submission to the SEC staff setting forth why no action should be commenced against it and is continuing to cooperate with the SEC’s investigation and discuss with the SEC staff a potential resolution to the matter, which would be subject to the approval of the Commission and Bankruptcy Court.

On June 29, 2020, the Company Parties filed voluntary petitions for relief under Chapter 11 in Bankruptcy Court. As a result of such bankruptcy filings, substantially all legal proceedings pending against the Company Parties have been stayed.

Royalties

We have entered into numerous mineral rights agreements, in which payments under the agreements are expensed as incurred. Certain agreements require annual or quarterly payments based upon annual tons mined or the average selling price of tons sold. Total royalty expense associated with these agreements was $1.3 million and $2.9 million for the three months ended September 30, 2020 and 2019, respectively, and $4.8 million and $8.5 million for the nine months ended September 30, 2020 and 2019, respectively.

17.	Transactions with Related Parties

We sell minerals to SCR-Sibelco NV, the owner of approximately 65% of the outstanding shares of Covia’s common stock (“Sibelco”), and certain of its subsidiaries (together with Sibelco, collectively, “related parties”). Sales to related parties amounted to $1.1 million and $1.9 million in the three months ended September 30, 2020 and 2019, respectively, and $5.7 million and $6.4 million in the nine months ended September 30, 2020 and 2019, respectively. At September 30, 2020 and December 31, 2019, we had accounts receivable from related parties of $1.4 million and $1.8 million, respectively. These amounts are included in Accounts receivable, net in the accompanying Condensed Consolidated Balance Sheets.

We purchase minerals from certain related parties. Purchases from related parties amounted to $3.4 million and $0.6 million in the three months ended September 30, 2020 and 2019, respectively, and $10.3 million and $2.6 million in the nine months ended September 30, 2020 and 2019, respectively. At September 30, 2020 and December 31, 2019, we had accounts payable to related parties of $1.1 million and $0.9 million, respectively. These amounts are included in Liabilities subject to compromise in the accompanying Condensed Consolidated Balance Sheets.

On June 1, 2018, we entered into an agreement with Sibelco whereby Sibelco provides sales and marketing support for certain products supporting the performance coatings and polymer solutions markets in North America and Mexico, for which we pay a 5% commission of revenue, and in the rest of the world, for which we pay a 10% commission of revenue. Sibelco also assists with sales and marketing efforts for certain products in the ceramics and sanitary ware industries outside of North America and Mexico for which we pay a 5% commission of revenue. In addition, we provide sales and marketing support to Sibelco for certain products used in ceramics in North America and Mexico for which we earn a 10% commission of revenue. We recorded net commission expense of $1.0 million and $1.1 million in the three months ended September 30, 2020 and 2019, respectively, and $2.4 million and $3.2 million in the nine months ended September 30, 2020 and 2019, respectively. These amounts are recorded in Selling, general and administrative expenses on the Condensed Consolidated Statements of Income (Loss).

Covia Holdings Corporation and Subsidiaries

(Debtor-in-Possession)

Notes to Condensed Consolidated Financial Statements

(Unaudited)

18.Revenues

Revenues are primarily derived from contracts with customers with terms typically ranging from one to eight years in length and are measured by the amount of consideration we expect to receive in exchange for transferring our products. Revenues are recognized as each performance obligation within the contract is satisfied; this occurs with the transfer of control of our product in accordance with delivery methods as defined in the underlying contract. Performance obligations do not extend beyond one year. Transfer of control to customers generally occurs when products leave our facilities or at another predetermined control transfer point. We account for shipping and handling activities that occur after control of the related good transfers as a cost of fulfillment instead of a separate performance obligation.

We disaggregate revenues by major source consistent with our segment reporting. See Note 19 for further disaggregation of revenue.

Accounts receivable as presented in the Condensed Consolidated Balance Sheets are related to our contracts and are recorded when the right to consideration becomes likely at the amount management expects to collect. Accounts receivable do not bear interest if paid when contractually due, and payments are generally due within thirty to forty-five days of invoicing. We typically do not record contract assets, as the transfer of control of our products results in an unconditional right to receive consideration.

We enter into certain supply agreements with customers that include provisions requiring payment at the inception of the supply agreement. Deferred revenue is recorded when payment is received in advance of the performance obligation. Changes in deferred revenue were as follows:

	Nine Months Ended September 30,
	2020			2019
	(in thousands)
Beginning balance	$	13,194		$	10,826
Deferral of revenue		21,000			23,370
Recognition of unearned revenue		(20,668	)		(15,370	)
Ending balance	$	13,526		$	18,826

At September 30, 2020 and December 31, 2019, respectively, deferred revenue balances of $9.1 million and $7.8 million were recorded in Current liabilities. At September 30, 2020 and December 31, 2019, respectively, deferred revenue balances of $4.4 million and $5.4 million were recorded in Other non-current liabilities.

At September 30, 2020 and December 31, 2019, respectively, we did not have any customers whose accounts receivable balance exceeded 10% of total accounts receivable.

In the nine months ended September 30, 2020, no customers exceeded 10% of revenues. In the nine months ended September 30, 2019, one customer accounted for 10% of revenues. This customer is part of our Energy segment.

19.Segment Reporting

We organize our business into two reportable segments, Energy and Industrial. 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. The 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.

Covia Holdings Corporation and Subsidiaries

(Debtor-in-Possession)

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Prior to the second quarter of 2019, the Company’s chief operating decision maker (“CODM”) primarily evaluated an operating segment’s performance based on segment gross profit, which does not include any selling, general, and administrative costs or corporate costs. Beginning with the second quarter of 2019, the CODM changed the method to evaluate the Company’s operating segments’ performance based on segment contribution margin. Segment contribution margin excludes selling, general, and administrative costs, corporate costs, operating costs of idled facilities, and operating costs of excess railcar capacity. This change was made to better measure the operating performance of the reportable segments and to monitor performance without these non-operational costs.

The reportable segments are consistent with how management views the markets served by us and the financial information reviewed by the CODM in deciding how to allocate resources and assess performance.

Segment information for the nine months ended September 30, 2019 presented in the table below has been revised accordingly to reflect the new measure of profit and loss.

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2020			2019			2020			2019
	(in thousands)
Revenues
Energy	$	56,315		$	223,318		$	277,300		$	710,940
Industrial		173,045			185,639			494,253			571,199
Total revenues		229,360			408,957			771,553			1,282,139

Segment contribution margin
Energy		14,211			24,576			39,105			87,507
Industrial		65,532			59,061			168,310			175,792
Total segment contribution margin		79,743			83,637			207,415			263,299

Operating costs of idled facilities and excess railcar capacity		16,218			6,914			36,805			20,923
Selling, general, and administrative		28,093			35,628			91,284			116,232
Depreciation, depletion, and amortization		27,730			51,920			93,769			169,219
Asset impairments		-			7,761			298,299			7,761
Restructuring and other charges		1,086			3,378			35,999			14,915
Loss (gain) on sale of subsidiaries		(67	)		(127,195	)		897			(127,195	)
Other operating expense (income), net		(883	)		18			(3,786	)		(4,704	)
Income (loss) from operations		7,566			105,213			(345,852	)		66,148
Interest expense, net (contractual interest for the three months ended September 30, 2020, $32,144)		1,714			26,894			84,637			79,896
Reorganization items, net		214,340			-			238,656			-
Other non-operating expense, net		670			1,924			6,265			5,682
Loss before provision (benefit) from income taxes	$	(209,158	)	$	76,395		$	(675,410	)	$	(19,430	)

Asset information, including capital expenditures and depreciation, depletion, and amortization, by segment is not included in reports used by management in its monitoring of performance and, therefore, is not reported by segment.

Covia Holdings Corporation and Subsidiaries

(Debtor-in-Possession)

Notes to Condensed Consolidated Financial Statements

(Unaudited)

20.Goodwill and Intangible Assets

Goodwill represents the excess of purchase price over the fair value of net assets acquired in business combinations. Goodwill was $119.8 million at both September 30, 2020 and December 31, 2019, and is entirely attributable to the Industrial segment. We evaluate goodwill at the reporting unit level on an annual basis on October 31 and also on an interim basis when indicators of impairment exist. There were no events or changes in circumstances that would more likely than not result in an impairment in the carrying value of goodwill at September 30, 2020.

Changes in the carrying amount of intangible assets are as follows:

	September 30, 2020
	Gross Carrying Amount		Accumulated Amortization			Amortization			Intangible Assets, net		Weighted Average Amortization Period
	(in thousands)
Stream mitigation rights	$	2,328	$	(971	)	$	(45	)	$	1,312	16 years
Customer relationships		51,537		(19,264	)		(5,201	)		27,072	4 years
Intangible assets, net	$	53,865	$	(20,235	)	$	(5,246	)	$	28,384	4 years

	December 31, 2019
	Gross Carrying Amount		Accumulated Amortization			Impairment			Intangible Assets, net		Weighted Average Amortization Period
	(in thousands)
Stream mitigation rights	$	4,170	$	(971	)	$	(1,842	)	$	1,357	17 years
Customer relationships		73,000		(19,264	)		(21,463	)		32,273	4 years
Intangible assets, net	$	77,170	$	(20,235	)	$	(23,305	)	$	33,630	5 years

Amortization expense is recognized in depreciation, depletion and amortization expense in the Condensed Consolidated Statements of Loss. Amortization expense was $1.9 million and $3.3 million for the three months ended September 30, 2020 and 2019, respectively, and $5.2 million and $18.3 million for the nine months ended September 30, 2020 and 2019, respectively.

The estimated amortization expense related to intangible assets for the five succeeding years is as follows:

	Amortization
	(in thousands)
2020	$	1,900
2021		7,594
2022		7,594
2023		7,594
2024		3,189
Thereafter		513
Total	$	28,384

21.Merger-Related Restructuring and Other Charges

In response to changing market demands, we idled operations and reduced capacities at facilities serving the Energy segment. We did not allocate Merger-related restructuring charges to our Energy segment.

Additionally, in connection with the Merger, we initiated restructuring activities to achieve cost synergies from our combined operations. We did not allocate these Merger-related restructuring charges to either of our business segments.

Covia Holdings Corporation and Subsidiaries

(Debtor-in-Possession)

Notes to Condensed Consolidated Financial Statements

(Unaudited)

The following table presents a summary of our Merger-related restructuring and other charges for the nine months ended September 30, 2020 and 2019:

	Merger-related		Idled facilities		Total
	(in thousands)
Nine Months Ended September 30, 2020
Severance and relocation costs	$	-	$	11,184	$	11,184
Contract termination costs		1,086		-		1,086
Total restructuring charges	$	1,086	$	11,184	$	12,270

Nine Months Ended September 30, 2019
Severance and relocation costs	$	1,921	$	2,434	$	4,355
Contract termination costs		-		1,293		1,293
Total restructuring charges	$	1,921	$	3,727	$	5,648

The following table presents our Merger-related restructuring reserve activity during the nine months ended September 30, 2020 and 2019:

	Merger-related			Idled facilities			Total
	(in thousands)
Accrued restructuring charges
Balances at December 31, 2019	$	7,735		$	477		$	8,212
Charges		1,086			11,184			12,270
Cash payments		(7,146	)		(10,480	)		(17,626	)
Balances at September 30, 2020	$	1,675		$	1,181		$	2,856

Balances at December 31, 2018	$	15,578		$	3,974		$	19,552
Charges		1,921			3,727			5,648
Cash payments		(10,884	)		(4,677	)		(15,561	)
Balances at September 30, 2019	$	6,615		$	3,024		$	9,639

The Merger-related restructuring reserve is included in accrued expenses on the Condensed Consolidated Balance Sheets at September 30, 2020 and December 31, 2019.

The Merger-related restructuring and other charges on the Condensed Consolidated Statements of Income (Loss) for the nine months ended September 30, 2020 includes charges related to bankruptcy filing including advisory fees incurred prior to the petition date, consulting and strategic costs of $23.7 million. For the nine months ended September 30, 2019, other charges related to executive severance and benefits of $5.5 million and consulting and strategic costs of $3.8 million are recorded in Restructuring and other charges on the Condensed Consolidated Statements of Income (Loss). These other charges were recorded in Accrued expenses on the Condensed Consolidated Balance Sheets but not included in the above tables.

As a response to changing market conditions the Company has taken further action in the second quarter of 2020, which includes the idling of our Kermit and Utica facility, reducing productive capacity at several facilities, and reducing headcount across the Company.

Covia Holdings Corporation and Subsidiaries

(Debtor-in-Possession)

Notes to Condensed Consolidated Financial Statements

(Unaudited)

22.Liabilities Subject to Compromise

As discussed in Note 1, “Basis of Presentation”, since the Petition Date, the Company has been operating as debtor-in-possession under the jurisdiction of the Bankruptcy Court and in accordance with provisions of the Bankruptcy Code. On the accompanying Condensed Consolidated Balance Sheet, the caption “Liabilities subject to compromise” reflects the expected allowed amount of the pre-petition claims that are not fully secured and that have at least a possibility of not being repaid at the full claim amount.

Liabilities subject to compromise at September 30, 2020 consisted of the following:

		September 30, 2020
		(in thousands)
Current liabilities
Current portion of long-term debt	$		1,570,054
Operating lease liabilities, current			14,065
Accounts payable			41,630
Accrued expenses			68,021
Rejected lease claims			334,157
Total current liabilities			2,027,927

Long-term debt			1,499
Operating lease liabilities, non-current			72,852
Other non-current liabilities			2,518
Total liabilities subject to compromise	$		2,104,796

Determination of the value at which liabilities will ultimately be settled cannot be made until the Bankruptcy Court approves the Plan. The Company will continue to evaluate the amount and classification of its pre-petition liabilities. Any additional liabilities that are subject to compromise will be recognized accordingly, and the aggregate amount of liabilities subject to compromise may change.

23.Reorganization Items, Net

Reorganization items incurred as a result of the Chapter 11 Cases are presented separately in the Condensed Consolidated Statements of Income (Loss). For the nine months ended September 30, 2020, $24.3 million of deferred long-term debt fees on debt subject to compromise were written off and included in Reorganization items, net. For both the three and nine months ended September 30, 2020, $15.3 million of professional fees incurred direct and incremental to the Chapter 11 Cases, $197.0 million net expense of termination and modification of lease agreements, $3.2 million expense of asset abandonments and $1.1 million gain of settlements on liabilities subject to compromise for amounts less than previously estimated are included in Reorganization items, net.

24.Condensed Combined Debtor-In-Possession Financial Information

The financial statements below represent the condensed combined financial statements of the Company Parties. Effective September 30, 2020, the results of the Company’s non-filing entities, which are comprised primarily of the Company's international entities, are not included in the Debtor’s Balance Sheet or in the Debtor’s Statements of Loss.

Intercompany transactions among the Company Parties have been eliminated in the financial statements contained herein. Intercompany transactions among the Company Parties and the non-filing entities have not been eliminated in the Debtor’s Balance Sheet.

Covia Holdings Corporation and Subsidiaries

(Debtor-in-Possession)

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Debtors’ Statements of Loss

	Three Months Ended			Nine Months Ended
	September 30, 2020			September 30, 2020
	(in thousands)
Revenues	$	168,270		$	611,407
Cost of goods sold (excluding depreciation, depletion, and amortization shown separately)		132,650			517,645

Operating expenses
Selling, general and administrative expenses		25,070			81,964
Depreciation, depletion and amortization expense		24,452			83,232
Asset impairments		-			297,358
Restructuring and other charges		1,086			35,999
Loss (gain) on sale of subsidiaries		(67	)		897
Other operating income, net		(5,796	)		(21,561	)
Loss from operations		(9,125	)		(384,127	)

Interest expense, net		1,454			85,549
Reorganization items, net		214,340			238,656
Other non-operating expense, net		451			5,764
Loss before benefit for income taxes		(225,370	)		(714,096	)

Benefit for income taxes		(6,932	)		(41,202	)
Net loss	$	(218,438	)	$	(672,894	)

Covia Holdings Corporation and Subsidiaries

(Debtor-in-Possession)

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Debtors’ Balance Sheet

	September 30, 2020
	(in thousands)
Current assets
Cash and cash equivalents	$	207,456
Restricted cash		39,604
Accounts receivable, net of allowance for doubtful accounts of $4,278		91,011
Intercompany receivable		93,640
Inventories, net		84,160
Prepaid expenses and other current assets		70,823
Total current assets		586,694

Property, plant and equipment, net		863,136
Operating right-of-use assets, net		66,735
Goodwill		62,763
Intangibles, net		28,384
Investments		386,660
Other non-current assets		22,547
Total assets	$	2,016,919

Current liabilities
Operating lease liabilities, current	$	2,258
Accounts payable		23,748
Intercompany payable		137,457
Accrued expenses		57,523
Deferred revenue		9,148
Total current liabilities		230,134

Operating lease liabilities, non-current		11,669
Employee benefit obligations		36,264
Deferred tax liabilities, net		1,118
Other non-current liabilities		52,906
Liabilities subject to compromise		2,104,796
Total liabilities		2,436,887
Total equity		(419,968	)
Total liabilities and equity	$	2,016,919

Covia Holdings Corporation and Subsidiaries

(Debtor-in-Possession)

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Debtors’ Statement of Cash Flows

	Nine Months Ended
	September 30, 2020
	(in thousands)
Net loss attributable to Covia Holdings Corporation	$	(672,894	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation, depletion, and amortization		83,232
Amortization of deferred financing costs		2,483
Asset impairments		297,358
Loss on disposal of fixed assets		(2,323	)
Deferred income tax benefit		(2,014	)
Stock compensation expense		1,978
Non-cash loss on derivatives		35,820
Non-cash reorganization items, net		224,466
Other, net		(32,601	)
Change in operating assets and liabilities:
Accounts receivable		35,800
Inventories		10,650
Prepaid expenses and other assets		(41,969	)
Accounts payable		40,850
Accrued expenses		(9,289	)
Net cash used in operating activities		(28,453	)

Cash flows from investing activities
Capital expenditures		(8,911	)
Capitalized interest		(280	)
Proceeds from sale of fixed assets		4,815
Net cash used in investing activities		(4,376	)

Cash flows from financing activities
Payments on Term Loan		(7,931	)
Payments on other long-term debt		(66	)
Payments on finance lease liabilities		(2,142	)
Tax payments for withholdings on share-based awards exercised or distributed		(187	)
Net cash used in financing activities		(10,326	)

Decrease in cash, cash equivalents and restricted cash		(43,155	)

Cash, cash equivalents and restricted cash
Beginning of period		290,215
End of period	$	247,060

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cautionary Statement Concerning Forward-Looking Statements for Purposes of the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995

The Private Securities Litigation Reform Act of 1995 (“Act”) provides a safe harbor for forward-looking statements to encourage companies to provide prospective information, so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those discussed in the statements. We wish to take advantage of the “safe harbor” provisions of the Act.

Certain statements in this Report are forward-looking statements within the meaning of the Act, and such statements are intended to qualify for the protection of the safe harbor provided by the Act. All statements other than statements of historical fact included in this Report are forward-looking statements, and such statements are subject to risks and uncertainties. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. Forward-looking statements give our current expectations and projections as to future performance, occurrences and trends, including statements expressing optimism or pessimism about future results or events. The words “anticipate,” “estimate,” “expect,” “objective,” “goal,” “project,” “intend,” “plan,” “believe,” “assume,” “will,” “should,” “may,” “can have,” “likely,” “target,” “forecast,” “guide,” “guidance,” “outlook,” “seek,” “strategy,” “future,” and similar words or expressions identify forward-looking statements. Similarly, all statements we make relating to our strategies, plans, goals, objectives and targets as well as our estimates and projections of results, sales, earnings, costs, expenditures, cash flows, growth rates, initiatives, and the outcomes or impacts of pending or threatened litigation or regulatory actions are also forward-looking statements.

Forward-looking statements are based upon a number of assumptions and factors concerning future conditions that may ultimately prove to be inaccurate and could cause actual results to differ materially from those in the forward-looking statements. Forward-looking statements, whether made herein, disclosed previously or in our other releases, reports or filings made with the Securities and Exchange Commission (the “SEC”), are subject to risks and uncertainties and they are not guarantees of future performance. Actual results may differ materially from those discussed in forward-looking statements, thus negatively affecting our business, financial condition, results of operations or liquidity.

Many of the risks and uncertainties that we face are currently influenced by, and will continue to be influenced by, factors related to the Chapter 11 Cases (as defined herein), including:

•

our ability to obtain confirmation the proposed Joint Chapter 11 Plan of Reorganization of Covia Holdings Corporation and its Debtor Affiliates (the “Plan”) and successfully consummate the Company Parties’ anticipated restructuring (the “restructuring”), including by satisfying the conditions and milestones in the Restructuring Support Agreement (as defined herein);

•

our ability to improve our liquidity and long-term capital structure and to address our debt service obligations through the restructuring and the potential adverse effects of the Chapter 11 Cases on our liquidity and results of operation;

•

our ability to obtain timely approval by the Bankruptcy Court (as defined herein) with respect to the motions filed in the Chapter 11 Cases;

•

objections to the Company’s recapitalization process or other pleadings filed that could protract the Chapter 11 Cases and third-party motions which may interfere with Company's ability to consummate the restructuring as contemplated by the Restructuring Support Agreement or an alternative restructuring;

•

the length of time that the Company will operate under Chapter 11 protection and the continued availability of operating capital during the pendency of the Chapter 11 Cases;

•

increased administrative and legal costs related to the Chapter 11 process;

•

potential delays in the Chapter 11 process due to the effects of the COVID-19 pandemic;

•

the effects of the restructuring and the Chapter 11 Cases on the Company and the interests of various constituents;

•

our substantial level of indebtedness and related debt service obligations and restrictions, including those expected to be imposed by covenants in any exit financing, that may limit our operational and financial flexibility;

•

the Company’s ability to access debt or equity markets on favorable terms or at all;

•

risks arising from the delisting of the Company’s common stock from the New York Stock Exchange; and

•

our ability to continue as a going concern and our ability to maintain relationships with suppliers, customers, employees and other third parties as a result of such going concern, the restructuring and the Chapter 11 Cases.

Forward-looking statements are and will be based upon our views and assumptions regarding future events and operating performance at the time the statements are made, and are applicable only as of the dates of such statements. We believe the expectations expressed in the forward-looking statements we make are based on reasonable assumptions within the bounds of our knowledge. However, forward-looking statements, by their nature, involve assumptions, risks, uncertainties and other factors, many of these factors are beyond our control, and any one or a combination of which could materially affect our business, financial condition, results of operations or liquidity.

Additional important assumptions, risks, uncertainties and other factors concerning future conditions that could cause actual results and financial condition to differ materially from our expectations, or cautionary statements, are disclosed under the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Report and in our Annual Report on Form 10-K, as filed with the SEC on March 16, 2020 (the “Form 10-K”), and may be discussed from time to time in our other filings with the SEC, including Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. All written and oral forward-looking statements attributable to us, or to persons acting on our behalf, are expressly qualified in their entirety by these cautionary statements as well as other cautionary statements that are made from time to time in our other SEC filings and public communications. You should evaluate all forward-looking statements made in this Report in the context of these risks and uncertainties.

We caution you not to place undue reliance on forward-looking statements. The important factors referenced above may not contain all of the factors that are important to you. In addition, we cannot assure you that we will realize the results or developments we expect or anticipate or, even if substantially realized, that they will result in the consequences or affect us or our operations in the way we expect. We expressly disclaim any obligation to update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law. You are advised, however, to consult any further disclosures we make on related subjects in our public announcements and SEC filings.

The financial information, discussion and analysis that follow should be read in conjunction with our condensed consolidated financial statements and the related notes included in this Report as well as the financial and other information included in the Form 10-K.

Current Bankruptcy Proceedings

On June 29, 2020, Covia Holdings Corporation and certain of the Company’s direct and indirect U.S. subsidiaries (collectively, the “Company Parties”) filed voluntary petitions for relief (the “Chapter 11 Cases”) under Chapter 11 of Title 11 of the United States Code (the “Bankruptcy Code”) in 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.

For more information regarding the impact of the Chapter 11 Cases, see Voluntary Reorganization under Chapter 11 and Liquidity After Filing the Chapter 11 Cases in this Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note 1 to our condensed consolidated financial statements.

Overview

We are a leading provider of diversified mineral-based and material solutions for the Industrial and Energy markets. We produce a wide range of specialized silica sand, nepheline syenite, feldspar, calcium carbonate, clay, and kaolin products for use in the glass, ceramics, coatings, metals, foundry, polymers, construction, water filtration, sports and recreation, and oil and gas markets in North America and around the world. We currently have 33 active mining facilities with over 25 million tons of annual mineral processing capacity and two active coating facilities with over 320 thousand tons of annual coating capacity. Our mining and coating facilities span North America and also include operations in China and Denmark. Our U.S., Mexico, and Canada operations have many sites in close proximity to our customer base.

Our operations are organized into two segments based on the primary end markets we serve – Energy and Industrial. 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 Energy segment products serve hydraulic fracturing operations in the U.S., Canada, Argentina, Mexico, China, and northern Europe. Our Industrial segment provides raw, value-added, and custom-blended products to the glass, construction, ceramics, metals, foundry, coatings, polymers, sports and recreation, filtration and various other industries, primarily in North America.

We believe our segments are complementary. Our ability to sell products to a wide range of customers across multiple end markets allows us to maximize the recovery of our reserve base within our mining operations and to mitigate the cyclicality of our earnings.

Our Strategy

Our strategy is centered on three objectives – growing our Industrial segment’s profitability, repositioning our Energy segment and strengthening our balance sheet.

Recent Trends and Outlook

Voluntary Reorganization under Chapter 11

On June 29, 2020 (“Petition Date”), the Company Parties commenced voluntary cases under Chapter 11 of the Bankruptcy Code (“Chapter 11”) in the United States Bankruptcy Court for the Southern District of Texas, Houston Division. Primary factors causing us to file for Chapter 11 protection included unsustainable long-term debt obligations and significant excess operating costs, driven by the economic slowdown caused by COVID-19.

The Chapter 11 process can be unpredictable and involves significant risks and uncertainties. As a result of these risks and uncertainties, the amount and composition of the Company’s assets, liabilities, officers and/or directors could be significantly different following the outcome of the Chapter 11 cases, and the description of the Company’s operations, properties and liquidity and capital resources included in this Report may not accurately reflect its operations, properties and liquidity and capital resources following the Chapter 11 process. For further discussion, see Note 1 to our condensed consolidated financial statements and those risk factors discussed under “Risk Factors” in Part II, Item 1A of this Report.

The Company expects to continue working on a business plan of reorganization and engage with certain of the Company’s creditors under its Credit and Guaranty Agreement, dated as of June 1, 2018 (as amended or otherwise modified from time to time, the “Term Loan Agreement”) and the Bankruptcy Court in order to confirm a Chapter 11 plan of reorganization, as applicable. The Company Parties have received initial approval from the Bankruptcy Court to maintain ordinary course operations and uphold their respective commitments to their stakeholders, including employees, customers, and vendors, during the restructuring process, subject to the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code. The commencement of the Chapter 11 Cases constituted an event of default under, and resulted in the acceleration of, substantially all of the Company Parties’ debt obligations. While the Chapter 11 Cases are pending, the Company Parties do not anticipate making interest payments due under their respective debt obligations, except for the Company’s letter of credit facility, which the Company entered into after the commencement of the Chapter 11 Cases.

In connection with the Chapter 11 Cases, the Company Parties entered into a Restructuring Support Agreement with certain creditors (the “Consenting Stakeholders”), which contemplated agreed-upon terms for a prearranged plan of reorganization. On July 7, 2020, the Consenting Stakeholders and the Company Parties entered into an Amended and Restated Restructuring Support Agreement (the “Restructuring Support Agreement”) to (a) revise the defined term “Required Consenting Stakeholders” to mean those Consenting Stakeholders holding 60.01% instead of 50.01% of the aggregate outstanding principal amount of the term loans under the Term Loan Agreement that are held by the Consenting Stakeholders and (b) provide that the Bankruptcy Court must enter, instead of enforce, an order setting the general claims bar date in the Chapter 11 Cases within 60 days of the Petition Date.

Under the Restructuring Support Agreement, the Consenting Stakeholders agreed, subject to certain terms and conditions, to support a financial restructuring of the existing debt of, existing equity interests in, and certain other obligations of the Company Parties, pursuant to a prearranged plan of reorganization as filed with the Bankruptcy Court. The Restructuring Support Agreement may be terminated by one or more of the Consenting Stakeholders or the Company. 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. The Bankruptcy Court may refuse to confirm the Plan.

On September 25, 2020, the Company Parties filed a proposed Joint Chapter 11 Plan of Reorganization of Covia Holdings Corporation and Its Debtor Affiliates (the “Plan”) and a related Disclosure Statement (the “Disclosure Statement”) describing, among other things, the Plan; the Company Parties’ anticipated financial restructuring; the events leading to the Chapter 11 Cases; certain events that have occurred or are anticipated to occur during the Chapter 11 Cases, including the anticipated solicitation of votes to approve the Plan from certain of the Company Parties’ creditors; projected recoveries with respect to claims against and equity interests in the Company Parties under the Plan; and certain other aspects of the anticipated financial restructuring.

For more information regarding the impact of the Chapter 11 Cases, see Liquidity After Filing the Chapter 11 Cases and Note 1 to our condensed consolidated financial statements.

COVID-19 Pandemic

The COVID-19 pandemic and related economic impacts have created significant volatility and uncertainty in our business. Oil prices declined sharply in 2020 due to lower demand which significantly reduced well completion activity in North America and the corresponding demand for proppants. Despite efforts to reduce the supply of oil from the Organization of Petroleum Exporting Countries and other oil producing nations (“OPEC+”), excess oil inventory remains and has resulted in a severe downturn in completion activity that is expected to persist for the foreseeable future.

The COVID-19 pandemic has also caused, and is likely to continue to cause, economic, market and other disruptions throughout North America, which has affected our Industrial segment throughout the first nine months of 2020. In particular, we experienced declines in volumes in the second quarter of 2020 from customers who either experienced reduced end market demand or were temporarily idled due to quarantine mandates. These reduced volumes occurred across most of our end markets within our Industrial segment. It remains unclear how long the effects of the COVID-19 pandemic will negatively impact longer-term demand for our products.

Certain areas of our business began to stabilize in June 2020 and continued to stabilize throughout the third quarter, particularly in our Industrial end market businesses; however, we expect a significant impact to revenue and profitability in 2020 across both segments compared to 2019. In response to these market conditions, the Company has taken several steps to further reduce active capacity and lower operational and overhead costs throughout the Company. These actions include the idling of our Kermit, Seiling and Utica facilities, de-rating productive capacity at several plants, and reducing headcount across the Company while tightly controlling discretionary spending across the Company.

The full extent to which our business is affected by the COVID-19 pandemic will depend on various factors and consequences beyond our control, including the duration and magnitude of the pandemic, shifting customer trends, additional actions by businesses and governments in response to the pandemic, the speed and effectiveness of responses to combat the virus, and the effects of low oil prices on the global economy generally. Further, as a result of the COVID-19 pandemic, we may be subject to higher costs including, but not limited to, work stoppages, production curtailments or need for redundant staff due to quarantine. These effects could have a significant adverse effect on the markets in which we conduct our business and the demand for our products and services.

Energy Proppant Trends

Demand for proppant is significantly influenced by the level of well completions by exploration and production (“E&P”) and oil field services (“OFS”) companies, which depends largely on the current and anticipated profitability of developing oil and natural gas reserves. The type of proppant used in wells depends on a variety of factors, including cost and desired size, sphericity, roundness, and crush strength. Over the last two years, substantial “local” frac sand reserves were developed primarily within the Permian, Eagle Ford, and Mid-Con basins. The quality of local proppants differs from Northern White Sand in that local proppant generally possesses lower crush strength and less sphericity, however their delivered costs are substantially lower. Given their lower costs, demand for local proppant products has strengthened considerably and has taken substantial market share from Northern White Sand in the markets where it is available.

Proppant supply grew throughout 2018 and in early 2019, driven primarily by significant growth in the supply of new local plants in the Permian, Eagle Ford, and Mid-Con basins. Most local plants were developed to supply local basins in which they are located and lack the logistical infrastructure to economically ship product to other basins. We commissioned local facilities in Crane, Texas and Kermit, Texas in the Permian basin in the third quarter of 2018, each with three million tons of annual production capacity, and a local facility in Seiling, Oklahoma in the Mid-Con basin in the fourth quarter of 2018 with two million tons of annual production capacity. During the second quarter of 2020, due to the continued reduction in demand in the Permian Basin, the Company reduced the production capacity of its Crane facility and idled its Kermit facility.

The total amount of local sand supply brought to market has significantly exceeded market demand and has resulted in lower volumes and prices for Covia. In response to these dynamics, Covia has taken significant steps to match its productive capacity to market demand through the idling of more than 30 million tons of capacity over the last two years, including operations at mines in Utica, Illinois; Kermit, Texas; Kasota, Minnesota; Shakopee, Minnesota; Brewer, Missouri; Voca, Texas; Maiden Rock, Wisconsin; and Wexford, Michigan and at our resin coating facilities in Cutler, Missouri; Guion, Arkansas; and Roff, Oklahoma. Additionally, we reduced production capacity and total production at certain of our Northern White sand plants. This has allowed us to lower fixed plant costs and consolidate volumes into lower cost operations. In addition, the Company recorded a $1.4 billion impairment to its Northern White and Seiling asset groups at the end of 2019. The reduced capacity of the Kermit, Texas and Crane, Texas facilities has resulted in an impairment charge recognized in the nine months ended September 30, 2020 of approximately $288.2 million.

Following the onset of the COVID-19 pandemic, oil prices declined into negative levels, resulting in a dramatic decline in completions activity which severely impacted our sales volumes of frac sand. The low price of oil is expected to depress demand for our products for the foreseeable future.

Industrial End Market Trends

Our Industrial segment’s products are sold to customers in the glass, construction, ceramics, metals, foundry, coatings, polymers, sports and recreation, filtration and various other industries. The sales in our Industrial segment have historically correlated strongly with overall economic activity levels as reflected in the gross domestic product, unemployment levels, vehicle production and growth in the housing market. In the first quarter of 2020, overall sales within our Industrial segment remained solid with certain sectors (including containerized glass and coatings and polymers) providing above-average growth due to consumer, regulatory and/or manufacturing trends. Beginning in the second quarter of 2020, with the onset of the COVID-19 pandemic, demand for many of our Industrial products began to decline compared to the second quarter of 2019 due to lower demand for end market applications and disruptions to our customers’ production facilities. Over the long term, we expect our Industrial segment to align with rates similar to U.S. gross domestic product (“GDP”) growth.

Key Metrics Used to Evaluate Our Business

Our management uses a variety of financial and operational metrics to analyze the performance of our Energy and Industrial segments. We determine our reportable segments based on the primary industries we serve, our management structure and the financial information reviewed by our chief operating decision maker in deciding how to allocate resources and assess performance. We evaluate the performance of our segments based on their volumes sold, average selling price, and segment contribution margin and associated per ton metrics. We evaluate the performance of our business based on company-wide operating cash flows, earnings before interest, taxes, depreciation and amortization (“EBITDA”), costs incurred that are considered non-operating, and Adjusted EBITDA. Segment contribution margin, EBITDA, and Adjusted EBITDA are defined in the Non-GAAP Financial Measures section below. We view these metrics as important factors in evaluating profitability and review these measurements frequently to analyze trends and make decisions, and believe these metrics provide beneficial information for investors for similar reasons.

Segment Gross Profit

Segment gross profit is defined as segment revenue less segment cost of sales, excluding depreciation, depletion and amortization expenses, selling, general, and administrative costs, and corporate costs.

Non-GAAP Financial Measures

Segment contribution margin, EBITDA and Adjusted EBITDA are supplemental non-GAAP financial measures used by management and certain external users of our financial statements in evaluating our operating performance.

Segment contribution margin is a key metric we use to evaluate our operating performance and to determine resource allocation between segments. We define segment contribution margin as segment revenue less segment cost of sales, excluding any depreciation, depletion and amortization expenses, selling, general, and administrative costs, and operating costs of idled facilities and excess railcar capacity. Segment contribution margin per ton is defined as segment contribution margin divided by tons sold. Segment contribution margin is not a measure of our financial performance under GAAP and should not be considered an alternative or superior to measures derived in accordance with GAAP. Refer to Note 19 for further detail, including a reconciliation of operating loss from continuing operations, the most directly comparable GAAP financial measure, to segment contribution margin.

We define EBITDA as net income before interest expense, income tax expense (benefit), depreciation, depletion and amortization. Adjusted EBITDA is defined as EBITDA before non-cash stock-based compensation and certain other income or expenses, including restructuring and other charges, impairments, reorganization items, net and Merger-related expenses. Beginning in the first quarter of 2019, we also include non-cash lease expense of intangible assets in our calculation of Adjusted EBITDA as a result of the adoption of ASC 842.

We believe EBITDA and Adjusted EBITDA are useful because they allow management to more effectively evaluate our normalized operations from period to period as well as provide an indication of cash flow generation from operations before investing or financing activities. Accordingly, EBITDA and Adjusted EBITDA do not take into consideration our financing methods, capital structure or capital expenditure needs. Further, we expect that significant impacts will result from the reorganization under the Chapter 11 Cases, including the settlement of prepetition liabilities for amounts less than the carrying amounts at September 30, 2020, as well as professional fees including advisory and legal fees as we complete our reorganization process. As previously noted, Adjusted EBITDA excludes certain non-operational income and/or costs, the removal of which improves comparability of operating results across reporting periods. However, EBITDA and Adjusted EBITDA have limitations as analytical tools and should not be considered as alternatives to, or more meaningful than, net income as determined in accordance with GAAP as indicators of our operating performance. Certain items excluded from EBITDA and Adjusted EBITDA are significant components in understanding and assessing a company’s financial performance, such as a company’s cost of capital and tax structure, as well as the historic costs of depreciable assets, none of which are components of EBITDA or Adjusted EBITDA.

Additionally, Adjusted EBITDA is not intended to be a measure of free cash flow for management’s discretionary use, as it does not consider certain cash requirements such as interest payments, tax payments and debt service requirements. Adjusted EBITDA contains certain other limitations, including the failure to reflect our cash expenditures, cash requirements for working capital needs and cash costs to replace assets being depreciated and amortized, and excludes certain non-operational charges. We compensate for these limitations by relying primarily on our GAAP results and by using Adjusted EBITDA only as a supplement. Non-GAAP financial information should not be considered in isolation or viewed as a substitute for measures of performance as defined by GAAP.

Although we attempt to determine EBITDA and Adjusted EBITDA in a manner that is consistent with other companies in our industry, our computation of EBITDA and Adjusted EBITDA may not be comparable to other similarly titled measures of other companies due to potential inconsistencies in the methods of calculation. We believe that EBITDA and Adjusted EBITDA are widely followed measures of operating performance.

The following table sets forth a reconciliation of net income, the most directly comparable GAAP financial measure, to EBITDA and Adjusted EBITDA:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2020			2019			2020			2019
	(in thousands)						(in thousands)
Reconciliation of EBITDA and Adjusted EBITDA

Net income (loss) from continuing operations attributable to Covia	$	(205,846	)	$	53,772		$	(642,409	)	$	(32,867	)
Interest expense, net		1,714			26,894			84,637			79,896
Benefit from income taxes		(3,278	)		22,471			(32,937	)		13,281
Depreciation, depletion, and amortization expense		27,730			51,920			93,769			169,219
EBITDA		(179,680	)		155,057			(496,940	)		229,529

Non-cash stock compensation expense¹		148			2,296			1,978			8,378
Asset impairments²		-			7,761			298,299			7,761
Restructuring and other charges³		3,756			3,378			38,669			17,504
Reorganization items, net⁴		214,340			-			238,656			-
Loss (gain) on sale of subsidiaries⁵		(67	)		(127,195	)		897			(127,195	)
Costs and expenses related to the Merger and integration⁶		-			-			-			896
Non-cash charges relating to operating leases⁷		-			1,856			-			6,056
Excess railcar costs⁸		8,502			-			8,502			-
Adjusted EBITDA (non-GAAP)	$	46,999		$	43,153		$	90,061		$	142,929
_____________

(1) Represents the non-cash expense for stock-based awards issued to our employees and outside directors. Stock compensation expenses are reported in Selling, general and administrative expenses.
(2) The $298.3 million represents expenses associated with the impairment of long-lived assets in the Energy segment for the nine months ended September 30, 2020. The $7.8 million represents expenses associated with the impairment of our Propel SSP® self-suspending proppant in the Energy segment in the three and nine months ended September 30, 2019.
(3) Represents expenses associated with restructuring activities as a result of the Merger and idled facilities, strategic costs, other charges related to executive severance and benefits, as well as professional fees associated with the Chapter 11 filing which were incurred prior to the petition date.
(4) Represents professional fees related to the Chapter 11 Cases subsequent to the petition date, termination and modification of lease agreements, settlements on liabilities subject to compromise for amounts less than previously estimated and Term Loan deferred financing costs, net that were expensed as a result of the Company's Chapter 11 Cases.
(5) Represents gains associated with the sale of the Calera, Alabama lime processing facility (“Calera”) and the W&W Railroad for the three and nine months ended September 30, 2019.
(6) Costs and expenses related to the Merger and integration include legal, accounting, financial advisory services, severance, integration and other expenses.
(7) Represents the amount of operating lease expense incurred in 2019 related to intangible assets that were reclassified to Operating right-of-use assets, net on the Consolidated Balance Sheets, as a result of the adoption of ASC 842. The expense, previously recognized as non-cash amortization expense, is now recognized in Cost of goods sold (excluding depreciation, depletion, and amortization shown separately) on the Consolidated Statements of Loss.
(8) Represents the amount of non-cash operating lease expense, storage and freight expense on excess railcars incurred in the three and nine months September 30, 2020 and recognized in Cost of goods sold (excluding depreciation, depletion, and amortization shown separately) on the Consolidated Statements of Loss.

Results of Operations

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2020			2019		2020		2019
	(in thousands)					(in thousands)
Operating Data
Energy
Tons sold		1,270			4,177		6,064		13,191
Revenues	$	56,315		$	223,318	$	277,300	$	710,940
Segment gross profit (loss)		(2,007	)		17,662		2,300		66,584
Segment contribution margin	$	14,211		$	24,576	$	39,105	$	87,507
Industrial
Tons sold		3,445			3,583		9,605		10,744
Revenues	$	173,045		$	185,639	$	494,253	$	571,199
Segment gross profit		65,532			59,061		168,310		175,792
Segment contribution margin	$	65,532		$	59,061	$	168,310	$	175,792
Totals
Tons sold		4,715			7,760		15,669		23,935
Revenues	$	229,360		$	408,957	$	771,553	$	1,282,139
Segment gross profit		63,525			76,723		170,610		242,376
Segment contribution margin	$	79,743		$	83,637	$	207,415	$	263,299

Three Months Ended September 30, 2020 Compared to Three Months Ended September 30, 2019

Revenues

Revenues were $229.4 million for the three months ended September 30, 2020 compared to $409.0 million for the three months ended September 30, 2019, a decrease of $179.6 million, or 44%. Volumes were 4.7 million tons for the three months ended September 30, 2020 compared to 7.8 million tons for the three months ended September 30, 2019, a decrease of 3.1 million tons, or 40%. Our volumes and revenues decreased as a result of declining demand across both segments, primarily attributable to the reduction in oil production and the effects of the COVID-19 pandemic on key end-markets served by our business. Although the Company realized an average product selling price increase of approximately 2% in the third quarter of 2020 compared to the third quarter of 2019, the Company’s total average selling price for the third quarter of 2020 declined by approximately 8% compared to the third quarter of 2019 due to declines in freight revenue as well as unfavorable product mix away from higher priced product lines.

Revenues in the Energy segment were $56.3 million for the three months ended September 30, 2020 compared to $223.3 million for the three months ended September 30, 2019, a decrease of $167.0 million, or 75%. The decrease in revenues was driven by lower sales volumes and realized pricing due to weakened market conditions across all major product lines within the Energy segment during the three months ended September 30, 2020. Volumes sold into the Energy segment were 1.3 million tons in the three months ended September 30, 2020, compared to 4.2 million tons in the three months ended September 30, 2019, a decrease of 2.9 million tons, or 69%.

Revenues in the Industrial segment were $173.0 million for the three months ended September 30, 2020 compared to $185.6 million for the three months ended September 30, 2019, a decrease of $12.6 million, or 7%. Volumes sold into the Industrial segment were 3.4 million tons in the three months ended September 30, 2020, compared to 3.6 million tons for the three months ended September 30, 2019, a decrease of 0.2 million tons, or 6%. In the third quarter of 2019 we completed the sale of our Calera facility and W&W Railroad which accounted for $7.3 million of revenue for the three months ended September 30, 2019. Other than the sale of the Calera facility and the W&W Railroad, the remainder of the decline in revenue and volume decreases during the third quarter of 2020 compared to the third quarter of 2019 were primarily attributed to the COVID-19 pandemic, however market conditions and demand improved throughout the third quarter of 2020.

Segment Gross Profit (Loss) and Segment Contribution Margin

Segment gross profit was $63.5 million for the three months ended September 30, 2020 compared to segment gross profit of $76.7 million for the three months ended September 30, 2019, a decrease of $13.2 million, or 17%. The segment gross profit decrease was primarily due to the decrease in sales volumes and pricing, which were partially offset by a decrease in railcar lease expense for the three months ended September 30, 2020.

Segment contribution margin was $79.7 million in the three months ended September 30, 2020 and excludes $7.7 million of operating costs of idled facilities and $8.5 million of excess railcar costs. Segment contribution margin was $83.6 million in the three months ended September 30, 2019 and excludes $1.0 million of operating costs of idled facilities and $5.9 million of excess railcar capacity costs. These excluded costs are entirely attributable to the Energy segment. We have made significant progress in the third quarter of 2020 in reducing costs associated with reducing our overall railcar fleet via the rejection of a number of above-market leases. We expect the excess railcar amounts to decline in the future as a result of the reorganization process.

Our Energy segment had a gross loss of $2.0 million for the three months ended September 30, 2020 compared to a gross profit of $17.7 million for the three months ended September 30, 2019, a decrease of $19.7 million, or 111%. This decrease in gross profit was primarily due to lower volumes and average selling prices driven by oversupplied oil and gas markets and the ongoing effects of the COVID-19 pandemic.

Industrial segment gross profit was $65.5 million for the three months ended September 30, 2020 compared to $59.1 million for the three months ended September 30, 2019, an increase of $6.4 million, or 11%. Excluding the sale of our Calera facility and W&W Railroad in the third quarter of 2019, Industrial gross profit was $56.8 million for the three months ended September 30, 2019 or an increase of $8.7 million. The increase in Industrial segment gross profit was primarily due to plant cost improvements, which included reductions in our workforce and controlled variable input costs, which were partially offset by reductions in demand and sales volume caused by the North American business closures due to the COVID-19 pandemic.

Selling, General and Administrative Expenses

Selling, general and administrative expenses (“SG&A”) decreased $7.5 million, or 21%, to $28.1 million for the three months ended September 30, 2020 compared to $35.6 million for the three months ended September 30, 2019. SG&A for the three months ended September 30, 2020 included $0.1 million of stock compensation expense compared to $2.3 million of stock compensation expense in the three months ended September 30, 2019, driven by lower grant activity in the current year versus the prior year. The remainder of the decrease is primarily due to the effects of headcount reductions and lower travel and professional fees. A large portion of our external professional services fees have been incurred in connection with the Chapter 11 bankruptcy proceeding, which is classified as “Reorganization items, net” that are direct and incremental to the petition process. Consequently, there has been a reduction in professional services spending classified within Selling, general and administrative expenses in the third quarter of 2020 compared to the third quarter of 2019.

Depreciation, Depletion and Amortization

Depreciation, depletion and amortization (“DD&A”) decreased $24.2 million, or 47%, to $27.7 million for the three months ended September 30, 2020, compared to $51.9 million in the three months ended September 30, 2019. Depreciation of property, plant, and equipment and amortization expense decreased during the third quarter of 2020 compared to the third quarter of 2019 due to a lower depreciable base of existing property, plant, and equipment as well as the sale of the Calera facility. In the fourth quarter of 2019, an impairment charge of approximately $1.4 billion, primarily related to the long-lived assets of our Energy segment, was the driver of the lower depreciation in the third quarter of 2020. Additionally, the impairment charges primarily taken on our regional sand asset groups in the second quarter of 2020 resulted in a reduction in the Company’s depreciation, depletion and amortization in the third quarter of 2020 versus the third quarter of 2019.

Asset Impairments

In the three months ended September 30, 2020, we did not record any asset impairments related to long-lived assets. In the three months ended September 30, 2019 we recorded a $7.8 million charge to adjust the carrying amount of long-lived assets specific to our Propel SSP® self-suspending proppant within the Energy segment, to their salvage value.

Restructuring and Other Charges

In the three months ended September 30, 2020, we incurred $1.1 million of restructuring charges related to the restructuring of a labor union agreement at one of our facilities. In the three months ended September 30, 2019, we incurred $3.4 million of strategic-related charges.

Gain on Sale of Subsidiaries

In the three months ended September 30, 2019, we recorded a gain of $127.2 million on the sale of Calera and the W&W Railroad. There were no such sales completed or gains recognized in the three months ended September 30, 2020.

Other Operating Expense (Income), net

Other operating income, net increased $0.9 million to $0.9 million for the three months ended September 30, 2020 primarily attributable to gains on the disposal of miscellaneous fixed assets.

Income from Operations

Income from continuing operations decreased approximately $97.6 million to $7.6 million for the three months ended September 30, 2020 compared to $105.2 million for the three months ended September 30, 2019. This change was primarily due to the $127.2 million gain on sale of subsidiaries recognized in the prior period partially offset by the decrease in DD&A of $24.2 million during the three months ended September 30, 2020.

Interest Expense, net

Interest expense, net decreased $25.2 million to $1.7 million for the three months ended September 30, 2020 compared to $26.9 million for the three months ended September 30, 2019. The decrease in interest expense is primarily due to the stay on interest expense on the Term Loan as of the Petition Date pending resolution of the Chapter 11 Cases. Our contractual interest expense that would be reflected if the Chapter 11 Cases were not underway was approximately $32.1 million for the three months ended September 30, 2020.

Reorganization items, net

In the three months ended September 30, 2020, we incurred $214.3 million of Reorganization items, net related primarily to professional fees incurred due to the Chapter 11 Cases, termination and modification of lease agreements. These amounts were partially offset by settlements on liabilities subject to compromise for amounts less than previously estimated. We did not record reorganization items in the nine months ended September 30, 2019.

Other Non-Operating Expense, net

Other non-operating expense, net decreased $1.2 million to $0.7 million in the three months ended September 30, 2020 compared to $1.9 million in the three months ended September 30, 2019. The decrease is primarily due to a decrease in pension settlement accounting charges in the third quarter of 2020 compared to the third quarter of 2019.

Provision for Income Taxes

Provision for income taxes decreased $25.8 million to $3.3 million for the three months ended September 30, 2020 compared to a provision of $22.5 million for the three months ended September 30, 2019. Profits before income taxes decreased $285.6 million to a loss of $209.2 million for the three months ended September 30, 2020 compared to a profit of $76.4 million for the three months ended September 30, 2019. The decrease in provision from income taxes is primarily attributable to a decrease in income before taxes.

The effective tax rate was 1.6% and 29.4% for the three months ended September 30, 2020 and 2019, respectively. The decrease in the effective tax rate is primarily attributable to a valuation allowance recorded against deferred taxes. The provision for income taxes for interim periods is determined using an estimate of our annual effective tax rate, adjusted for discrete items that are taken into account in the relevant period. Each quarter, we update our estimate of the annual effective tax rate. If our estimated effective tax rate changes, we make a cumulative adjustment.

In response to the economic impact of the COVID-19 pandemic, on March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act. The CARES Act enacts a number of economic relief measures, including the infusion of various tax cash benefits into negatively affected companies to ease the impact of the pandemic. We are still assessing the impact of CARES Act. The CARES Act included provisions allowing net operating losses arising in tax years beginning after December 31, 2017, and before January 1, 2021 to be carried back to each of the five tax years preceding the tax year of such loss. In addition, the CARES Act removed the limitation that net operating losses generated after 2017 could only offset 80% of taxable income. For the quarter ending March 31, 2020, we recorded a discrete benefit of $29.3 million resulting from this change because these losses now eligible for utilization were estimated as not realizable prior to the CARES Act. No tax benefit was recorded for the quarter ending September 30, 2020. As of September 30, 2020 we have $33.8 million recorded as a receivable on the Condensed Consolidated Balance Sheets related to the CARES Act.

Net Income (Loss) Attributable to Covia

Net loss attributable to Covia increased $259.6 million to $205.8 million for the three months ended September 30, 2020 compared to net income attributable to Covia of $53.8 million for the three months ended September 30, 2019 primarily due to lower profitability in the Energy segment and expenses related to the Chapter 11 Cases incurred in the three months ended September 30, 2020 discussed above.

Adjusted EBITDA

Adjusted EBITDA increased $3.8 million to $47.0 million for the three months ended September 30, 2020 compared to $43.2 million for the three months ended September 30, 2019. Adjusted EBITDA for the three months ended September 30, 2020 excludes the impact of $0.1 million of non-cash stock compensation expense, $0.1 million gain in working capital adjustments on sale of subsidiaries, $3.8 million in restructuring and other charges, $8.5 million of excess railcar costs, and $214.3 million in reorganization items, net. The change in Adjusted EBITDA is largely due to the changes in segment profit margin, SG&A and other factors discussed above.

Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019

Revenues

Revenues were $771.6 million for the nine months ended September 30, 2020 compared to revenues of $1,282.1 million for the nine months ended September 30, 2019, a decrease of $510.5 million, or 40%. Total volumes were 15.7 million tons for the nine months ended September 30, 2020 compared to total volumes of 23.9 million tons for the nine months ended September 30, 2019, a decrease of 8.2 million tons, or 34%. Our revenues decreased largely due to pricing and volumes declines in the Energy business, which resulted from the reduction of E&P activities in North America, coupled with the broad impacts of the interruptions caused by the COVID-19 pandemic which negatively impacted our Industrial segment.

Revenues in the Energy segment were $277.3 million for the nine months ended September 30, 2020 compared to $710.9 million for the nine months ended September 30, 2019. Volumes sold into the Energy segment were 6.1 million tons in the nine months ended September 30, 2020 compared to 13.2 million tons in the nine months ended September 30, 2019, a decrease of 7.1 million tons, or 54%. In addition to the disruptions experienced at the macro- and industry-specific levels as a result of the reduction of E&P activities in North America and the COVID-19 pandemic, and the resulting price and volume impacts, revenues also decreased due to reduced production capacity and total production at certain of our plants since the second quarter of 2019, which were concentrated on the Northern White production facilities.

Revenues in the Industrial segment were $494.3 million for the nine months ended September 30, 2020 compared to $571.2 million for the nine months ended September 30, 2019, a decrease of $76.9 million, or 13%. Volumes sold into the Industrial segment were 9.6 million tons in the nine months ended September 30, 2020, compared to 10.7 million tons for the nine months ended September 30, 2019, a decrease of 1.1 million tons, or 10%. In addition to impacts from the COVID-19 pandemic, total Industrial revenue and volume decreases are primarily attributable to lower transportation-related revenues for the nine months ended September 30, 2020. Transportation-related revenues represented a greater proportion of Industrial segment shipments in the nine months ended September 30, 2019 compared to the nine months ended September 30, 2020. Revenues also decreased when compared to the prior nine-month period based on product mix shift and lower volumes due to reduced demand resulting from the disruption caused by the COVID-19 pandemic across the end-markets we serve through our Industrial segment.

Segment Gross Profit and Segment Contribution Margin

Segment gross profit was $170.6 million for the nine months ended September 30, 2020 compared to segment gross profit of $242.4 million for the nine months ended September 30, 2019, a decrease of $71.8 million, or 30%. The segment gross profit decrease was primarily a result of the proppant market downturn in our Energy segment which caused reduced pricing, lower volumes and a reduction in profitability. Additionally, the COVID-19 pandemic caused reductions in demand across the Industrial end markets we serve in 2020. Partially offsetting these impacts were reductions in terminal operating costs and railcar lease expense in the current year. Due to the $1.4 billion impairment charge recognized in the fourth quarter of 2019, which significantly reduced our “Operating right-of-use assets” recorded on our Condensed Consolidated Balance Sheets, we are recognizing less lease expense, largely related to railcars, in the current period versus the prior year comparable period.

Segment contribution margin was $207.4 million in the nine months ended September 30, 2020 and further excludes $17.1 million of operating costs of idled facilities and $19.7 million of excess railcar capacity costs. Segment contribution margin was $263.3 million in the nine months ended September 30, 2019 and further excludes $3.0 million of operating costs of idled facilities and $17.9 million of excess railcar capacity costs. These excluded costs are entirely attributable to the Energy segment.

The Energy segment had a gross profit of $2.3 million for the nine months ended September 30, 2020 compared to a gross profit of $66.6 million for the nine months ended September 30, 2019, a decrease of $64.3 million, or 97%. This decrease was primarily due to lower volumes, reduced pricing and related reduction in profitability as a result of the proppant market declines.

Industrial segment gross profit was $168.3 million for the nine months ended September 30, 2020 compared to $175.8 million for the nine months ended September 30, 2019, a decrease of $7.5 million, or 4% as a result of declining volumes and revenues driven by the COVID-19 pandemic which impacted the end markets the Company serves.

Selling, General and Administrative Expenses

SG&A decreased $24.9 million, or 21%, to $91.3 million for the nine months ended September 30, 2020 compared to $116.2 million for the nine months ended September 30, 2019. SG&A for the nine months ended September 30, 2020 includes stock compensation expense of $2.0 million compared to $8.4 million for the nine months ended September 30, 2019. The decrease in stock compensation expense was primarily due to the decrease in awards granted in 2020. The remainder of the decrease is primarily due to a $12.8 million decrease as a result of initiatives to reduce corporate expenses and headcount reductions which have decreased salary and benefit expenses by $9.1 million when compared to the nine months ended September 30, 2019.

Depreciation, Depletion and Amortization

Depreciation, depletion and amortization decreased $75.4 million, or 45%, to $93.8 million for the nine months ended September 30, 2020, compared to $169.2 million in the nine months ended September 30, 2019. Depreciation of property, plant, and equipment and amortization expense decreased during this period due to a lower depreciable base of existing property, plant, and equipment. In the fourth quarter of 2019, an impairment charge of approximately $1.4 billion, primarily related to the long-lived assets of our Energy segment, was the driver of the lower depreciation in the nine months ended September 30, 2020.

Asset Impairments

We recorded impairment charges of $298.3 million related to property, plant and equipment in our Seiling, Oklahoma and our West Texas asset group for the nine months ended September 30, 2020, due to lower anticipated sales in the future at our local sand facilities. In the nine months ended September 30, 2019, we recorded $7.8 million of impairment related to the abandonment of our Propel SSP^® self-suspending proppant in the third quarter of 2019.

Restructuring and Other Charges

We incurred restructuring and other charges of $36.0 million in the nine months ended September 30, 2020, primarily related to separation costs and professional fees incurred in preparation of our petition related to our Chapter 11 Cases, as well as ramp-down costs at idled facilities. We incurred restructuring and other charges of $14.9 million in the nine months ended September 30, 2019 primarily related to executive severance and benefits charges, as well as costs associated with idling of facilities in the first half of 2019.

Gain on Sale of Subsidiaries

In the nine months ended September 30, 2019, we recorded a gain of $127.2 million on the sale of the Calera facility and the W&W Railroad. There were no such sales in the nine months ended September 30, 2020.

Other Operating Income, net

Other operating income, net decreased $0.9 million to $3.8 million for the nine months ended September 30, 2020 compared to $4.7 million in the nine months ended September 30, 2019. For the nine months ended September 30, 2020, we recorded a $2.4 million gain on disposal of fixed assets. Other operating income, net for the nine months ended September 30, 2019 included the income related to realization of customary take-or-pay provisions of certain customer supply agreements. Additionally, for the nine months ended September 30, 2019, we recorded $1.9 million on loss on disposal of fixed assets and income related to easements granted for consideration on certain of our properties in Mexico and Virginia.

Income (Loss) from Operations

Income from continuing operations decreased $412.0 million to a loss of $345.9 million for the nine months ended September 30, 2020 compared to income of $66.1 million for the nine months ended September 30, 2019. This change was largely due to asset impairments of $298.3 million recognized in the nine months ended September 30, 2020 compared to $7.8 million in the prior period, a gain on sale of subsidiaries of $127.2 million recognized in the prior period, and restructuring and other charges of $36.0 million, offset by decreases in SG&A and DD&A in the nine months ended September 30, 2020 as noted above.

Interest Expense, net

Interest expense, net increased $4.7 million to $84.6 million for the nine months ended September 30, 2020 compared to $79.9 million for the nine months ended September 30, 2019. The increase in interest expense is due to the loss recognized on long-term interest rate swaps that were re-designated as cash flow hedges for accounting purposes in the second quarter of 2020, as a result of the event of default under the agreements governing our interest rate swaps in connection with the filing of the Chapter 11 Cases, resulting in deferred losses being immediately recognized as interest expense. Due to the filing of the Chapter 11 Cases on June 29, 2020, the forecasted interest payments which these instruments were intended to hedge against are no longer considered probable. This increase was offset slightly by a reduction in the principal on the Term Loan balance in the fourth quarter of 2019 as a result of the voluntary

repurchase of approximately $63.0 million of outstanding debt and normal scheduled amortization payments, as well as the decrease in interest rates in the first half of 2020 compared to the first half of 2019. The interest rate was 5.4% for the six months ended June 30, 2020 and 8.3% for the three months ended September 30, 2020, resulting in an interest rate of 6.3% for the nine months ended September 30, 2019. As of the Petition Date, the interest expense on the Term Loan was stayed pending the resolution of the Chapter 11 Cases.

Reorganization items, net

In the nine months ended September 30, 2020, we incurred $238.7 million of reorganization items, net related primarily to professional fees incurred due to the Chapter 11 Cases, Term Loan deferred financing costs that were expenses as a result of the Chapter 11 Cases, and terminations and modifications of lease agreements. These amounts were primarily offset by settlements on liabilities subject to compromise for amounts less than previously estimated. We did not record reorganization items, net in the nine months ended September 30, 2019.

Other Non-Operating Expense, net

Other non-operating expense, net increased $0.6 million to $6.3 million in the nine months ended September 30, 2020 compared to $5.7 million in the nine months ended September 30, 2019. The increase is due to the acceleration of previously deferred pension-related expenses as a result of the application of settlement accounting in the first half of 2020 as distributions exceeded the current period service and interest cost recognized.

Benefit from Income Taxes

Income taxes decreased $46.2 million to a benefit of $32.9 million for the nine months ended September 30, 2020 compared to provision of $13.3 million for the nine months ended September 30, 2019. Loss before income taxes increased $656.0 million to $675.4 million for the nine months ended September 30, 2020 compared to a loss of $19.4 million for the nine months ended September 30, 2019. The increase in tax benefit is primarily attributable to a discrete benefit resulting from provisions of the CARES Act allowing for increased carryback and utilization of net operating losses.

The effective tax rate was 4.9% and 68.4% for nine months ended September 30, 2020 and 2019, respectively. The decrease in the effective tax rate is primarily attributable to a valuation allowance recorded against deferred taxes offset by a discrete benefit resulting from provisions of the CARES Act allowing for increased carryback and utilization of net operating losses. As of September 30, 2020 we have $33.8 million recorded as a receivable on the Condensed Consolidated Balance Sheets related to the CARES Act.

Net Loss Attributable to Covia

Net loss attributable to Covia increased $609.5 million, or 1,853%, to a loss of $642.4 million for the nine months ended September 30, 2020, compared to a loss of $32.9 million for the nine months ended September 30, 2019. The change in net loss attributable to Covia is primarily due to decreases in revenues and gross profit and increases in SG&A, asset impairments, reorganization items and restructuring and other charges discussed above.

Adjusted EBITDA

Adjusted EBITDA decreased $52.9 million to $90.1 million for the nine months ended September 30, 2020 compared to $142.9 million for the nine months ended September 30, 2019. Adjusted EBITDA for the nine months ended September 30, 2020 excludes the impact of $2.0 million of non-cash stock compensation expense, $0.9 million loss in working capital adjustments on sale of subsidiaries, $38.7 million in restructuring and other related charges, $238.7 million in reorganization items, net related to the effects of the Chapter 11 Cases, $8.5 million of excess railcar costs, and $298.3 million related to impairment charges incurred associated with the idling of our facility in Kermit, Texas. The change in Adjusted EBITDA is largely due to the revenues, gross profit, and SG&A factors discussed above.

Liquidity and Capital Resources

Overview

In general, our liquidity is principally used to service our debt, meet our working capital needs, and invest in both maintenance and growth capital expenditures. Due to impacts of the macro-environment (including the impacts of the COVID-19 pandemic), industry, and other company-specific factors, we have taken significant actions to reduce our working capital requirements and our overhead costs, monetize certain non-core assets within our portfolio and maintain adequate liquidity. Historically, we have met our liquidity and capital investment needs with funds generated from operations and the issuance of debt, if necessary. Due to our current leverage profile, the maturity of our long-term debt, unfavorable long-term contracts and outlook of the key markets in which we operate, we executed the Restructuring Support Agreement with certain creditors and voluntarily filed the Chapter 11 Cases on June 29, 2020 in order to accelerate our strategic transformation and facilitate a financial restructuring.

Our principal sources of liquidity are cash on-hand and cash flow from operations, both now and in the near future. We have not secured any financing under debtor-in-possession financing and currently anticipate our liquidity needs will be satisfied during the Chapter 11 Cases by cash on-hand and expected cash flow from operations during the period. Our operations are capital intensive and short-term capital expenditures related to certain strategic projects can be substantial.

Liquidity After Filing the Chapter 11 Cases

During the duration of the Chapter 11 Cases, the Company’s principal sources of liquidity are expected to be limited to cash flow from operations and cash on hand which we believe is sufficient to fund our operations during our Chapter 11 case. Our ability to maintain adequate liquidity through the reorganization process and beyond depends on successful operation of our business, and appropriate management of operating expenses and capital spending. Our anticipated liquidity needs are highly sensitive to changes in each of these and other factors.

The condensed consolidated financial statements included in this Report have been prepared on a going concern basis of accounting, which contemplates continuity of operations, realization of assets, and satisfaction of liabilities and commitments in the normal course of business. The condensed consolidated financial statements do not reflect any adjustments that might result from the outcome of the Chapter 11 Cases. We have reclassified all of the Company Parties indebtedness to “Liabilities subject to compromise” at September 30, 2020. Our level of indebtedness has adversely impacted and is continuing to adversely impact our financial condition. As a result of our financial condition, the defaults under, and the resulting acceleration of, substantially all of our outstanding indebtedness, and the risks and uncertainties surrounding the Chapter 11 Cases, substantial doubt exists that we will be able to continue as a going concern. For further discussion, see Note 1 to our condensed consolidated financial statements and those risk factors discussed under “Risk Factors” in Part II, Item 1A of this Report.

In anticipation of the Chapter 11 Cases, we did not make our quarterly principal payment of $4.0 million on the Term Loan, which was due after the Petition Date. In addition, following the Chapter 11 Cases, all interest payments due on debt held by the Company Parties were stayed and are included in Liabilities subject to compromise on the Company’s Condensed Consolidated Balance Sheet as of September 30, 2020. Additionally, a significant portion of our accounts payable and accrued expenses on the Debtors’ Balance Sheet under Note 24 represent pre-petition claims which may not be paid in full.

Term Loan

Interest on the Term Loan accrues at a per annum rate of either (at our option) (a) LIBOR plus a spread or (b) the alternate base rate plus a spread, subject to a minimum LIBOR floor of 1%. The spread varies depending on our total net leverage ratio, defined as the ratio of debt (less up to $150 million of cash) to EBITDA for the most recent four fiscal quarter period, as follows:

	Term Loan
Leverage Ratio	Applicable Margin for Eurodollar Loans	Applicable Margin for ABR Loans
Greater than or equal to 2.50x	4.00%	3.00%
Greater than or equal to 2.0x and less than 2.50x	3.75%	2.75%
Greater than or equal to 1.50x and less than 2.0x	3.50%	2.50%
Less than 1.50x	3.25%	2.25%

The Term Loan contains customary representations and warranties, affirmative covenants, negative covenants and events of default. Negative covenants include, among others, limitations on debt, liens, asset sales, mergers, consolidations and fundamental changes, dividends and repurchases of equity securities, repayments or redemptions of subordinated debt, investments, transactions with affiliates, restrictions on granting liens to secure obligations, restrictions on subsidiary distributions, changes in the conduct of the business, amendments and waivers in organizational documents and junior debt instruments and changes in the fiscal year. The filing of the Chapter 11 Cases constituted an event of default under the Term Loan.

See Note 1 and 5 to our in the consolidated financial statements included in this Report for further detail regarding the Term Loan.

As of September 30, 2020, we had outstanding Term Loan borrowings of $1.56 billion and cash on-hand of $246.9 million. These outstanding balances, as well as the accrued interest thereon, have been classified as Liabilities subject to compromise in the accompanying Condensed Consolidated Balance Sheets.

Receivables Facility

On March 31, 2020, we entered into a Receivables Financing Agreement (“RFA”) among (i) Covia, as initial servicer, (ii) Covia Financing LLC, a wholly-owned subsidiary of Covia, as borrower (“Covia Financing”), (iii) the persons from time to time party thereto, as lenders, (iv) PNC Bank, National Association, as LC bank and as administrative agent (“PNC”), and (v) PNC Capital Markets LLC, as structuring agent (“Structuring Agent”). In connection with the RFA, on March 31, 2020, Covia, as originator and servicer, and Covia Financing, as the buyer, entered into a Purchase and Sale Agreement (“PSA”), and certain Covia subsidiaries, as sub-originators (“Sub-Originators”), and Covia, as the buyer and servicer, entered into the Sub-Originator Purchase and Sale Agreement (“Sub-PSA”). Together, the RFA, the PSA, and the Sub-PSA (“Agreements”) established the primary terms and conditions of an accounts receivable securitization program (the “Receivables Facility”).

Pursuant to the terms of the Sub-PSA, each of the Sub-Originators sold its receivables to Covia in a true sale conveyance. Pursuant to the PSA, Covia, in its capacity as originator, sold in a true sale conveyance its receivables, including the receivables it purchased from the Sub-Originators, to Covia Financing. Under the Receivables Facility, Covia Financing could borrow or obtain letters of credit in an amount not to exceed $75.0 million in the aggregate and would secure its obligations under the letters of credit through a pledge of undivided interests in the receivables it purchased from Covia, together with related security and interests in the proceeds thereof, to PNC. The loans under the Receivables Facility were an obligation of Covia Financing and not the Sub-Originators or Covia. None of the Sub-Originators nor Covia guaranteed the collectability of the trade receivables or the creditworthiness of the obligors of the receivables.

Amounts outstanding under the Receivables Facility accrued interest based on LIBOR Market Index Rate, provided that Covia Financing could select adjusted LIBOR for a tranche period. The Receivables Facility was scheduled to terminate on March 31, 2023, unless terminated earlier pursuant to the terms of the Agreements.

The filing of the Chapter 11 Cases constituted an event of default under the Receivables Facility. On July 1, 2020, as part of the Plan and with the approval of the Bankruptcy Court, the Company terminated the Receivables Facility. In connection with the termination of the Receivables Facility, the Company repaid all of the outstanding obligations in respect of principal, interest and fees under the Receivables Facility and obtained the termination and release of all security interests and liens in the assigned receivables granted in connection therewith from PNC.

Further, with the approval of the Bankruptcy Court, the Receivables Facility was replaced with a letter of credit facility pursuant to a final order of the Bankruptcy Court authorizing, among other things, (i) the Company’s funding of a new letter of credit collateral account held at Covia Financing, (ii) the entry into the Payoff and Reassignment Agreement (the “Payoff Agreement”), among the Company, Covia Financing, the Sub-Originators, PNC, and PNC Capital, (iii) the Company’s, Covia Financing’s and the Sub-Originators’ entry into, and performance of, their respective obligations under the Payoff Agreement and, as applicable, the Reimbursement Agreement for Cash-Collateralized Standby Letters of Credit, among PNC, Covia Financing, and the Company (the “Reimbursement Agreement” and, together with the Payoff Agreement, the “Letter of Credit Agreements”), and (iv) the execution of the transactions contemplated by the Letter of Credit Agreements. In July 2020, we cash collateralized approximately $37.0 million of our outstanding standby letters of credit.

Working Capital

Working capital is the amount by which current assets (excluding cash, cash equivalents and restricted cash) exceed current liabilities (excluding current portion of long-term debt) and represents a measure of liquidity. Covia’s working capital was $201.2 million at September 30, 2020 and $61.7 million at December 31, 2019. The increase in working capital is primarily due to the reclassification of substantially all of our current liabilities prior to the Petition Date relating to obligations of the Company Parties to Liabilities Subject to Compromise. Although our working capital requirements remain consistent with our requirements before the Petition Date, our liabilities reclassified as Liabilities Subject to Compromise may be settled for amounts substantially different from those in the accompanying condensed consolidated balance sheets. Excluding this classification change and the $334.2 million lease claim accrual, our working capital would have been $77.5 million at September 30, 2020. The change in pro forma working capital compared to December 31, 2019 was due to income tax refunds receivable due to the carryback of our net operating losses under the CARES Act, offset by lower investment in working capital for inventory and accounts receivable, which was driven by lower sales volumes and demand levels. During the quarter ended September 30, 2020, various working capital metrics improved, particularly cash collections and days sales outstanding ratios.

Cash Flow Analysis

Net Cash Provided by Operating Activities

Operating activities consist primarily of net income adjusted for non-cash items, including depreciation, depletion, and amortization, the gain on the sale of subsidiaries, impairment charges, non-cash losses on derivatives, non-cash reorganization items and the effect of changes in working capital.

Net cash provided by operating activities was $4.7 million for the nine months ended September 30, 2020, compared with $68.8 million of net cash provided by operating activities for the nine months ended September 30, 2019. This $64.1 million variance was primarily due to lower profitability in the three months ended September 30, 2020. The lower volumes in the nine months ended September 30, 2020 resulted in lower working capital requirements to fund accounts receivable and inventories. Improvements in collections also resulted in additional reductions in receivables compared to the nine months ended September 30, 2019.

Net Cash Provided by (Used in) Investing Activities

Investing activities in the current period consist primarily of capital expenditures for maintenance; however, the Company typically utilizes cash for both growth and maintenance projects. Capital expenditures generally consist of expansions of production or terminal facilities, land and reserve acquisition or maintenance related expenditures for asset replacement and health, safety, and quality improvements. As a result of current market conditions, the Company has refocused its capital investment strategy primarily toward maintenance capital and investments in projects to maintain health and safety standards.

Net cash used in investing activities was $24.9 million for the nine months ended September 30, 2020, compared with $155.2 million of net cash provided by investing activities in the nine months ended September 30, 2019. The $180.1 million variance was primarily due to reduced growth-related capital expenditures within the Energy segment to align with current market conditions. Capital expenditures were $28.8 million in the nine months ended September 30, 2020 and were primarily focused on maintenance expenditures at various facilities as well as investments in the Company’s nepheline syenite operations. Capital expenditures were $75.1 million in the nine months ended September 30, 2019 and were primarily focused on growth expenditures at our Canoitas, Mexico facility and the completion of in-basin sand plants.

Subject to our continuing evaluation of market conditions, we anticipate that our capital expenditures in 2020 will be approximately $45.0 million, which will be primarily associated with maintenance and cost improvement capital projects, and near-term payback growth projects. We expect to fund our capital expenditures through cash on our balance sheet and cash generated from our operations.

Net Cash Used in Financing Activities

Net cash used in financing activities was $10.5 million in the nine months ended September 30, 2020 compared to $18.1 million used in financing activities in the nine months ended September 30, 2019. This decrease is primarily due to decreased principal repayments of our Term Loan in the nine months ended September 30, 2020 versus the prior period. We have not made principal payments in 2020 since April of 2020 due to the Chapter 11 Cases, as discussed below.

Sources of Capital

As of September 30, 2020 and December 31, 2019, we had the following debt outstanding, net of cash, cash equivalents and restricted cash:

	September 30, 2020		December 31, 2019
	(in thousands)
Term Loan	$	-	$	1,566,440
Finance lease liabilities	1,408		6,875
Industrial Revenue Bond	-		10,000
Other borrowings	-		145
Term Loan deferred financing costs, net¹	-		(25,754)
Liabilities subject to compromise²	1,571,545		-
Total Debt	1,572,953		1,557,706
Less: Cash, cash equivalents and restricted cash	286,492		319,484
Net Debt	$	1,286,461	$	1,238,222

(1)	As a result of the Company's Chapter 11 Cases, the Company expensed $24.3 million of Term Loan deferred financing costs, net, recorded in Reorganization items, net in the Condensed Consolidated Statements of Loss for the nine months ended September 30, 2020.

(2)

In connection with our Chapter 11 Cases, the $1.6 billion outstanding under the Term Loan, the $10.0 million outstanding under the Industrial Revenue Bond, $3.0 million outstanding on finance leases and $0.1 million outstanding on Other borrowings have been reclassified to Liabilities subject to compromise in our Condensed Consolidated Balance Sheets as of September 30, 2020. Up to the Petition Date, we continued to accrue interest expense in relation to Term Loan reclassified as Liabilities subject to compromise.

Seasonality

Our business is affected by seasonal fluctuations in weather that impact our production levels and our customers’ business needs. For example, our Energy segment sales levels are lower in the first and fourth quarters due to lower market demand as adverse weather tends to slow oil and gas operations to varying degrees depending on the severity of the weather. In addition, our inability to mine and process sand year-round at certain of our surface mines results in a seasonal build-up of inventory as we mine sand to build a stockpile that will feed our drying facilities during the winter months. Additionally, in the second and third quarters, we sell higher volumes to our customers in our Industrial segment’s end markets due to the seasonal rise in demand driven by more favorable weather conditions.

Off-Balance Sheet Arrangements

We have no undisclosed off-balance sheet arrangements that have or are likely to have a current or future material impact on our financial condition, results of operations, liquidity, capital expenditures, or capital resources.

Contractual Obligations

Other than as disclosed elsewhere in this Report with respect to the filing of the Chapter 11 Cases, the acceleration of substantially all of our debt (including the Term Loan and the Industrial Revenue Bond) and the replacement of our Receivables Facility, there have been no material changes outside of the ordinary course of our business to the contractual arrangements disclosed in our “Contractual Obligations” table in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the Form 10-K.

Environmental Matters

We are subject to various federal, state and local laws and regulations governing, among other things, hazardous materials, air and water emissions, environmental contamination and reclamation and the protection of the environment and natural resources. We have made, and expect to make in the future, expenditures to comply with such laws and regulations, but cannot predict the full amount of such future expenditures. We may also incur fines and penalties from time to time associated with noncompliance with such laws and regulations.

As of September 30, 2020 and December 31, 2019, we had $54.7 million and $46.5 million, respectively, recognized for Asset retirement obligations, which include future reclamation costs. There were no significant changes with respect to environmental liabilities or future reclamation costs, however, the timing of the settlement estimate has been revised based on decisions made to idle certain production facilities. This has resulted in an increase to the Asset retirement obligation recognized in the condensed consolidated financial statements as it is computed on a discounted cash flow model.

Critical Accounting Policies and Estimates

Our unaudited condensed consolidated financial statements have been prepared in conformity with GAAP, which requires management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of our financial statements and the reported amounts of revenues and expenses during the reporting period. While we do not believe that the reported amounts would be materially different, application of these policies involves the exercise of judgment and the use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates. We evaluate our estimates and judgments on an ongoing basis. We base our estimates on experience and various other assumptions that we believe are reasonable under the circumstances. All of our significant accounting policies, including certain critical accounting policies and estimates, are disclosed in our Form 10-K.

Recent Accounting Pronouncements

Refer to Note 1 of our unaudited condensed consolidated financial statements included in this Report.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

Due to our variable-rate indebtedness, we are exposed to fluctuations in interest rates. We voluntarily filed the Chapter 11 Cases on June 29, 2020 and entered into a RSA with our term lenders. The RSA suspended the payment of interest on our term loan. Prior to our Chapter 11 filing, we were exposed to fluctuations in interest rates and elected to hedge a portion of our interest rate exposure via fixed interest rate swaps. These derivative instruments are reported at fair value in accrued expenses and other non-current liabilities. Changes in the fair value of derivatives are recorded each period in other comprehensive income.

For derivatives not designated as hedges, the gain or loss is recognized in current earnings. No components of our cash flow hedging instruments were excluded from the assessment of hedge effectiveness. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for making fixed-rate payments over the life of the agreements without exchange of the underlying notional value. The gain or loss on the interest rate swap is recorded in accumulated other comprehensive loss and subsequently reclassified into interest expense in the same period during which the hedged transaction affects earnings.

Our Chapter 11 filing constituted an event of default under the agreements governing the interest rate swaps, resulting in the acceleration of our indebtedness thereunder.

We do not use derivative financial instruments for trading or speculative purposes. By their nature, all such instruments involve risk, including the possibility that a loss may occur from the failure of another party to perform according to the terms of a contract (credit risk) or the possibility that future changes in market price may make a financial instrument less valuable or more onerous (market risk). As is customary for these types of instruments, we do not require collateral or other security from other parties to these instruments. We believe that there is no significant risk of loss in the event of nonperformance of the counterparties to these financial instruments.

We formally designate and document instruments at inception that qualify for hedge accounting of underlying exposures in accordance with GAAP. We assess, both at inception and for each reporting period, whether the financial instruments used in hedging transactions are effective in offsetting changes in cash flows of the related underlying exposure. Due to the uncertainty that the occurrence of the forecasted transactions being hedged will occur, we have de-designated the financial instruments as of June 29, 2020 and reclassified the losses that were deferred in accumulated “Other comprehensive income” to “Interest expense, net” beginning with the three-month period ending June 30, 2020.

As of September 30, 2020, the fair value of the interest rate swaps was a liability of $35.9 million.

Our pre-Petition Date interest rate was LIBOR-based, subject to a floor of 5%. Due to low LIBOR rates these swap agreements had an unfavorable impact on our interest cost. The Company will review its risk management strategy as it approaches approval of its Plan.

Credit Risk

We are subject to risks of loss resulting from nonpayment or nonperformance by our customers. In the nine months ended September 30, 2020 we did not have any customers that exceeded 10% of revenues. In the nine months ended September 30, 2019, one customer exceeded 10% of revenues and accounted for 10% of revenues in such period. At September 30, 2020 and December 31, 2019, we had no customers whose accounts receivable balance exceeded 10% of total receivables. We examine the creditworthiness of third-party customers to whom we extend credit and manage our exposure to credit risk through credit analysis, credit approval, credit limits and monitoring procedures, and for certain transactions, we may request letters of credit, prepayments or guarantees, although collateral is generally not required. As a result of the COVID-19 pandemic, a number of companies within the Energy segment have experienced financial distress which may increase the risk of losses on our accounts receivable.

Foreign Currency Risk

We are subject to market risk related to foreign currency exchange rate fluctuations. Revenues from international operations represented 19% and 10% of our revenues for the nine months ended September 30, 2020 and 2019, respectively. A portion of our business is transacted in currencies other than the functional currency, including the Canadian dollar and Mexican peso. Our foreign currency exchange risk is somewhat mitigated by our ability to offset a portion of these non-U.S. dollar-denominated revenues with operating expenses that are paid in the same currencies. To date, foreign currency fluctuations have not had a material impact on results from operations. However, translation of net assets denominated in another currency result in changes to our net asset carrying values in the condensed consolidated balance sheets.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure of Controls and Procedures

We maintain disclosure controls and procedures, as that term is defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. In designing and evaluating the disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable, and not absolute, assurance of achieving the desired control objectives of such controls and procedures. Our management, under the supervision and with the participation of our Chief Executive Officer (“CEO”) (our principal executive officer) and Chief Financial Officer (“CFO”) (our principal financial officer), has evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our CEO and CFO have each concluded that such disclosure controls and procedures were effective as of the end of the period covered by this report.

Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as that term is defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act. There have been no changes in our internal control over financial reporting during the quarter ended September 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Chapter 11 Proceedings

On June 29, 2020, the Company Parties filed the Chapter 11 Cases seeking relief under the Bankruptcy Code with the Bankruptcy Court for the Southern District of Texas, Houston Division. See “Voluntary Reorganization under Chapter 11” under Note 1 to our condensed consolidated financial statements for information regarding the Chapter 11 Cases.

SEC Investigation

Product Liability Matters

We and/or our predecessors have been named as a defendant, usually among many defendants, in numerous product liability lawsuits brought by or on behalf of current or former employees of our customers alleging damages caused by silica exposure. As of September 30, 2020, we were subject to approximately 38 active silica exposure cases. Many of the claims pending against us arise out of the alleged use of our silica products in foundries or as an abrasive blast media and have been filed in various jurisdictions over the years. In accordance with the terms of our insurance coverage, these claims are being defended by our subsidiaries’ insurance carriers, subject to our payment of a percentage of the defense costs. Based on information currently available, management cannot reasonably estimate a loss at this time. Although the outcomes of these lawsuits cannot be predicted with certainty, management does not believe that the pending lawsuits, individually or in the aggregate, are reasonably likely to have a material adverse effect on our financial position, results of operations or cash flows.

Other Matters

We are involved in other legal actions and claims arising in the ordinary course of business. We currently believe that each such action and claim will be resolved without a material effect on our financial condition, results of operations, or liquidity. However, litigation involves an element of uncertainty. Future developments could cause these actions or claims to have a material effect on our financial condition, results of operations, and liquidity.

ITEM 1A. RISK FACTORS

In addition to other information set forth in this Report, you should carefully consider the risk factors discussed under the caption “Risk Factors” in our Annual Report on Form 10-K. Other than those noted above and the risk factors set forth below, there have been no material changes to the risk factors previously disclosed in the Form 10-K.

An epidemic, pandemic or public health crisis could disrupt our operations and have a material adverse effect on our business.

Our business could be materially and adversely affected by the outbreak of a widespread health epidemic or pandemic, such as COVID-19 (coronavirus), avian flu or African swine flu. Outbreaks of contagious illness occur from time to time around the world. The occurrence of such an outbreak or other adverse public health developments could materially disrupt our business and operations, including if government authorities impose mandatory closures, seek voluntary closures or impose restrictions on operations. Furthermore, the risk of contracting viruses or other illnesses that may be transmitted through human contact could cause employees to avoid interacting with other people, which could materially and adversely affect the ability to adequately staff our operations. An outbreak could also cause disruption in our supply chain and adversely impact our ability to ensure supplies to our facilities and to provide safety measures to protect our employees, which could materially and adversely affect our continuous operations. If an outbreak reaches pandemic levels, there may also be long-term effects on the economies of effected countries. Any of the foregoing within the countries in which we or our customers and suppliers operate or are dependent on supplies or revenues would severely disrupt our operations and could have a material adverse effect on our business, results of operations, cash flows and financial condition.

Beginning in March 2020, the broader impact of the COVID-19 pandemic began disrupting our operations. Impacts to our business have included reduced activity and, in some cases, idling of customer facilities which have impacted our sales volumes and revenues. In addition, the COVID-19 pandemic (along with disruptions in the global oil and gas markets) has impacted global oil demand resulting in a significant decline in oil prices. The impact of the lower oil prices resulted in lower drilling and completion activity for our Energy customers which has negatively impacted and will continue to impact proppant sales as well as the financial condition of our customers within the Energy segment which may impact their ability to pay amounts due to the Company. Finally, stay-at-home orders by governments where we operate have forced our employees, and the employees of some of our customers, to work from home which has negatively impacted our business.

Further, given the more recent announcements during the summer of 2020 of certain areas of the U.S. reactivating closures plans and uncertainties surrounding the spread of the disease, we expect a significant impact to revenue and profitability for the remainder of 2020 across both segments. In response to these market conditions, the Company has taken several steps to further reduce active capacity within our Energy segment and lower operational and overhead costs throughout the Company. These actions include the idling of our Kermit and Utica facility, reducing productive capacity at our Seiling facility, and reducing headcount across the Company.

The extent to which our operations will be impacted by the outbreak will depend largely on future developments, which are highly uncertain and cannot be accurately predicted, including new information which may emerge concerning the severity of the outbreak and the actions by the government authorities to contain the outbreak or treat its impact, among other things. Insurance may be unavailable to cover any losses we incur as a result of the outbreak.

Even if a virus or other illness does not spread significantly, the perceived risk of infection or health risk may affect our business. Our operations could also be disrupted if any of our employees or employees of our customers and suppliers were suspected of having a contagious illness or susceptible to becoming infected with a contagious illness, since this could require us or our customers and suppliers to screen and/or quarantine some or all of such employees.

Risks Associated with Chapter 11 Proceedings

We are subject to the risks and uncertainties associated with Chapter 11 proceedings.

On June 29, 2020, Covia Holdings Corporation and certain of its direct and indirect U.S. subsidiaries commenced the Chapter 11 Cases and, on June 29, 2020, entered into the Restructuring Support Agreement, which was amended and restated on July 7, 2020, with certain of the Company’s creditors under the Term Loan. For the duration of our Chapter 11 Cases, our operations and our ability to develop and execute the business plan, as well as our continuation as a going concern, are subject to risks and uncertainties associated with bankruptcy. These risks include the following:

•

our ability to obtain confirmation of a plan of reorganization under the Chapter 11 Cases and successfully consummate the restructuring, including by satisfying the conditions and milestones in the Restructuring Support Agreement;

•

our ability to obtain timely approval by the Bankruptcy Court with respect to the motions filed in the Chapter 11 Cases;

•

objections to the Company’s recapitalization process or other pleadings filed that could protract the Chapter 11 Cases and third-party motions which may interfere with Company's ability to consummate the restructuring contemplated by the Restructuring Support Agreement or an alternative restructuring;

•

the length of time that the Company will operate under Chapter 11 protection and the continued availability of operating capital during the pendency of the Chapter 11 Cases;

•

increased administrative and legal costs related to the Chapter 11 process;

•

potential delays in the Chapter 11 process due to the effects of the COVID-19 pandemic;

•

the effects of the restructuring and the Chapter 11 Cases on the Company and the interests of various constituents;

•

Delays in our Chapter 11 Cases increase the risks of us being unable to reorganize our business and emerge from bankruptcy and increase our costs associated with the bankruptcy process.

These risks and uncertainties could affect our business and operations in various ways. For example, negative events associated with our Chapter 11 proceedings could adversely affect our relationships with our suppliers, service providers, customers, employees, and other third parties, which in turn could adversely affect our operations and financial condition. Also, we need the prior approval of the Bankruptcy Court for transactions outside the ordinary course of business, which may limit our ability to respond timely to certain events or take advantage of certain opportunities. Because of the risks and uncertainties associated with our Chapter 11 proceedings, we cannot accurately predict or quantify the ultimate impact of events that will occur during our Chapter 11 proceedings that may be inconsistent with our plans.

Operating under Bankruptcy Court protection for a long period of time may harm our business.

Our future results are dependent upon the successful confirmation and implementation of a plan of reorganization. A long period of operations under Bankruptcy Court protection could have a material adverse effect on our business, financial condition, results of operations and liquidity. So long as the Chapter 11 proceedings continue, our senior management will be required to spend a significant amount of time and effort dealing with the reorganization instead of focusing exclusively on our business operations. A prolonged period of operating under Bankruptcy Court protection also may make it more difficult to retain management and other key personnel necessary to the success and growth of our business.

Additionally, so long as the Chapter 11 proceedings continue, we will be required to incur significant costs for professional fees and other expenses associated with the administration of the Chapter 11 proceedings. If we are unable to obtain such court approval, or alternative financing on favorable terms or at all, our chances of successfully reorganizing our business may be seriously jeopardized, and, as a result, any securities in us could become further devalued or become worthless.

Furthermore, we cannot predict the ultimate amount of all settlement terms for the liabilities that will be subject to a plan of reorganization. Even once a plan of reorganization is approved and implemented, our operating results may be adversely affected by the possible reluctance of prospective lenders and other counterparties to do business with a company that recently emerged from Chapter 11 proceedings.

The Chapter 11 Cases limit the flexibility of our management team in running our business.

While we operate our businesses as debtor-in-possession under supervision by the Bankruptcy Court, we are required to obtain the approval of the Bankruptcy Court and, in some cases, certain lenders prior to engaging in activities or transactions outside the ordinary course of business. Bankruptcy Court approval of non-ordinary course activities entails preparation and filing of appropriate motions with the Bankruptcy Court, negotiation with the creditors’ committee(s) and other parties-in-interest and one or more hearings. The creditors’ committee(s) and other parties-in interest may be heard at any Bankruptcy Court hearing and may raise objections with respect to these motions. This process may delay major transactions and limit our ability to respond quickly to opportunities and events in the marketplace. Furthermore, in the event the Bankruptcy Court does not approve a proposed activity or transaction, we would be prevented from engaging in activities and transactions that we believe are beneficial to us.

We may not be able to obtain confirmation of a Chapter 11 plan of reorganization.

To emerge successfully from Bankruptcy Court protection as a viable entity, we must meet certain statutory requirements with respect to adequacy of disclosure with respect to the plan of reorganization, solicit and obtain the requisite acceptances of such a plan and fulfill other statutory conditions for confirmation of such a plan, which have not occurred to date. The confirmation process is subject to numerous, unanticipated potential delays, including a delay in the Bankruptcy Court’s commencement of the confirmation hearing regarding our plan of reorganization.

We may not receive the requisite acceptances of constituencies in the Chapter 11 proceedings to confirm our plan. Even if the requisite acceptances of our plan are received, the Bankruptcy Court may not confirm such a plan. The precise requirements and evidentiary showing for confirming a plan, notwithstanding its rejection by one or more impaired classes of claims or equity interests, depends upon a number of factors including, without limitation, the status and seniority of the claims or equity interests in the rejecting class (i.e., secured claims or unsecured claims or subordinated or senior claims). If a Chapter 11 plan of reorganization is not confirmed by the Bankruptcy Court, it is unclear whether we would be able to reorganize our business and what, if anything, holders of claims against us would ultimately receive with respect to their claims.

There can be no assurance as to whether we will successfully reorganize and emerge from the Chapter 11 proceedings or, if we do successfully reorganize, as to when we would emerge from the Chapter 11 proceedings. If we are unable to successfully reorganize, we may not be able to continue our operations.

The Restructuring Support Agreement is subject to significant conditions and milestones that may be beyond our control and may be difficult for us to satisfy. If the Restructuring Support Agreement is terminated, our ability to confirm and consummate a plan of reorganization could be materially and adversely affected.

The Restructuring Support Agreement, as may be amended from time to time, sets forth certain conditions we must satisfy, including the timely satisfaction of milestones in the Chapter 11 proceedings, such as confirmation of the Plan and effectiveness of the Plan, and obtaining a new or amended exit revolving credit facility, the form and substance of which is reasonably satisfactory to the Consenting Stakeholders (as defined therein). Our ability to timely complete such milestones is subject to risks and uncertainties that may be beyond our control. The Restructuring Support Agreement gives the Consenting Stakeholders the ability to terminate the Restructuring Support Agreement under certain circumstances, including the failure of certain conditions to be satisfied. Should a termination event occur, all obligations of the parties to the Restructuring Support Agreement will terminate. A termination of the Restructuring Support Agreement may result in the loss of support for the Plan, which could adversely affect our ability to confirm and consummate the Plan. If the Plan is not consummated, there can be no assurance that any new Plan would be as favorable to holders of claims as the current Plan and our Chapter 11 proceedings could become protracted, which could significantly and detrimentally impact our relationships with vendors, suppliers, employees, and customers.

Our long-term liquidity requirements and the adequacy of our capital resources are difficult to predict at this time.

We face uncertainty regarding the adequacy of our liquidity and capital resources. In addition to the cash requirements necessary to fund ongoing operations, we have incurred significant professional fees and other costs in connection with preparation for the Chapter 11 proceedings and expect that we will continue to incur significant professional fees and costs throughout our Chapter 11 proceedings. We cannot assure you that cash on hand, cash flow from operations will be sufficient to continue to fund our operations and allow us to satisfy our obligations related to the Chapter 11 proceedings until we are able to emerge from the Chapter 11 proceedings.

Our liquidity, including our ability to meet our ongoing operational obligations, is dependent upon, among other things: (i) our ability to comply with the terms and conditions of any cash collateral order that may be entered by the Bankruptcy Court in connection with the Chapter 11 proceedings, (ii) our ability to maintain adequate cash on hand, (iii) our ability to generate cash flow from operations, (iv) our ability to develop, confirm and consummate a Chapter 11 plan or other alternative restructuring transaction, and (v) the cost, duration and outcome of the Chapter 11 proceedings.

As a result of the Chapter 11 proceedings, our financial results may be volatile and may not reflect historical trends.

During the Chapter 11 proceedings, we expect our financial results to continue to be volatile as restructuring activities and expenses, contract terminations and rejections, and claims assessments significantly impact our condensed consolidated financial statements. As a result, our historical financial performance is likely not indicative of our financial performance after the date of the bankruptcy filing. In addition, if we emerge from Chapter 11, the amounts reported in subsequent condensed consolidated financial statements may materially change relative to historical consolidated financial statements, including as a result of revisions to our operating plans pursuant to a plan of reorganization. We also may be required to adopt fresh start accounting, in which case our assets and liabilities will be recorded at fair value as of the fresh start reporting date, which may differ materially from the recorded values of assets and liabilities on our consolidated balance sheets. Our financial results after the application of fresh start accounting also may be different from historical trends.

We may be subject to claims that will not be discharged in the Chapter 11 proceedings, which could have a material adverse effect on our financial condition and results of operations.

The Bankruptcy Code provides that the confirmation of a plan of reorganization discharges a debtor from substantially all debts arising prior to confirmation. With few exceptions, all claims that arose prior to June 29, 2020, or before confirmation of the plan of reorganization (i) would be subject to compromise and/or treatment under the plan of reorganization and/or (ii) would be discharged in accordance with the terms of the plan of reorganization. Any claims not ultimately discharged through the plan of reorganization could be asserted against the reorganized entities and may have an adverse effect on our financial condition and results of operations on a post-reorganization basis.

We may experience increased levels of employee attrition as a result of the Chapter 11 proceedings.

As a result of the Chapter 11 proceedings, we may experience increased levels of employee attrition, and our employees likely will face considerable distraction and uncertainty. A loss of key personnel or material erosion of employee morale could adversely affect our business and results of operations. Our ability to engage, motivate and retain key employees or take other measures intended to motivate and incent key employees to remain with us through the pendency of the Chapter 11 proceedings may be limited by restrictions on implementation of incentive programs under the Bankruptcy Code. The loss of services of members of our senior management team could impair our ability to execute our strategy and implement operational initiatives, which would be likely to have a material adverse effect on our business, financial condition and results of operations.

Trading in our common stock during the pendency of the Chapter 11 proceedings is highly speculative and poses substantial risks.

All of our indebtedness is senior to the Company’s existing common stock in our capital structure. As we have a substantial amount of indebtedness, any trading in our common stock during the pendency of the Chapter 11 Cases is highly speculative and poses substantial risks to purchasers of our common stock.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Our safety program establishes a system for promoting a safety culture that encourages incident prevention and continually strives to improve our safety and health performance. Our safety program includes as its domain all established safety and health specific programs and initiatives for our material compliance with all local, state and federal legislation, standards, and regulations as they apply to a safe and healthy employee, stakeholder, and work environment.

Our safety program has the ultimate goal of the identification, elimination or control of all risks to personnel, stakeholders, and facilities, that can be controlled and directly managed, and those it does not control or directly manage, but can expect to have an influence upon.

The operation of our U.S. based mines is subject to regulation by the Federal Mine Safety and Health Administration (“MSHA”) under the Federal Mine Safety and Health Act of 1977 (the “Mine Act”). MSHA inspects our mines on a regular basis and issues various citations and orders when it believes a violation has occurred under the Mine Act. Following passage of The Mine Improvement and New Emergency Response Act of 2006, MSHA significantly increased the numbers of citations and orders charged against mining operations. The dollar penalties assessed for citations issued have also increased in recent years.

The information concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K is included in Exhibit 95.1 to this Report and is incorporated by reference.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

The Exhibits to this Report are listed in the Exhibit Index.

The following documents are filed or furnished as exhibits to this Quarterly Report on Form 10-Q. For convenient reference, each exhibit is listed in the following Exhibit Index according to the number assigned to it in the Exhibit Table of Item 601 of Regulation S-K.

(x) Filed herewith

(*) Management contract or compensatory plan or arrangement

Exhibit No.		Description

3.1		Amended and Restated Certificate of Incorporation of Covia Holdings Corporation (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K of the Company, filed with the SEC on June 6, 2018) (File No. 001-38510).

3.2		Amended and Restated Bylaws of Covia Holdings Corporation incorporated by reference to Exhibit 3.2 to the Current Report on Form 8-K of the Company, filed with the SEC on June 6, 2018) (File No. 001-38510).

4.1		Amended and Restated Stockholders Agreement, dated as of September 1, 2019, by and among Covia Holdings Corporation, SCR-Sibelco NV and the other parties named therein (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K of the Company, filed with the SEC on August 22, 2019) (File No. 001-38510).

10.1		Amended and Restated Restructuring Support Agreement, dated as of July 7, 2020, by and among the Company Parties and the Consenting Stakeholders (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K of the Company, filed with the SEC on July 10, 2010) (File No. 001-38510).

31.1(x)		Certification of Chief Executive Officer pursuant to Rules 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2(x)		Certification of Chief Financial Officer pursuant to Rules 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1(x)		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2(x)		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

95.1(x)		Mine Safety Disclosure Exhibit

Exhibit No.		Description


101.INS(x)		Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

101.SCH(x)		Inline XBRL Taxonomy Extension Schema Document.

101.CAL(x)		Inline XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF(x)		Inline XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB(x)		Inline XBRL Taxonomy Extension Label Linkbase Document.

101.PRE(x)		Inline XBRL Taxonomy Extension Presentation Linkbase Document.

104		Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101).

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Covia Holdings Corporation


By:	/s/ Andrew D. Eich
	Andrew D. Eich
	Executive Vice President, Chief Financial Officer and Treasurer
	(Principal Financial Officer and Duly Authorized Officer)

Date:	November 9, 2020

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