UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________________________
FORM 10-Q
_____________________________________________________ | | | | | |
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended June 30, 20212022
OR | | | | | |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Transition Period from ___ to ___
Commission file number 001-37936
SMART SAND, INC.
(Exact name of registrant as specified in its charter) | | | | | |
Delaware | 45-2809926 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) |
| |
1725 Hughes Landing Blvd, Suite 800 | |
The Woodlands, Texas 77380 | (281) 231-2660 |
(Address of principal executive offices) | (Registrant’s telephone number) |
| | | | | | | | | | | | | | |
Securities registered pursuant to Section 12(b) of the Act: |
Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
Common Stock, par value $0.001 per share | | SND | | Nasdaq Global Select Market |
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 ý☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted 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 and post such files). Yes ý☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. | | | | | | | | | | | | | | | | | | | | |
Large accelerated filer ☐ | Accelerated filer ☐ | Non-accelerated Filer ý☒ | 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 Act). Yes ☐ No ý☒
Number of shares of common stock outstanding, par value $0.001 per share, as of July 27, 2021: 43,295,834August 2, 2022: 45,293,519
Certain Definitions
The following definitions apply throughout this quarterly report unless the context requires otherwise: | | | | | | | | |
“We”, “Us”, “Company”, “Smart Sand” or “Our” | | Smart Sand, Inc., a company organized under the laws of Delaware, and its subsidiaries. |
| | |
“shares”, “stock” | | The common stock of Smart Sand, Inc., nominal value $0.001 per share. |
| | |
“ABL Credit Facility”, “ABL Credit Agreement”, “ABL Security Agreement” | | The five-year senior secured asset-based lending credit facility (the “ABL Credit Facility”) pursuant to: (i) an ABL Credit Agreement, dated December 13, 2019, between the Company and Jefferies Finance LLC, (theas amended from time to time (as amended, the “ABL Credit Agreement”); and (ii) a Guarantee and Collateral Agreement, dated December 13, 2019, between the Company and Jefferies Finance LLC, as agent, (theas amended from time to time (as amended, the “Security Agreement”). |
| | |
“Oakdale Equipment Financing”, “MLA” | | The five-year Master Lease Agreement, dated December 13, 2019, between Nexseer Capital (“Nexseer”) and related lease schedules in connection therewith (collectively, the “MLA”). The MLA is structured as a sale-leaseback of substantially all of the equipment at the Company’s mining and processing facility located near Oakdale, Wisconsin. The Oakdale Equipment Financing is considered a lease under article 2A of the Uniform Commercial Code but is considered a financing arrangement (and not a lease) for accounting or financial reporting purposes. |
| | |
“Loan Agreement”, “Acquisition Liquidity Support Facility” | | In connection with the Company’s acquisition of Eagle Oil and Gas Proppants Holdings LLC from Eagle Materials Inc., which acquisition was completed on September 18, 2020, the Company, as borrower, entered into a Loan and Security Agreement, dated September 18, 2020 (the “Loan Agreement”), with Eagle Materials Inc., as lender, secured by certain property rights and assets of the acquired business, whereby the Company may draw loans in an aggregate amount up to $5.0 million during the twelve-month period ending September 19, 2021 (the “Acquisition Liquidity Support Facility”). |
| | |
“Exchange Act” | | The Securities Exchange Act of 1934, as amended. |
| | |
“Securities Act” | | The Securities Act of 1933, as amended. |
| | |
“FCA”, “DAT”, “DAP” | | Free Carrier, Delivered at Terminal, Delivered at Place, respectively, Incoterms 2010. |
| | |
“FASB”, “ASU”, “ASC”, “GAAP” | | Financial Accounting Standards Board, Accounting Standards Update, Accounting Standards Codification, Accounting Principles Generally Accepted in the United States, respectively. |
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SMART SAND, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS | | | June 30, 2021 | | December 31, 2020 | | June 30, 2022 | | December 31, 2021 |
| | (unaudited) | | | (unaudited) | |
| | (in thousands, except share amounts) | | (in thousands, except share amounts) |
Assets | Assets | | | | Assets | | | |
Current assets: | Current assets: | | | | Current assets: | | | |
Cash and cash equivalents | Cash and cash equivalents | $ | 39,278 | | | $ | 11,725 | | Cash and cash equivalents | $ | 2,098 | | | $ | 25,588 | |
Accounts receivable | Accounts receivable | 10,371 | | | 69,720 | | Accounts receivable | 32,224 | | | 17,481 | |
Unbilled receivables | Unbilled receivables | 1,220 | | | 127 | | Unbilled receivables | 4,751 | | | 1,884 | |
Inventory | Inventory | 15,937 | | | 19,136 | | Inventory | 16,875 | | | 15,024 | |
Prepaid expenses and other current assets | Prepaid expenses and other current assets | 14,860 | | | 11,378 | | Prepaid expenses and other current assets | 9,197 | | | 13,886 | |
Total current assets | Total current assets | 81,666 | | | 112,086 | | Total current assets | 65,145 | | | 73,863 | |
Property, plant and equipment, net | Property, plant and equipment, net | 268,417 | | | 274,676 | | Property, plant and equipment, net | 270,593 | | | 262,465 | |
Operating lease right-of-use assets | Operating lease right-of-use assets | 29,028 | | | 32,099 | | Operating lease right-of-use assets | 30,818 | | | 29,828 | |
Intangible assets, net | Intangible assets, net | 7,857 | | | 8,253 | | Intangible assets, net | 7,065 | | | 7,461 | |
Other assets | Other assets | 490 | | | 563 | | Other assets | 347 | | | 402 | |
Total assets | Total assets | $ | 387,458 | | | $ | 427,677 | | Total assets | $ | 373,968 | | | $ | 374,019 | |
Liabilities and Stockholders’ Equity | Liabilities and Stockholders’ Equity | | | | Liabilities and Stockholders’ Equity | | | |
Current liabilities: | Current liabilities: | | Current liabilities: | |
Accounts payable | Accounts payable | $ | 4,942 | | | $ | 3,268 | | Accounts payable | $ | 12,698 | | | $ | 8,479 | |
Accrued expenses and other liabilities | Accrued expenses and other liabilities | 10,037 | | | 13,142 | | Accrued expenses and other liabilities | 14,146 | | | 14,073 | |
Deferred revenue, current | 4,827 | | | 6,875 | | |
Current portion of deferred revenue | | Current portion of deferred revenue | 9,339 | | | 9,842 | |
| Long-term debt, net, current | 7,177 | | | 6,901 | | |
Operating lease liabilities, current | 7,602 | | | 7,077 | | |
Current portion of long-term debt | | Current portion of long-term debt | 6,869 | | | 7,127 | |
Current portion of operating lease liabilities | | Current portion of operating lease liabilities | 10,663 | | | 9,029 | |
Total current liabilities | Total current liabilities | 34,585 | | | 37,263 | | Total current liabilities | 53,715 | | | 48,550 | |
Deferred revenue, net | 6,984 | | | 3,482 | | |
Long-term debt, net | 18,826 | | | 22,445 | | |
Operating lease liabilities, long-term | 24,497 | | | 27,020 | | |
Long-term deferred revenue | | Long-term deferred revenue | 2,389 | | | 6,428 | |
Long-term debt | | Long-term debt | 14,783 | | | 15,353 | |
Long-term operating lease liabilities | | Long-term operating lease liabilities | 22,541 | | | 23,690 | |
Deferred tax liabilities, long-term, net | Deferred tax liabilities, long-term, net | 27,141 | | | 32,981 | | Deferred tax liabilities, long-term, net | 19,170 | | | 22,434 | |
Asset retirement obligation | Asset retirement obligation | 16,108 | | | 14,996 | | Asset retirement obligation | 24,816 | | | 16,155 | |
Contingent consideration | 0 | | | 180 | | |
| Other non-current liabilities | Other non-current liabilities | 505 | | | 503 | | Other non-current liabilities | 42 | | | 249 | |
Total liabilities | Total liabilities | 128,646 | | | 138,870 | | Total liabilities | 137,456 | | | 132,859 | |
Commitments and contingencies (Note 15) | 0 | | 0 | |
Commitments and contingencies (Note 14) | | Commitments and contingencies (Note 14) | 0 | | 0 |
Stockholders’ equity | Stockholders’ equity | | Stockholders’ equity | |
Common stock, $0.001 par value, 350,000,000 shares authorized; 43,547,924 issued and 41,832,789 outstanding at June 30, 2021; 43,193,394 issued and 41,575,129 outstanding at December 31, 2020 | 42 | | | 42 | | |
Treasury stock, at cost, 1,715,135 and 1,618,265 shares at June 30, 2021 and December 31, 2020, respectively | (4,422) | | | (4,134) | | |
Common stock, $0.001 par value, 350,000,000 shares authorized; 44,115,732 issued and 42,242,852 outstanding at June 30, 2022; 43,789,814 issued and 42,012,813 outstanding at December 31, 2021 | | Common stock, $0.001 par value, 350,000,000 shares authorized; 44,115,732 issued and 42,242,852 outstanding at June 30, 2022; 43,789,814 issued and 42,012,813 outstanding at December 31, 2021 | 42 | | | 42 | |
Treasury stock, at cost, 1,872,880 and 1,777,001 shares at June 30, 2022 and December 31, 2021, respectively | | Treasury stock, at cost, 1,872,880 and 1,777,001 shares at June 30, 2022 and December 31, 2021, respectively | (4,776) | | | (4,535) | |
Additional paid-in capital | Additional paid-in capital | 172,512 | | | 171,209 | | Additional paid-in capital | 176,150 | | | 174,486 | |
Retained earnings | Retained earnings | 90,088 | | | 121,267 | | Retained earnings | 64,580 | | | 70,593 | |
Accumulated other comprehensive income | Accumulated other comprehensive income | 592 | | | 423 | | Accumulated other comprehensive income | 516 | | | 574 | |
Total stockholders’ equity | Total stockholders’ equity | 258,812 | | | 288,807 | | Total stockholders’ equity | 236,512 | | | 241,160 | |
Total liabilities and stockholders’ equity | Total liabilities and stockholders’ equity | $ | 387,458 | | | $ | 427,677 | | Total liabilities and stockholders’ equity | $ | 373,968 | | | $ | 374,019 | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
SMART SAND, INC.
CONDENSED CONSOLIDATED INCOME STATEMENTS OF OPERATIONS
(UNAUDITED) | | | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2021 | | 2020 | | 2021 | | 2020 | | 2022 | | 2021 | | 2022 | | 2021 |
| | (in thousands, except per share amounts) | | (in thousands, except per share amounts) |
Revenues: | Revenues: | | Revenues: | |
Sand sales revenue | Sand sales revenue | $ | 28,801 | | | $ | 7,375 | | | $ | 51,948 | | | $ | 38,362 | | Sand sales revenue | $ | 67,111 | | | $ | 28,801 | | | $ | 105,400 | | | $ | 51,948 | |
Shortfall revenue | Shortfall revenue | 0 | | | 14,000 | | | 1,741 | | | 15,307 | | Shortfall revenue | — | | | — | | | 1,915 | | | 1,741 | |
Logistics revenue | Logistics revenue | 838 | | | 4,731 | | | 3,400 | | | 19,925 | | Logistics revenue | 1,603 | | | 838 | | | 3,004 | | | 3,400 | |
Total revenue | Total revenue | 29,639 | | | 26,106 | | | 57,089 | | | 73,594 | | Total revenue | 68,714 | | | 29,639 | | | 110,319 | | | 57,089 | |
Cost of goods sold | Cost of goods sold | 31,999 | | | 11,906 | | | 64,426 | | | 52,995 | | Cost of goods sold | 59,743 | | | 31,999 | | | 103,329 | | | 64,426 | |
Gross profit | Gross profit | (2,360) | | | 14,200 | | | (7,337) | | | 20,599 | | Gross profit | 8,971 | | | (2,360) | | | 6,990 | | | (7,337) | |
Operating expenses: | Operating expenses: | | Operating expenses: | |
Salaries, benefits and payroll taxes | Salaries, benefits and payroll taxes | 2,285 | | | 2,155 | | | 4,660 | | | 5,057 | | Salaries, benefits and payroll taxes | 3,225 | | | 2,285 | | | 6,617 | | | 4,660 | |
Depreciation and amortization | Depreciation and amortization | 577 | | | 461 | | | 1,138 | | | 914 | | Depreciation and amortization | 563 | | | 577 | | | 1,090 | | | 1,138 | |
Selling, general and administrative | Selling, general and administrative | 3,855 | | | 2,930 | | | 7,009 | | | 6,460 | | Selling, general and administrative | 3,795 | | | 3,855 | | | 7,843 | | | 7,009 | |
Bad debt expense | Bad debt expense | 19,592 | | | 0 | | | 19,592 | | | 0 | | Bad debt expense | 1 | | | 19,592 | | | 1 | | | 19,592 | |
Change in the estimated fair value of contingent consideration | 0 | | | 0 | | | 0 | | | (1,020) | | |
| Total operating expenses | Total operating expenses | 26,309 | | | 5,546 | | | 32,399 | | | 11,411 | | Total operating expenses | 7,584 | | | 26,309 | | | 15,551 | | | 32,399 | |
Operating (loss) income | (28,669) | | | 8,654 | | | (39,736) | | | 9,188 | | |
Operating income (loss) | | Operating income (loss) | 1,387 | | | (28,669) | | | (8,561) | | | (39,736) | |
Other income (expenses): | Other income (expenses): | | Other income (expenses): | |
| Interest expense, net | Interest expense, net | (513) | | | (607) | | | (1,060) | | | (1,079) | | Interest expense, net | (406) | | | (513) | | | (833) | | | (1,060) | |
Other income | Other income | 3,467 | | | 63 | | | 3,665 | | | 82 | | Other income | 56 | | | 3,467 | | | 268 | | | 3,665 | |
Total other income (expenses), net | Total other income (expenses), net | 2,954 | | | (544) | | | 2,605 | | | (997) | | Total other income (expenses), net | (350) | | | 2,954 | | | (565) | | | 2,605 | |
(Loss) income before income tax expense (benefit) | (25,715) | | | 8,110 | | | (37,131) | | | 8,191 | | |
Income (loss) before income tax expense (benefit) | | Income (loss) before income tax expense (benefit) | 1,037 | | | (25,715) | | | (9,126) | | | (37,131) | |
Income tax expense (benefit) | Income tax expense (benefit) | 1,552 | | | 3,470 | | | (5,952) | | | 3,635 | | Income tax expense (benefit) | 1,127 | | | 1,552 | | | (3,113) | | | (5,952) | |
Net (loss) income | $ | (27,267) | | | $ | 4,640 | | | $ | (31,179) | | | $ | 4,556 | | |
Net (loss) income per common share: | | | | | | | | |
Net loss | | Net loss | $ | (90) | | | $ | (27,267) | | | $ | (6,013) | | | $ | (31,179) | |
Net loss per common share: | | Net loss per common share: | | | | | | | |
Basic | Basic | $ | (0.65) | | | $ | 0.12 | | | $ | (0.75) | | | $ | 0.11 | | Basic | $ | 0.00 | | | $ | (0.65) | | | $ | (0.14) | | | $ | (0.75) | |
Diluted | Diluted | $ | (0.65) | | | $ | 0.12 | | | $ | (0.75) | | | $ | 0.11 | | Diluted | $ | 0.00 | | | $ | (0.65) | | | $ | (0.14) | | | $ | (0.75) | |
Weighted-average number of common shares: | Weighted-average number of common shares: | | | | | | | | Weighted-average number of common shares: | | | | | | | |
Basic | Basic | 41,748 | | | 39,644 | | | 41,689 | | | 39,867 | | Basic | 42,181 | | | 41,748 | | | 42,134 | | | 41,689 | |
Diluted | Diluted | 41,748 | | | 39,644 | | | 41,689 | | | 39,867 | | Diluted | 42,181 | | | 41,748 | | | 42,134 | | | 41,689 | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
SMART SAND, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED) | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
| (in thousands) |
Net (loss) income | $ | (27,267) | | | $ | 4,640 | | | $ | (31,179) | | | $ | 4,556 | |
Other comprehensive income: | | | | | | | |
Foreign currency translation adjustment | 44 | | | 384 | | | 169 | | | 221 | |
Comprehensive (loss) income | $ | (27,223) | | | $ | 5,024 | | | $ | (31,010) | | | $ | 4,777 | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| (in thousands) |
Net loss | $ | (90) | | | $ | (27,267) | | | $ | (6,013) | | | $ | (31,179) | |
Other comprehensive income (loss): | | | | | | | |
Foreign currency translation adjustment | (74) | | | 44 | | | (58) | | | 169 | |
Comprehensive loss | $ | (164) | | | $ | (27,223) | | | $ | (6,071) | | | $ | (31,010) | |
| | | | | | | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
SMART SAND, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(UNAUDITED)
Six months endedMonths Ended June 30, 20212022 | | | Common Stock | | Treasury Stock | | Additional Paid-in Capital | | | | Accumulated Other Comprehensive Income | | Total Stockholders’ Equity | | Common Stock | | Treasury Stock | | Additional Paid-in Capital | | | | Accumulated Other Comprehensive (Loss) Income | | Total Stockholders’ Equity |
| | Outstanding Shares | | Par Value | | Shares | | Amount | | Retained Earnings | | | Outstanding Shares | | Par Value | | Shares | | Amount | | Retained Earnings | |
| | (in thousands, except share amounts) | | (in thousands, except share amounts) |
Balance at December 31, 2020 | 41,575,129 | | | $ | 42 | | | 1,618,265 | | | $ | (4,134) | | | $ | 171,209 | | | $ | 121,267 | | | $ | 423 | | | $ | 288,807 | | |
Balance at December 31, 2021 | | Balance at December 31, 2021 | 42,012,813 | | | $ | 42 | | | 1,777,001 | | | $ | (4,535) | | | $ | 174,486 | | | $ | 70,593 | | | $ | 574 | | | $ | 241,160 | |
Foreign currency translation adjustment | Foreign currency translation adjustment | — | | | — | | | — | | | — | | | — | | | — | | | 125 | | | 125 | | Foreign currency translation adjustment | — | | | — | | | — | | | — | | | — | | | — | | | 16 | | | 16 | |
Acquisition stock issuance | 14,430 | | | — | | | — | | | — | | | 20 | | | — | | | — | | | 20 | | |
Vesting of restricted stock | Vesting of restricted stock | 158,364 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | Vesting of restricted stock | 179,630 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Stock-based compensation | Stock-based compensation | — | | | — | | | — | | | — | | | 678 | | | — | | | — | | | 678 | | Stock-based compensation | — | | | — | | | — | | | — | | | 826 | | | — | | | — | | | 826 | |
Employee stock purchase plan compensation | Employee stock purchase plan compensation | — | | | — | | | — | | | — | | | 7 | | | — | | | — | | | 7 | | Employee stock purchase plan compensation | — | | | — | | | — | | | — | | | 5 | | | — | | | — | | | 5 | |
Employee stock purchase plan issuance | Employee stock purchase plan issuance | 19,483 | | | — | | | — | | | — | | | 17 | | | — | | | — | | | 17 | | Employee stock purchase plan issuance | 16,285 | | | — | | | — | | | — | | | 25 | | | — | | | — | | | 25 | |
Restricted stock buy back | (48,077) | | | — | | | 48,077 | | | (140) | | | — | | | — | | | — | | | (140) | | |
Purchase of treasury stock | | Purchase of treasury stock | (56,400) | | | — | | | 56,400 | | | (127) | | | — | | | — | | | — | | | (127) | |
| Net loss | Net loss | — | | | — | | | — | | | — | | | — | | | (3,912) | | | — | | | (3,912) | | Net loss | — | | | — | | | — | | | — | | | — | | | (5,923) | | | — | | | (5,923) | |
Balance at March 31, 2021 | 41,719,329 | | | $ | 42 | | | 1,666,342 | | | $ | (4,274) | | | $ | 171,931 | | | $ | 117,355 | | | $ | 548 | | | $ | 285,602 | | |
Balance at March 31, 2022 | | Balance at March 31, 2022 | 42,152,328 | | | $ | 42 | | | 1,833,401 | | | $ | (4,662) | | | $ | 175,342 | | | $ | 64,670 | | | $ | 590 | | | $ | 235,982 | |
Foreign currency translation adjustment | Foreign currency translation adjustment | — | | | — | | | — | | | — | | | — | | | — | | | 44 | | | 44 | | Foreign currency translation adjustment | — | | | — | | | — | | | — | | | — | | | — | | | (74) | | | (74) | |
| Vesting of restricted stock | Vesting of restricted stock | 162,253 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | Vesting of restricted stock | 130,003 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Stock-based compensation | Stock-based compensation | — | | | — | | | — | | | — | | | 574 | | | — | | | — | | | 574 | | Stock-based compensation | — | | | — | | | — | | | — | | | 802 | | | — | | | — | | | 802 | |
Employee stock purchase plan compensation | Employee stock purchase plan compensation | — | | | — | | | — | | | — | | | 7 | | | — | | | — | | | 7 | | Employee stock purchase plan compensation | — | | | — | | | — | | | — | | | 6 | | | — | | | — | | | 6 | |
| Restricted stock buy back | (48,793) | | | — | | | 48,793 | | | (148) | | | — | | | — | | | — | | | (148) | | |
| Purchase of treasury stock | | Purchase of treasury stock | (39,479) | | | — | | | 39,479 | | | (114) | | | — | | | — | | | — | | | (114) | |
Net loss | Net loss | — | | | — | | | — | | | — | | | — | | | (27,267) | | | — | | | (27,267) | | Net loss | — | | | — | | | — | | | — | | | — | | | (90) | | | — | | | (90) | |
Balance at June 30, 2021 | 41,832,789 | | | $ | 42 | | | 1,715,135 | | | $ | (4,422) | | | $ | 172,512 | | | $ | 90,088 | | | $ | 592 | | | $ | 258,812 | | |
Balance at June 30, 2022 | | Balance at June 30, 2022 | 42,242,852 | | | $ | 42 | | | 1,872,880 | | | $ | (4,776) | | | $ | 176,150 | | | $ | 64,580 | | | $ | 516 | | | $ | 236,512 | |
|
SMART SAND, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (continued)
(UNAUDITED)
Six months endedMonths Ended June 30, 20202021 | | | Common Stock | | Treasury Stock | | Additional Paid-in Capital | | | | Accumulated Other Comprehensive Loss | | Total Stockholders’ Equity | | Common Stock | | Treasury Stock | | Additional Paid-in Capital | | | | Accumulated Other Comprehensive (Loss) Income | | Total Stockholders’ Equity |
| | Outstanding Shares | | Par Value | | Shares | | Amount | | Retained Earnings | | | Outstanding Shares | | Par Value | | Shares | | Amount | | Retained Earnings | |
| | (in thousands, except share amounts) | | (in thousands, except share amounts) |
Balance at December 31, 2019 | 40,234,451 | | | $ | 40 | | | 740,957 | | | $ | (2,979) | | | $ | 165,223 | | | $ | 83,313 | | | $ | (41) | | | $ | 245,556 | | |
Balance at December 31, 2020 | | Balance at December 31, 2020 | 41,575,129 | | | $ | 42 | | | 1,618,265 | | | $ | (4,134) | | | $ | 171,209 | | | $ | 121,267 | | | $ | 423 | | | $ | 288,807 | |
Foreign currency translation adjustment | | Foreign currency translation adjustment | — | | | — | | | — | | | — | | | — | | | — | | | 125 | | | 125 | |
Acquisition stock issuance | | Acquisition stock issuance | 14,430 | | | — | | | — | | | — | | | 20 | | | — | | | — | | | 20 | |
Vesting of restricted stock | | Vesting of restricted stock | 158,364 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Stock-based compensation | | Stock-based compensation | — | | | — | | | — | | | — | | | 678 | | | — | | | — | | | 678 | |
Employee stock purchase plan compensation | | Employee stock purchase plan compensation | — | | | — | | | — | | | — | | | 7 | | | — | | | — | | | 7 | |
Employee stock purchase plan issuance | | Employee stock purchase plan issuance | 19,483 | | | — | | | — | | | — | | | 17 | | | — | | | — | | | 17 | |
Purchase of treasury stock | | Purchase of treasury stock | (48,077) | | | — | | | 48,077 | | | (140) | | | — | | | — | | | — | | | (140) | |
| Net loss | | Net loss | — | | | — | | | — | | | — | | | — | | | (3,912) | | | — | | | (3,912) | |
Balance at March 31, 2021 | | Balance at March 31, 2021 | 41,719,329 | | | $ | 42 | | | 1,666,342 | | | $ | (4,274) | | | $ | 171,931 | | | $ | 117,355 | | | $ | 548 | | | 285,602 | |
Foreign currency translation adjustment | Foreign currency translation adjustment | — | | | — | | | — | | | — | | | — | | | — | | | (163) | | | (163) | | Foreign currency translation adjustment | — | | | — | | | — | | | — | | | — | | | — | | | 44 | | | 44 | |
Vesting of restricted stock | Vesting of restricted stock | 139,947 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | Vesting of restricted stock | 162,253 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Stock-based compensation | Stock-based compensation | — | | | — | | | — | | | — | | | 1,025 | | | — | | | — | | | 1,025 | | Stock-based compensation | — | | | — | | | — | | | — | | | 574 | | | — | | | — | | | 574 | |
Employee stock purchase plan compensation | Employee stock purchase plan compensation | — | | | — | | | — | | | — | | | 14 | | | — | | | — | | | 14 | | Employee stock purchase plan compensation | — | | | — | | | — | | | — | | | 7 | | | — | | | — | | | 7 | |
Employee stock purchase plan issuance | Employee stock purchase plan issuance | 21,486 | | | — | | | — | | | — | | | 46 | | | — | | | — | | | 46 | | Employee stock purchase plan issuance | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Restricted stock buy back | (10,468) | | | — | | | 10,468 | | | (14) | | | — | | | — | | | — | | | (14) | | |
Shares repurchased | (778,300) | | | — | | | 778,300 | | | (1,000) | | | — | | | — | | | — | | | (1,000) | | |
Purchase of treasury stock | | Purchase of treasury stock | (48,793) | | | — | | | 48,793 | | | (148) | | | — | | | — | | | — | | | (148) | |
Net loss | Net loss | — | | | — | | | — | | | — | | | — | | | (84) | | | — | | | (84) | | Net loss | — | | | — | | | — | | | — | | | — | | | (27,267) | | | — | | | (27,267) | |
Balance at March 31, 2020 | 39,607,116 | | | $ | 40 | | | 1,529,725 | | | $ | (3,993) | | | $ | 166,308 | | | $ | 83,229 | | | $ | (204) | | | 245,380 | | |
Foreign currency translation adjustment | — | | | — | | | — | | | — | | | — | | | — | | | 384 | | | 384 | | |
Vesting of restricted stock | 177,628 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | |
Stock-based compensation | — | | | — | | | — | | | — | | | 943 | | | — | | | — | | | 943 | | |
Employee stock purchase plan compensation | — | | | — | | | — | | | — | | | 12 | | | — | | | — | | | 12 | | |
| Restricted stock buy back | (30,673) | | | — | | | 30,673 | | | (31) | | | — | | | — | | | — | | | (31) | | |
| Net income | — | | | — | | | — | | | — | | | — | | | 4,640 | | | — | | | 4,640 | | |
Balance at June 30, 2020 | 39,754,071 | | | $ | 40 | | | 1,560,398 | | | $ | (4,024) | | | $ | 167,263 | | | $ | 87,869 | | | $ | 180 | | | $ | 251,328 | | |
Balance at June 30, 2021 | | Balance at June 30, 2021 | 41,832,789 | | | $ | 42 | | | 1,715,135 | | | $ | (4,422) | | | $ | 172,512 | | | $ | 90,088 | | | $ | 592 | | | $ | 258,812 | |
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
SMART SAND, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED) | | | Six Months Ended June 30, | | Six Months Ended June 30, |
| | 2021 | | 2020 | | 2022 | | 2021 |
| | (in thousands) | | (in thousands) |
Operating activities: | Operating activities: | | | | Operating activities: | | | |
Net (loss) income | $ | (31,179) | | | $ | 4,556 | | |
Net loss | | Net loss | $ | (6,013) | | | $ | (31,179) | |
Adjustments to reconcile net (loss) income to net cash provided by operating activities: | Adjustments to reconcile net (loss) income to net cash provided by operating activities: | | Adjustments to reconcile net (loss) income to net cash provided by operating activities: | |
Depreciation, depletion and accretion of asset retirement obligation | Depreciation, depletion and accretion of asset retirement obligation | 12,604 | | | 10,697 | | Depreciation, depletion and accretion of asset retirement obligation | 13,206 | | | 12,604 | |
| Amortization of intangible assets | Amortization of intangible assets | 398 | | | 398 | | Amortization of intangible assets | 398 | | | 398 | |
| Loss (gain) on disposal of assets | (60) | | | 275 | | |
| Gain on disposal of assets | | Gain on disposal of assets | (16) | | | (58) | |
Provision for bad debt | Provision for bad debt | 19,592 | | | 0 | | Provision for bad debt | 1 | | | 19,592 | |
Amortization of deferred financing cost | Amortization of deferred financing cost | 53 | | | 53 | | Amortization of deferred financing cost | 53 | | | 53 | |
Accretion of debt discount | Accretion of debt discount | 93 | | | 92 | | Accretion of debt discount | 93 | | | 93 | |
Deferred income taxes | Deferred income taxes | (5,839) | | | 1,004 | | Deferred income taxes | (3,264) | | | (5,839) | |
Stock-based compensation, net | Stock-based compensation, net | 1,252 | | | 1,968 | | Stock-based compensation, net | 1,628 | | | 1,252 | |
Employee stock purchase plan compensation | Employee stock purchase plan compensation | 14 | | | 25 | | Employee stock purchase plan compensation | 11 | | | 14 | |
Change in contingent consideration fair value | 0 | | | (1,020) | | |
| Changes in assets and liabilities: | Changes in assets and liabilities: | | Changes in assets and liabilities: | |
Accounts receivable | Accounts receivable | 39,756 | | | 2,957 | | Accounts receivable | (10,974) | | | 39,756 | |
Unbilled receivables | Unbilled receivables | (1,094) | | | 4,717 | | Unbilled receivables | (6,635) | | | (1,094) | |
Inventory | Inventory | 3,199 | | | 1,128 | | Inventory | (1,850) | | | 3,199 | |
Prepaid expenses and other assets | Prepaid expenses and other assets | (2,391) | | | 460 | | Prepaid expenses and other assets | 1,854 | | | (2,391) | |
Deferred revenue | Deferred revenue | 1,215 | | | (2,196) | | Deferred revenue | (4,542) | | | 1,215 | |
Accounts payable | Accounts payable | 1,698 | | | (361) | | Accounts payable | 3,229 | | | 1,698 | |
Accrued and other expenses | Accrued and other expenses | (2,831) | | | (2,557) | | Accrued and other expenses | 1,872 | | | (2,833) | |
Income taxes payable | 0 | | | 3,646 | | |
Net cash provided by operating activities | 36,480 | | | 25,842 | | |
Net cash (used in) provided by operating activities | | Net cash (used in) provided by operating activities | (10,949) | | | 36,480 | |
Investing activities: | Investing activities: | | | | Investing activities: | | | |
Acquisition of Blair facility | | Acquisition of Blair facility | (6,547) | | | — | |
Purchases of property, plant and equipment | Purchases of property, plant and equipment | (5,043) | | | (6,423) | | Purchases of property, plant and equipment | (5,137) | | | (5,043) | |
Proceeds from disposal of assets | Proceeds from disposal of assets | 2 | | | 0 | | Proceeds from disposal of assets | — | | | 2 | |
Net cash used in investing activities | Net cash used in investing activities | (5,041) | | | (6,423) | | Net cash used in investing activities | (11,684) | | | (5,041) | |
Financing activities: | Financing activities: | | | | Financing activities: | | | |
Proceeds from the issuance of notes payable | 0 | | | 952 | | |
Repayments of notes payable | Repayments of notes payable | (3,370) | | | (2,482) | | Repayments of notes payable | (3,581) | | | (3,370) | |
Payments under equipment financing obligations | (65) | | | (56) | | |
Payment of deferred financing and debt issuance costs | 0 | | | (20) | | |
Payments under finance leases | | Payments under finance leases | (60) | | | (65) | |
| Proceeds from revolving credit facility | Proceeds from revolving credit facility | 0 | | | 6,000 | | Proceeds from revolving credit facility | 3,000 | | | — | |
Repayment of revolving credit facility | 0 | | | (8,500) | | |
| Payment of contingent consideration | Payment of contingent consideration | (180) | | | (310) | | Payment of contingent consideration | — | | | (180) | |
Proceeds from equity issuance | 17 | | | 46 | | |
| Employee stock purchase plan issuance | | Employee stock purchase plan issuance | 25 | | | 17 | |
Purchase of treasury stock | Purchase of treasury stock | (288) | | | (1,045) | | Purchase of treasury stock | (241) | | | (288) | |
Net cash used in financing activities | Net cash used in financing activities | (3,886) | | | (5,415) | | Net cash used in financing activities | (857) | | | (3,886) | |
| Net increase in cash and cash equivalents | 27,553 | | | 14,004 | | |
Net decrease in cash and cash equivalents | | Net decrease in cash and cash equivalents | (23,490) | | | 27,553 | |
Cash and cash equivalents at beginning of year | Cash and cash equivalents at beginning of year | 11,725 | | | 2,639 | | Cash and cash equivalents at beginning of year | 25,588 | | | 11,725 | |
Cash and cash equivalents at end of period | Cash and cash equivalents at end of period | $ | 39,278 | | | $ | 16,643 | | Cash and cash equivalents at end of period | $ | 2,098 | | | $ | 39,278 | |
Supplemental disclosure of cash flow information | Supplemental disclosure of cash flow information | | | | Supplemental disclosure of cash flow information | | | |
| Non-cash investing activities: | | |
| Asset retirement obligation | $ | 737 | | | $ | 0 | | |
Non-cash financing activities: | | | | |
| Capitalized expenditures in accounts payable and accrued expenses | Capitalized expenditures in accounts payable and accrued expenses | $ | 172 | | | $ | 225 | | Capitalized expenditures in accounts payable and accrued expenses | $ | 927 | | | $ | 172 | |
Issuance of acquisition common stock | Issuance of acquisition common stock | $ | 20 | | | $ | 0 | | Issuance of acquisition common stock | $ | — | | | $ | 20 | |
Asset retirement obligation | | Asset retirement obligation | $ | 8,281 | | | $ | 737 | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
SMART SAND, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
NOTE 1 — Organization and Nature of Business & Market Update
Organization and Nature of Business
The Company was incorporated in July 2011 and is headquartered in The Woodlands, Texas. The Company isprimarily operates as a fully integrated frac and industrial sand supply and services company, offeringcompany. The Company offers complete mine to wellsite proppant supply and logistics and storage solutions. The Company is engaged insolutions to our frac sand customers. These operations include the excavation, processing and sale of sand, or proppant, for use in hydraulic fracturing operations for the oil and natural gas industry andindustry. The Company also offers proppant logistics and wellsite storage solutions through its SmartSystemsTM products and services. In late 2021, the Company created its Industrial Products Solutions (“IPS”) business in order to diversify its customer base and markets it serves by offering sand to customers for industrial uses, such as glass, foundry, building products, filtration, geothermal, renewables, ceramics, turf & landscape, retail, and recreation.
The Company completed construction of the first phase ofcommenced mining operations at its frac sand mine and related processing facility in Oakdale, Wisconsin and commenced operationsfacility in July 2012. Through multiple expansions at Oakdale and the recent acquisition in September 2020 of the Utica, Illinois mine and processing facilities,facility in September 2020, the Company has current annual processing capacity of approximately 7.1 million tons. With the acquisition of the Blair, Wisconsin mine and processing facility in March 2022, which is currently idled, we have the ability to expand to approximately 10.0 million tons should the Company decide to bring the Blair facility online.
The Company provides complete logistics solutions through its frac sand facilities with accessacquired rights in 2018 to three Class I rail lines and its in-basinoperate a unit train capable transloading terminal in Van Hook, North Dakota to service the Bakken Formation in the Williston Basin. TheseIn 2020, the Company, as part of its acquisition of the Utica, Illinois facility, obtained rights to use a rail terminal located in El Reno, Oklahoma. In September 2021, the Company acquired the rights to construct and operate another transloading terminal in Waynesburg, Pennsylvania to service the Appalachian Basin, including the Marcellus and Utica Formations, which became operational in January 2022.
The Company provides complete logistics solutions enablethrough its mine sites and transload facilities with direct access to four Class I rail lines, and has the Companyability to cost-effectively deliver products to its customers anywhere inaccess all Class I rail lines within the United States.States and Canada.
The Company provides proppant storage and management solutions through its SmartSystems products and services under which it offers various solutions that create efficiencies, flexibility, enhanced safety and reliability for customers by providing the capability to unload, store and deliver proppant at the wellsite, as well as the ability to rapidly set up, takedown and transport the entire system. The SmartDepotTM silo system includes passive and active dust suppression technology, along with the capability of a gravity-fed operation. The Company has developed a new transload technology, the self-contained SmartPathTM transloader, to complement its existing solutions. The SmartPath is a mobile sand transloading system designed to work with bottom dump trailers and features a drive over conveyor, surge bin, and dust collection system. Rapid deployment trailers are designed for quick setup, takedown and transportation of the entire SmartSystem, and they detach from the wellsite equipment, which allows for removal from the wellsite during operation. A proprietary software program, the SmartSystem TrackerTM allows customers to monitor silo-specific information, including location, proppant type and proppant inventory. We believe that our SmartSystems reduce trucking and related fuel consumption for our customers, helping them meet their goals to reduce their carbon footprint in their daily operations.
NOTE 2 — Summary of Significant Accounting Policies
The information presented below supplements the complete description of our significant accounting policies disclosed in our 20202021 Form 10-K, filed with the SECSecurities and Exchange Commission (“SEC”) on March 3, 2021.8, 2022.
Basis of Presentation and Consolidation
The accompanying unaudited quarterly condensed consolidated financial statements (“interim statements”) of the Company are presented in accordance with the rules and regulations of the Securities and Exchange CommissionSEC for quarterly reports on Form 10-Q and therefore do not include all the information and notes required by GAAP. In the opinion of management, all adjustments and disclosures necessary for a fair presentation of these interim statements have been included. All adjustments are of a normal recurring nature. The results reported in these interim statements are not necessarily indicative of the results that may be reported for the entire year. The consolidated balance sheet as of December 31, 20202021 was derived from the audited consolidated financial statements as of and for the year ended December 31, 2020.2021. These interim statements should be read in conjunction with the Company’s consolidated financial statements for the year ended December 31, 2020. 2021.
Certain 2020 statement of cash flow items have been reclassified to conform to the current financial statement presentation. These reclassifications have no effect on previously reported net income.
SMART SAND, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Use of Estimates
The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Significant estimates used in the preparation of these financial statements include, but are not limited to: the sand reserves and their impact
SMART SAND, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
on calculating the depletion expense under the units-of-production method; the depreciation and amortization associated with property, plant and equipment and definite-lived intangible assets, impairment considerations of assets, (including impairment of identifiedincluding intangible assets, fixed assets, and other long-lived assets);inventory; estimated cost of future asset retirement obligations; fair value of acquired assets and assume liabilities; stock-based compensation; recoverability of deferred tax assets; inventory reserve; and the collectability of receivables; and certain liabilities.
Actual results could differ materially from management’s best estimates as additional information or actual results become available in the future.future, and those differences could be material. The decreaseddecreases in demand related to the coronavirus (“COVID-19”) pandemic in 2020 and 2021 and the ongoing conflict in Ukraine have caused dramatic swings in oil and natural gas prices and significant volatility in the oilfield service sector over the last 18 months.sector. The Company is currently unable to estimate the impact of these events on its future financial position and results of operations. Therefore, the Company can give no assurances that these events will not have a material adverse effect on its financial position or results of operations.
Employee Retention Credit
The Company qualified for federal government assistance through employee retention credit provisions of the Consolidated Appropriations Act of 2021. During the threeAs of December 31, 2021 and six months ended June 30, 2021,2022, the Company recorded $3,352 of employee retention credits in other income on its consolidated income statementsincluded $4,676 and included$4,317, respectively, in prepaid expenses and other current assets on theits consolidated balance sheet as of June 30, 2021.sheets related to receivables for the employee retention credits. The calculation of the credit iswas based on employees continued employment and represents a portion of the wages paid to them. For income tax purposes, the credit will result in decreased expense related to the wages it offsets in the period received.
Recent Accounting Pronouncements
In June 2016,There are no recent accounting pronouncements that materially affect the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), which modifies how companies recognize expected credit losses on financial instruments and other commitments to extend credit held by an entity at each reporting date. Existing GAAP requires an “incurred loss” methodology whereby companies are prohibited from recording an expected loss until it is probable that the loss has been incurred. ASU 2016-13 requires companies to use a methodology that reflects current expected credit losses (“CECL”) and requires consideration of a broad range of reasonable and supportable information to record and report credit loss estimates, even when the CECL is remote. Companies will be required to record the allowance for credit losses and deduct that amount from the basisstatements of the asset and a related expense will be recognized in selling, general and administrative expenses on the income statement, similar to bad debt expense under existing GAAP. There is much latitude given to entities in determining the methodology for calculating the CECL. The guidance is effective for the Company for financial statement periods beginning after December 15, 2022, although early adoption is permitted. While the Company is still in the process of evaluating the effects of ASU 2016-13 and its related updates on the consolidated financial statements, at the time of adoption, it believes the primary effect, if any will be an allowance recorded against its accounts and unbilled receivables on its balance sheet and related expense on its income statement. The Company cannot determine the financial impact on its consolidated financial statements upon adoption as its accounts and unbilled receivables balances are affected by ongoing transactions with customers.Company.
NOTE 3 — Business CombinationAcquisition
Eagle Proppants HoldingsAsset Acquisition Blair Facility
On September 18, 2020,March 4, 2022, the Company entered into an Equitya Membership Interest Purchase and Sale Agreement (the “Purchase Agreement”) with Eagle MaterialsHi-Crush Inc., a Delaware corporation (“Eagle”HCR”), and Hi-Crush Blair LLC, a Delaware limited liability company and wholly-owned subsidiary of HCR (“Blair”), pursuant to which the Company acquired all of the issued and outstanding interests in Eagle Oil and Gas Proppants Holdings LLC, a Delaware limited liability company and wholly-owned subsidiaryinterest of Eagle (“Eagle Proppants Holdings”),Blair from EagleHCR for aggregate non-cashcash consideration of approximately $2,080. In satisfaction of the$6,450, subject to customary purchase price the Company issued to Eagle 1,504 shares of its common stock; the Company issued an additional 14 shares of its common stockadjustments as set forth in January 2021 as settlement of the net working capital adjustment. The number of
SMART SAND, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
shares issued was determined by the weighted average trading price of the Company’s common stock over the twenty days preceding the date of the Purchase Agreement.
In connection with the acquisition of Eagle Proppants Holdings, the Company, as borrower, also entered into a Loan Agreement with Eagle, as lender. See Note 7 - Debt, for additional information.(the “Transaction”).
The primary assets of Eagle Proppants Holdings and its subsidiaries include aBlair consist of an idle frac sand mine and related processing facility located in Utica, Illinois and a transloadBlair, Wisconsin. The Blair facility, in nearby Peru, Illinois. The Utica facility hasonce operational, will have approximately 1.62.9 million tons of total annual processing capacity and hascontains an onsite, unit train capable rail terminal with access to the BNSF rail line throughClass 1 Canadian National Railway.
The Company accounted for this transaction as an asset acquisition based on an evaluation of the Peru, Illinois transload facility.guidance in ASC 805. The Company determined that there was not a substantive process in place that generates outputs that can be sold to a customer, and therefore the acquisition did not meet the definition of a business. The Company recognized identifiable assets acquired on a relative fair value basis. All assets acquired are allocated to property, plant and equipment, net on the balance sheet as of March 31, 2022. The Company also recorded an increase to its asset retirement obligations and a corresponding increase in purchases of property plant and equipment in the amount of $8,281 for the six months ended June 30, 2022.
The table below presents the calculation of the total purchase consideration: | | | | | | | | |
Base price consideration | | $ | 2,000 | |
20-day volume weighted average price of Smart Sand stock | | $ | 1.33 | |
Shares issued | | 1,504 | |
Closing share price on September 18, 2020 | | $ | 1.37 | |
Total equity issued | | $ | 2,0606,450 | |
Net working capital adjustmentadjustments and capitalized costs | | $ | 2097 | |
Total purchase consideration | | $ | 2,0806,547 | |
The Company’s final allocation of the purchase price in connection with the acquisition was calculated as follows: | | | | | | | | | | | | | | |
| | | | Fair Value |
Assets Acquired | | |
| Cash | | $ | 309 | |
| Accounts receivable | | 75 | |
| Inventory | | 2,459 | |
| Prepaid expenses and other current assets | | 124 | |
| Property, plant and equipment | | 60,310 | |
| Right-of-use assets | | 9,603 | |
| | Total assets acquired | | 72,880 | |
Liabilities Assumed | | |
| Accounts payable | | 16 | |
| Accrued expenses and other liabilities | | 2,008 | |
| Asset retirement obligations | | 8,424 | |
| Operating lease liabilities | | 9,603 | |
| Deferred income taxes | | 11,149 | |
| | Total liabilities assumed | | 31,200 | |
| | Estimated fair value of net assets acquired | | $ | 41,680 | |
The estimated aggregate fair value of the net assets acquired was $41,680, which exceeded the total consideration and results in a bargain purchase gain of $39,600 on the acquisition date, which is included in net income for the year ended December 31, 2020. The Company believes that the seller wanted to exit the business relatively quickly and that there were a limited number of potential buyers due to the downturn in the market, which resulted in the bargain purchase gain.
The Company determined the fair values of the acquired assets and assumed liabilities based on the highest and best use of such assets as required by GAAP. Cash, accounts receivable, prepaid expenses and other current assets, accounts payable, accrued expenses and other liabilities were based on underlying assets and liabilities whose carrying value approximates fair value. The Company acquired $2,050 of contractual receivables; however, it does not expect to collect on $1,975 of such
SMART SAND, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
contractual receivables as these customers are in bankruptcy proceedings. The fair value of inventory was determined using market prices the Company expected to receive for the inventory when it is sold. Operating leases were considered to be at market rates and the fair values of the associated operating lease liabilities and right-of-use assets were determined using the Company’s lease accounting policies. The fair value of the asset retirement obligations was calculated consistently with the Company’s other asset retirement obligations and includes assumptions about inflation and discount rates over time to represent the estimated future cost of dismantling, restoring and reclaiming the plant and mines in accordance with legal obligations. Deferred income taxes represent the temporary differences between future expenses for GAAP purposes and income tax purposes at the Company’s applicable enacted tax rate. The Company determined the fair values of the property, plant and equipment with the assistance of external valuation specialists. The fair value was based on the highest and best use, as required by GAAP, which was determined to be the orderly liquidation value rather than the value imputed by other valuation methods. Total acquisition costs incurred in the year ended December 31, 2020 were $891. Company’s allocation of the purchase price was complete as of December 31, 2020.
NOTE 4 — Inventory
Inventory consisted of the following: | | | June 30, 2021 | | December 31, 2020 | | June 30, 2022 | | December 31, 2021 |
Raw material | Raw material | $ | 271 | | | $ | 428 | | Raw material | $ | 727 | | | $ | 293 | |
Work in progress | Work in progress | 7,092 | | | 10,465 | | Work in progress | 3,063 | | | 3,082 | |
Finished goods | Finished goods | 4,497 | | | 4,400 | | Finished goods | 8,349 | | | 7,269 | |
Spare parts | Spare parts | 4,077 | | | 3,843 | | Spare parts | 4,736 | | | 4,380 | |
Total inventory | Total inventory | $ | 15,937 | | | $ | 19,136 | | Total inventory | $ | 16,875 | | | $ | 15,024 | |
NOTE 5 — Property, Plant and Equipment, net
Net property, plant and equipment consisted of: | | | June 30, 2021 | | December 31, 2020 | | June 30, 2022 | | December 31, 2021 |
Machinery, equipment and tooling | Machinery, equipment and tooling | $ | 30,079 | | | $ | 29,002 | | Machinery, equipment and tooling | $ | 32,993 | | | $ | 30,813 | |
SmartSystems | SmartSystems | 26,498 | | | 22,352 | | SmartSystems | 27,534 | | | 27,343 | |
Vehicles | Vehicles | 3,021 | | | 2,893 | | Vehicles | 3,199 | | | 3,066 | |
Furniture and fixtures | Furniture and fixtures | 1,325 | | | 1,302 | | Furniture and fixtures | 1,336 | | | 1,325 | |
Plant and building | Plant and building | 200,202 | | | 199,867 | | Plant and building | 200,129 | | | 199,958 | |
Real estate properties | Real estate properties | 6,478 | | | 6,458 | | Real estate properties | 6,507 | | | 6,496 | |
Railroad and sidings | Railroad and sidings | 27,703 | | | 27,703 | | Railroad and sidings | 33,622 | | | 27,703 | |
Land and land improvements | Land and land improvements | 33,155 | | | 33,040 | | Land and land improvements | 40,172 | | | 35,652 | |
Asset retirement obligation | Asset retirement obligation | 20,730 | | | 19,993 | | Asset retirement obligation | 28,818 | | | 20,536 | |
Mineral properties | Mineral properties | 7,442 | | | 7,442 | | Mineral properties | 7,442 | | | 7,442 | |
Deferred mining costs | Deferred mining costs | 2,448 | | | 2,123 | | Deferred mining costs | 2,455 | | | 2,455 | |
Construction in progress | Construction in progress | 6,864 | | | 7,489 | | Construction in progress | 9,064 | | | 9,574 | |
| | 365,945 | | | 359,664 | | | 393,271 | | | 372,363 | |
Less: accumulated depreciation and depletion | Less: accumulated depreciation and depletion | 97,528 | | | 84,988 | | Less: accumulated depreciation and depletion | 122,678 | | | 109,898 | |
Total property, plant and equipment, net | Total property, plant and equipment, net | $ | 268,417 | | | $ | 274,676 | | Total property, plant and equipment, net | $ | 270,593 | | | $ | 262,465 | |
Depreciation expense was $6,449 and $6,037 for the three months ended June 30, 2022 and 2021, respectively, and $12,810 and $12,213 for the six months ended June 30, 2022 and 2021, respectively.
SMART SAND, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Depreciation expense was $6,037 and $5,253 for the three months ended June 30, 2021 and 2020, respectively, and $12,213 and $10,529 for the six months ended June 30, 2021 and 2020, respectively.
NOTE 6 — Accrued and Other Expenses
Accrued and other expenses were comprised of the following: | | | June 30, 2021 | | December 31, 2020 | | June 30, 2022 | | December 31, 2021 |
Employee related expenses | Employee related expenses | $ | 1,615 | | | $ | 1,048 | | Employee related expenses | $ | 1,615 | | | $ | 806 | |
| Accrued equipment | 0 | | | 55 | | |
Accrued equipment expense | | Accrued equipment expense | — | | | 58 | |
Accrued professional fees | Accrued professional fees | 1,016 | | | 1,129 | | Accrued professional fees | 410 | | | 691 | |
Accrued royalties | Accrued royalties | 2,288 | | | 2,624 | | Accrued royalties | 2,617 | | | 2,701 | |
Accrued freight and delivery charges | Accrued freight and delivery charges | 730 | | | 2,901 | | Accrued freight and delivery charges | 3,818 | | | 2,164 | |
Accrued real estate tax | Accrued real estate tax | 1,388 | | | 1,637 | | Accrued real estate tax | 1,206 | | | 1,010 | |
Accrued utilities | Accrued utilities | 704 | | | 748 | | Accrued utilities | 1,720 | | | 1,264 | |
Sales tax liability | Sales tax liability | 855 | | | 1,386 | | Sales tax liability | 666 | | | 665 | |
Income tax payable | | Income tax payable | — | | | 2,332 | |
Other accrued liabilities | Other accrued liabilities | 1,441 | | | 1,614 | | Other accrued liabilities | 2,094 | | | 2,382 | |
Total accrued liabilities | Total accrued liabilities | $ | 10,037 | | | $ | 13,142 | | Total accrued liabilities | $ | 14,146 | | | $ | 14,073 | |
NOTE 7 — Debt
The current portion of long-term debt consists of the following: | | | | | | | | | | | | | June 30, 2022 | | December 31, 2021 |
| | June 30, 2021 | | December 31, 2020 | |
Oakdale Equipment Financing | Oakdale Equipment Financing | $ | 3,706 | | | $ | 3,600 | | Oakdale Equipment Financing | 3,926 | | | 3,814 | |
Finance leases | Finance leases | 124 | | | 123 | | Finance leases | 115 | | | 117 | |
Notes Payable | 3,347 | | | 3,178 | | |
Notes payable | | Notes payable | 2,828 | | | 3,196 | |
Long-term debt, net, current | Long-term debt, net, current | $ | 7,177 | | | $ | 6,901 | | Long-term debt, net, current | $ | 6,869 | | | $ | 7,127 | |
Long-term debt, net of current portion consists of the following: | | | June 30, 2021 | | December 31, 2020 | | June 30, 2022 | | December 31, 2021 |
ABL Credit Facility | ABL Credit Facility | $ | 0 | | | $ | 0 | | ABL Credit Facility | $ | 3,000 | | | $ | — | |
Oakdale Equipment Financing, net | Oakdale Equipment Financing, net | 13,449 | | | 15,236 | | Oakdale Equipment Financing, net | 9,709 | | | 11,608 | |
| Finance Leases | 291 | | | 351 | | |
Notes Payable | 5,086 | | | 6,858 | | |
Finance leases | | Finance leases | 176 | | | 234 | |
Notes payable | | Notes payable | 1,898 | | | 3,511 | |
Long-term debt, net | Long-term debt, net | $ | 18,826 | | | $ | 22,445 | | Long-term debt, net | $ | 14,783 | | | $ | 15,353 | |
SMART SAND, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
The follow summarizes the maturity of our debt: | | | ABL Credit Facility | | Oakdale Equipment Financing | | Notes Payable | | Finance Leases | | Total | | ABL Credit Facility | | Oakdale Equipment Financing | | Notes Payable | | Finance Leases | | Total |
Remainder of 2021 | $ | 0 | | | $ | 2,319 | | | $ | 1,888 | | | $ | 75 | | | $ | 4,282 | | |
2022 | 0 | | | 4,638 | | | 3,551 | | | 137 | | | 8,326 | | |
Remainder of 2022 | | Remainder of 2022 | $ | — | | | $ | 2,319 | | | $ | 1,596 | | | $ | 66 | | | $ | 3,981 | |
2023 | 2023 | 0 | | | 4,638 | | | 2,405 | | | 245 | | | 7,288 | | 2023 | — | | | 4,639 | | | 2,073 | | | 245 | | | 6,957 | |
2024 | 2024 | 0 | | | 6,888 | | | 807 | | | 0 | | | 7,695 | | 2024 | 3,000 | | | 6,888 | | | 807 | | | — | | | 10,695 | |
2025 | 2025 | 0 | | | 1,724 | | | 187 | | | 0 | | | 1,911 | | 2025 | — | | | 1,724 | | | 187 | | | — | | | 1,911 | |
2026 and thereafter | 0 | | | 0 | | | 355 | | | 0 | | | 355 | | |
2026 | | 2026 | — | | | — | | | 181 | | | — | | | 181 | |
2027 and thereafter | | 2027 and thereafter | — | | | — | | | 174 | | | — | | | 174 | |
Total minimum payments | Total minimum payments | 0 | | | 20,207 | | | 9,193 | | | 457 | | | 29,857 | | Total minimum payments | 3,000 | | | 15,570 | | | 5,018 | | | 311 | | | 23,899 | |
Amount representing interest | Amount representing interest | 0 | | | (2,412) | | | (760) | | | (42) | | | (3,214) | | Amount representing interest | — | | | (1,481) | | | (292) | | | (20) | | | (1,793) | |
Amount representing unamortized lender fees | Amount representing unamortized lender fees | 0 | | | (640) | | | 0 | | 0 | | | (640) | | Amount representing unamortized lender fees | — | | | (454) | | | — | | | — | | | (454) | |
Present value of payments | Present value of payments | | 415 | | | Present value of payments | | 291 | | |
Less: current portion | Less: current portion | 0 | | | (3,706) | | | (3,347) | | | (124) | | | (7,177) | | Less: current portion | — | | | (3,926) | | | (2,828) | | | (115) | | | (6,869) | |
Total long-term debt, net | Total long-term debt, net | $ | 0 | | | $ | 13,449 | | | $ | 5,086 | | | $ | 291 | | | $ | 18,826 | | Total long-term debt, net | $ | 3,000 | | | $ | 9,709 | | | $ | 1,898 | | | $ | 176 | | | $ | 14,783 | |
ABL Credit Facility
On December 13, 2019, the Company entered into a $20,000 five-year senior secured asset-based credit facility with Jefferies Finance LLC. The available borrowing amount under the ABL Credit Facility as of June 30, 20212022 was $14,105$20,000 and is based on the Company’s eligible accounts receivable and inventory, as described in the ABL Credit Agreement. As of June 30, 2021,2022, there were 0 amountswas $3,000 outstanding under the ABL Credit Facility, $1,232$1,000 letters of credit and $12,873$16,000 was available to be drawn. As of June 30, 20212022 and December 31, 2020,2021, the Company was in compliance with all financial covenants.
Oakdale Equipment Financing
On December 13, 2019, the Company received net proceeds of $23,000 in an equipment financing arrangement with Nexseer. Substantially all of the Company'sCompany’s mining and processing equipment at its Oakdale facility are pledged as collateral under the Oakdale Equipment Financing. The Oakdale Equipment Financing bears interest at a fixed rate of 5.79%.
Notes Payable
The Company has entered into various financing arrangements, primarily to finance its manufactured wellsite proppant storage solutions equipment. Upon completion of the equipment manufacturing, title to the subject equipment passes to the financial institutions as collateral. In June 2020, the Company executed a note payable to defer certain near-term minimum royalty payments. All notes payable bear interest at rates between 4.00% and 7.49%.
Acquisition Liquidity Support Facility
In connection with
NOTE 8 — Leases
Lessee
The operating and financing components of the Company’s acquisition of Eagle Proppants Holdings,right-of-use assets and lease liabilities on the Company,consolidated balance sheets were as borrower, also entered into a Loan Agreement with Eagle, as lender, secured by certain property rights and assets of the acquired business, whereby the Company may draw loans in an aggregate amount up to $5,000 during the twelve month period ending September 18, 2021. There have been no borrowings under this facility.follows:
SMART SAND, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
NOTE 8 — Leases
Lessee
The operating and financing components of the Company’s right-of-use assets and lease liabilities on the consolidated balance sheet were as follows: | | | Balance Sheet Location | | June 30, 2021 | | December 31, 2020 | | Balance Sheet Location | | June 30, 2022 | | December 31, 2021 |
Right-of-use assets | Right-of-use assets | | | | | | | Right-of-use assets | | | | | | |
Operating | Operating | | Operating right-of-use assets | | $ | 29,028 | | | $ | 32,099 | | Operating | | Operating right-of-use assets | | $ | 30,818 | | | $ | 29,828 | |
Financing | Financing | | Property, plant and equipment, net | | 295 | | | 373 | | Financing | | Property, plant and equipment, net | | 161 | | | 262 | |
Total right-of use assets | Total right-of use assets | | $ | 29,323 | | | $ | 32,472 | | Total right-of use assets | | $ | 30,979 | | | $ | 30,090 | |
| Lease liabilities | Lease liabilities | | Lease liabilities | |
Operating | Operating | | Operating lease liabilities, current and long-term portions | | $ | 32,099 | | | $ | 34,097 | | Operating | | Operating lease liabilities, current and long-term portions | | $ | 33,204 | | | $ | 32,719 | |
Financing | Financing | | Long-term debt, current and long-term portions | | 415 | | | 474 | | Financing | | Long-term debt, current and long-term portions | | 291 | | | 351 | |
Total lease liabilities | Total lease liabilities | | $ | 32,514 | | | $ | 34,571 | | Total lease liabilities | | $ | 33,495 | | | $ | 33,070 | |
Operating lease costs are recorded as a single expense on the income statement of operations and allocated to the right-of-use assets and the related lease liabilities as depreciation expense and interest expense, respectively. Lease cost recognized in the consolidated income statement of operations for the three and six months ended June 30, 20212022 and 20202021 was as follows:
| | | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2021 | | 2020 | | 2021 | | 2020 | | 2022 | | 2021 | | 2022 | | 2021 |
Finance lease cost | Finance lease cost | | | | | | | | Finance lease cost | | | | | | | |
Amortization of right-of-use assets | Amortization of right-of-use assets | $ | 35 | | | $ | 35 | | | $ | 70 | | | $ | 69 | | Amortization of right-of-use assets | $ | 31 | | | $ | 35 | | | $ | 66 | | | $ | 70 | |
Interest on lease liabilities | Interest on lease liabilities | 7 | | | 9 | | | 15 | | | 19 | | Interest on lease liabilities | 5 | | | 7 | | | 11 | | | 15 | |
Operating lease cost | Operating lease cost | 2,878 | | | 3,105 | | | 5,765 | | | 7,095 | | Operating lease cost | 3,073 | | | 2,878 | | | 5,880 | | | 5,765 | |
Short-term lease cost | Short-term lease cost | 34 | | | 64 | | | 34 | | | 234 | | Short-term lease cost | 122 | | | 34 | | | 446 | | | 34 | |
| Total lease cost | Total lease cost | $ | 2,954 | | | $ | 3,213 | | | $ | 5,884 | | | $ | 7,417 | | Total lease cost | $ | 3,231 | | | $ | 2,954 | | | $ | 6,403 | | | $ | 5,884 | |
SMART SAND, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Other information related to the Company’s leasing activity for the three and six months ended June 30, 20212022 and 20202021 is as follows: | | | Six months ended June 30, | | Six Months Ended June 30, |
| | 2021 | | 2020 | | 2022 | | 2021 |
Cash paid for amounts included in the measurement of lease liabilities | Cash paid for amounts included in the measurement of lease liabilities | | | | | Cash paid for amounts included in the measurement of lease liabilities | | | | |
Operating cash flows used for finance leases | Operating cash flows used for finance leases | | $ | 15 | | | $ | 19 | | Operating cash flows used for finance leases | | $ | 11 | | | $ | 150 | |
Operating cash flows used for operating leases | Operating cash flows used for operating leases | | $ | 4,693 | | | $ | 6,902 | | Operating cash flows used for operating leases | | $ | 6,384 | | | $ | 4,693 | |
Financing cash flows used for finance leases | Financing cash flows used for finance leases | | $ | 61 | | | $ | 56 | | Financing cash flows used for finance leases | | $ | 60 | | | $ | 65 | |
| | Right-of-use assets obtained in exchange for new operating lease liabilities | Right-of-use assets obtained in exchange for new operating lease liabilities | | $ | 1,743 | | | $ | 4,322 | | Right-of-use assets obtained in exchange for new operating lease liabilities | | $ | 5,948 | | | $ | — | |
| | Weighted average remaining lease term - finance leases | Weighted average remaining lease term - finance leases | | 2.0 years | | 3.2 years | Weighted average remaining lease term - finance leases | | 1.3 years | | 2.0 years |
Weighted average discount rate - finance leases | Weighted average discount rate - finance leases | | 6.60 | % | | 6.60 | % | Weighted average discount rate - finance leases | | 6.87 | % | | 6.60 | % |
Weighted average remaining lease term - operating leases | Weighted average remaining lease term - operating leases | | 3.6 years | | 3.2 years | Weighted average remaining lease term - operating leases | | 3.2 years | | 3.7 years |
Weighted average discount rate - operating leases | Weighted average discount rate - operating leases | | 5.80 | % | | 5.68 | % | Weighted average discount rate - operating leases | | 5.81 | % | | 5.80 | % |
Maturities of the Company’s lease liabilities as of June 30, 20212022 are as follows: | | | Operating Leases | | Finance Leases | | Total | | Operating Leases | | Finance Leases | | Total |
Remainder of 2021 | | $ | 4,393 | | | $ | 65 | | | $ | 4,458 | | |
2022 | | 9,370 | | | 138 | | | 9,508 | | |
Remainder of 2022 | | Remainder of 2022 | | $ | 5,865 | | | $ | 66 | | | $ | 5,931 | |
2023 | 2023 | | 8,499 | | | 245 | | | 8,744 | | 2023 | | 12,199 | | | 245 | | | 12,444 | |
2024 | 2024 | | 6,918 | | | 0 | | | 6,918 | | 2024 | | 9,230 | | | — | | | 9,230 | |
2025 | 2025 | | 3,173 | | | 0 | | | 3,173 | | 2025 | | 4,422 | | | — | | | 4,422 | |
2026 | | 2026 | | 3,191 | | | — | | | 3,191 | |
Thereafter | Thereafter | | 4,000 | | | 0 | | | 4,000 | | Thereafter | | 1,806 | | | — | | | 1,806 | |
Total cash lease payments | Total cash lease payments | | 36,353 | | | 448 | | | 36,801 | | Total cash lease payments | | 36,713 | | | 311 | | | 37,024 | |
Less: amounts representing interest | Less: amounts representing interest | | (4,254) | | | (33) | | | (4,287) | | Less: amounts representing interest | | (3,509) | | | (20) | | | (3,529) | |
Total lease liabilities | Total lease liabilities | | $ | 32,099 | | | $ | 415 | | | $ | 32,514 | | Total lease liabilities | | $ | 33,204 | | | $ | 291 | | | $ | 33,495 | |
NOTE 9 — Asset Retirement Obligation
The Company had a post-closure reclamation and site restoration obligation of $16,108$24,816 as of June 30, 2021.2022. The following is a reconciliation of the total reclamation liability for asset retirement obligations.
| | | | | |
Balance at December 31, 20202021 | $ | 14,99616,155 | |
Additions and revisions of prior estimates | 7378,282 | |
Accretion expense | 375379 | |
| |
Balance at June 30, 20212022 | $ | 16,10824,816 | |
SMART SAND, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
NOTE 10 — Revenue
Disaggregation of Revenue
The following table presents the Company’s revenues disaggregated by type and percentage of total revenues for the periods indicated. | | | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2021 | | 2020 | | 2021 | | 2020 | | 2022 | | 2021 | | 2022 | | 2021 |
| | Revenue | | Percentage of Total Revenue | | Revenue | | Percentage of Total Revenue | | Revenue | | Percentage of Total Revenue | | Revenue | | Percentage of Total Revenue | | Revenue | | Percentage of Total Revenue | | Revenue | | Percentage of Total Revenue | | Revenue | | Percentage of Total Revenue | | Revenue | | Percentage of Total Revenue |
Sand sales revenue | Sand sales revenue | $ | 28,801 | | | 97 | % | | $ | 7,375 | | | 28 | % | | $ | 51,948 | | | 91 | % | | $ | 38,362 | | | 52 | % | Sand sales revenue | $ | 67,111 | | | 98 | % | | $ | 28,801 | | | 97 | % | | $ | 105,400 | | | 95 | % | | $ | 51,948 | | | 91 | % |
Shortfall revenue | Shortfall revenue | 0 | | | 0 | % | | 14,000 | | | 54 | % | | 1,741 | | | 3 | % | | 15,307 | | | 21 | % | Shortfall revenue | — | | | — | % | | — | | | — | % | | 1,915 | | | 2 | % | | 1,741 | | | 3 | % |
Logistics revenue | Logistics revenue | 838 | | | 3 | % | | 4,731 | | | 18 | % | | 3,400 | | | 6 | % | | 19,925 | | | 27 | % | Logistics revenue | 1,603 | | | 2 | % | | 838 | | | 3 | % | | 3,004 | | | 3 | % | | 3,400 | | | 6 | % |
Total revenues | $ | 29,639 | | | 100 | % | | $ | 26,106 | | | 100 | % | | $ | 57,089 | | | 100 | % | | $ | 73,594 | | | 100 | % | |
Total revenue | | Total revenue | $ | 68,714 | | | 100 | % | | $ | 29,639 | | | 100 | % | | $ | 110,319 | | | 100 | % | | $ | 57,089 | | | 100 | % |
The Company recorded $10,357$16,270 of deferred revenue on the consolidated balance sheet onas of December 31, 2020,2021, of which $4,194$5,493 has been recognized in the six months ended June 30, 2021.2022. Of the remaining amount, the Company expects to recognize $2,681$4,556 through December 31, 20212022 and the remainder through 2023.
NOTE 11 — Earnings Per Share
Basic net (loss) income per share of common stock is computed by dividing net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the period, excluding the dilutive effects of restricted stock. Diluted net (loss) income per share of common stock is computed by dividing the net (loss) income attributable to common stockholders by the sum of the weighted-average number of shares of common stock outstanding during the period plus the potential dilutive effects of restricted stock outstanding during the period calculated in accordance with the treasury stock method, although restricted stock is excluded if their effect is anti-dilutive. Because the impact of these items is anti-dilutive during periods of net loss, there was no difference between basic and diluted net loss per share of common stock for the three and six months ended June 30, 2021. Because their effect would be anti-dilutive, 2,253 shares of common stock underlying equity-based awards were excluded from the calculation of diluted earnings per share for both three and six months ended June 30, 2020. There is no reconciliation between weighted average common shares outstanding and diluted weighted average shares of common stock outstanding for any period presented.
NOTE 12 — Stock-Based Compensation
Equity Incentive Plan
In November 2016, in connection with its initial public offering, the Company adopted the 2016 Omnibus Incentive Plan (“2016 Plan”) which provides for the issuance of Awards (as defined in the 2016 Plan) of up to a maximum of 3,911 shares of the Company’s common stock to employees, non-employee members of the BoardCompany’s board of directors and consultants of the Company. On April 3, 2020, the Company’s board of directors adopted an amendment to the 2016 Plan to increase the available shares of common stock authorized for issuance by an additional 2,088 shares. On July 27, 2021, the Company’s board of directors authorized 231 shares currently held in treasury stock for issuance under the 2016 Plan. On April 22, 2022, the board of directors adopted an amendment to the 2016 Plan to increase the number of shares of common stock authorized for issuance by an additional 3,900 shares.
During the six months ended June 30, 2022 and 2021, and 2020, 14824 and 0 shares of restricted stock were issued under the Plans,2016 Plan, respectively. The grant date fair value per share of all the outstanding restricted stock was $2.44$1.78 - $7.79.$5.77. The shares vest over one to four years from their respective grant dates. For equity awards issued under the 2016 Plan, the grant date fair value was either the actual market price of the Company’s shares or an adjusted price using a Monte Carlo simulation for awards subject to the Company’s performance as compared to a defined peer group. The Company recognized, in operating expenses and cost of goods sold on the condensed consolidated income statements,statement of operations, $802 and $572 and $943 of compensation expense for the restricted stock during the three months ended June 30, 20212022 and 2020,2021, respectively. The Company recognized, in operating expenses and cost of goods sold on the condensed consolidated statement of operations, $1,628 and $1,252 of compensation expense for the restricted stock during the six months ended June 30, 2022 and 2021, respectively. There is no impact to the cash flows of the Company related to stock-based compensation expense. At June 30, 2022, the Company had unrecognized compensation expense of $7,155 related to granted but unvested stock awards, which is to be recognized as follows:
SMART SAND, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
income statements, $1,252 and $1,968 of compensation expense for the restricted stock during the six months ended June 30, 2021 and 2020, respectively. There is no impact to the cash flows of the Company related to stock-based compensation expense. At June 30, 2021, the Company had unrecognized compensation expense of $2,429 related to granted but unvested stock awards, which is to be recognized as follows:
| Remainder of 2021 | | $ | 1,058 | | |
2022 | | 858 | | |
Remainder of 2022 | | Remainder of 2022 | | $ | 1,526 | |
2023 | 2023 | | 509 | | 2023 | | 2,684 | |
2024 | 2024 | | 3 | | 2024 | | 1,845 | |
2025 | 2025 | | 1 | | 2025 | | 955 | |
2026 | | 2026 | | 145 | |
Total | Total | | $ | 2,429 | | Total | | $ | 7,155 | |
The following table summarizes restricted stock activity under the Plans from December 31, 20202021 through June 30, 2021:2022: | | | Number of Shares | | Weighted Average | | Number of Shares | | Weighted Average |
Unvested, December 31, 2020 | 1,886 | | | $ | 5.14 | | |
Unvested, December 31, 2021 | | Unvested, December 31, 2021 | 3,151 | | | $ | 3.06 | |
Granted | Granted | 14 | | | $ | 3.07 | | Granted | 824 | | | $ | 3.43 | |
Vested | Vested | (321) | | | $ | 8.34 | | Vested | (310) | | | $ | 4.75 | |
Forfeited | Forfeited | (130) | | | $ | 6.35 | | Forfeited | (577) | | | $ | 2.68 | |
Unvested, June 30, 2021 | 1,449 | | | $ | 3.26 | | |
Unvested, June 30, 2022 | | Unvested, June 30, 2022 | 3,088 | | | $ | 3.01 | |
Employee Stock Purchase Plan
Shares of the Company’s common stock may be purchased by eligible employees under the Company’s 2016 Employee Stock Purchase Plan in six-month intervals at a purchase price equal to at least 85% of the lesser of the fair market value of the Company’s common stock on either the first day or the last day of each six-month offering period. Employee purchases may not exceed 20% of their gross compensation during an offering period.
NOTE 1312 — Income Taxes
The Company calculates its interim income tax provision by estimating the annual expected effective tax rate and applying that rate to its ordinary year-to-date earnings or loss. In addition, the effect of changes in enacted tax laws, rates or tax status is recognized in the interim period in which the change occurs.
For the three months ended June 30, 20212022 and 2020,2021, the effective tax rate was approximately 108.7% and (6.0)% and 42.8%, respectively, based on the annual effective tax rate net of discrete federal and state taxes. For the six months ended June 30, 20212022 and 2020,2021, the effective tax rate was approximately 16.0%34.1% and 44.4%16.0%, respectively, based on the annual effective tax rate net of discrete federal and state taxes. For the three and six months ended June 30, 20212022 and 2020,2021, the statutory tax rate was 21.0%. The computation of the effective tax rate includes modifications from the statutory rate such as income tax credits, tax depletion deduction, carrybacks, and state apportionment changes, among other items.
The Company has recorded a liability of $2,684 for uncertain tax positions included in deferred tax liabilities, long-term, net on its consolidated balance sheet as of June 30, 2021,2022, related to its depletion deduction methodology, and a corresponding increase to the income tax expense on its condensed consolidated statement of operations. There was $2,163 liability for uncertain tax positions as of December 31, 2021 and there was no material change for the six months ended June 30, 2022.
As of June 30, 2022, the Company determined that it is more likely than not that it will not be able to fully realize the benefits of certain existing deductible temporary differences and has recorded a partial valuation allowance against the gross deferred tax assets, which is included in the deferred tax liabilities, long-term, net on its consolidated balance sheet, and a corresponding increase to the income tax expense on its condensed consolidated statement of operations. At December 31, 2021, the Company recorded a partial valuation allowance against the gross deferred tax assets on its consolidated balance sheet in the amount of $1,574 and a corresponding increase to the income tax expense on its consolidated statements of operations and there was no material change for the three and six months ended June 30, 2021. 2022.
SMART SAND, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
The Company’s federal income tax returns subsequent to 2017 remain open to audit by taxing authorities. The Company has not been informed that its tax returnreturns are the subject of any audit or investigation by taxing authorities.
SMART SAND, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
NOTE 1413 — Concentrations
As of June 30, 2021, four2022 three customers accounted for 84%69% of the Company’s total accounts receivable. As of December 31, 2020, 78%2021, 59% of the Company’s total accounts receivable balance was with one customer and was subject to ongoing litigation. The litigation was settled duringtwo customers.
During the second quarterthree months ended June 30, 2022, 72% of 2021 as described in Note 15.
the Company’s revenues were earned from three customers. During the three months ended June 30, 2021, 75% of the Company’s revenues were earned from four customers. During the threesix months ended June 30, 2020, 91%2022, 57% of the Company’s revenues were earned from twothree customers. During the six months ended June 30, 2021, 66% of the Company’s revenues were earned from three customers. During the six months ended June 30, 2020, 80% of the Company’s revenues were earned from four customers.
As of June 30, 2021,2022, one vendor accounted for 21%10% of the Company’s accounts payable. As of December 31, 2020, three vendors2021, one vendor accounted for 42%19% of the Company’s accounts payable.
During the three months ended June 30, 2022, two suppliers accounted for 37% of the Company’s cost of goods sold. During the three months ended June 30, 2021, two suppliers accounted for 53% of the Company’s cost of goods sold. During the threesix months ended June 30, 2020, three2022, two suppliers accounted for 50%31% of the Company’s cost of goods sold. During the six months ended June 30, 2021, two suppliers accounted for 51% of the Company’s cost of goods sold. During the six months ended June 30, 2020, two suppliers accounted for 57% of the Company’s cost of goods sold.
The Company’s primary product is Northern White frac sand and its mining operations are limited to Wisconsin and Illinois. There is a risk of loss if there are significant environmental, legal or economic changes to thisthese geographic area.areas of our mines, the oil and natural gas producing basins they serve, or the transportation routes between them.
NOTE 1514 — Commitments and Contingencies
Future Minimum Commitments
The Company is obligated under certain contracts for minimum payments for the right to use land for extractive activities, which is not within the scope of leases under ASC 842. Future minimum annual commitments under such contracts at June 30, 2021 are as follows: | | | | | |
| |
Remainder of 2021 | $ | 1,859 | |
2022 | 2,467 | |
2023 | 2,573 | |
2024 | 2,469 | |
2025 | 2,462 | |
Thereafter | 26,886 | |
Total | $ | 38,716 | |
Litigation
In addition to the matters described below, weWe may be subject to various legal proceedings, claims and governmental inspections, audits or investigations arising out of our operations in the normal course of business, which cover matters such as general commercial, governmental and trade regulations, product liability, environmental, intellectual property, employment and other actions. Although the outcomes of these routine claims cannot be predicted with certainty, in the opinion of management, the ultimate resolution of these matters will not have a material adverse effect on our financial statements.
U.S. Well Services, LLC
On January 14, 2019, the Company, as plaintiff filed suit against U.S. Well Services, LLC (“defendant”), in the Superior Court of the State of Delaware in and for New Castle County (C.A. No. N19C-01-144-PRW [CCLD]) (the “Court”). In the suit, the Company alleged that defendant was in breach of contract for failure to pay amounts due and payable under a long-term
SMART SAND, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
take-or-pay Master Product Purchase Agreement and coterminous Railcar Usage Agreement. Discovery was completed in the fall of 2020 and the trial took place in December 2020. On June 1, 2021, the Court issued a verdict in favor of the Company and on June 17, 2021, the Court issued an Order of Final Judgment (the “Order) awarding $50,896 in damages to the Company. On June 28, 2021, the Company entered into a Settlement Agreement and Release (“Settlement Agreement”) with defendant, pursuant to which defendant paid to the Company a $35,000 cash payment, and defendant and the Company each agreed to withdraw appeals of certain rulings that they each filed after the Order was issued. The Company and defendant also entered into a two year Right of First Refusal Agreement covering all purchases of Northern White frac sand by defendant and its affiliates in the continental United States from January 1, 2022 through December 31, 2023. The Company recorded $19,592 as non-cash bad debt expense, which is the difference between the $54,592 accounts receivable balance that was under litigation and the cash received under the Settlement Agreement.
Bonds
The Company has performance bonds with various public and private entities regarding reclamation, permitting and maintenance of public roadways. Total aggregate principal amount of performance bonds outstanding as of June 30, 20212022 was $9,132.$17,651.
SMART SAND, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis summarizes the significant factors affecting the consolidated operating results, financial condition, liquidity and cash flows of the Company as of and for the periods presented below. The following discussion and analysis should be read in conjunction with our unaudited condensed consolidated financial statements and related information contained herein and our audited financial statements as of December 31, 20202021 contained in our Annual Report on Form 10-K. We use contribution margin, EBITDA, Adjusted EBITDA contribution margin and free cash flow herein as non-GAAP measures of our financial performance. For further discussion of contribution margin, EBITDA, Adjusted EBITDA contribution margin and free cash flow, see the section entitled “Non-GAAP Financial Measures.” We define various terms to simplify the presentation of information in this Report.Quarterly Report on Form 10-Q (this “Report”). All share amounts are presented in thousands.
Forward-Looking Statements
This discussion contains forward-looking statements that are based on the beliefs of our management, as well as assumptions made by, and information currently available to our management. Actual results could differ materially from those discussed in or implied by forward-looking statements as a result of various factors, including those discussed herein and in the section entitled “Risk Factors” in our Form 10-K for the year ended December 31, 2020.2021. Our estimates and forward-looking statements are primarily based on our current expectations and estimates of future events and trends, which affect or may affect our business and operations. Although we believe that these estimates and forward-looking statements are based upon reasonable assumptions, they are subject to several risks and uncertainties and are made in light of information currently available to us. Important factors, in addition to the factors described in this quarterly report,Report, may adversely affect our results as indicated in forward-looking statements. You should read this quarterly reportReport and the documents that we have filed as exhibits hereto completely and with the understanding that our actual future results may be materially different from what we expect. The words “may,” “will,” “should,” “could,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “intend,” “potential,” “might,” “would,” “continue” or the negative of these terms or other comparable terminology and similar words are intended to identify estimates and forward-looking statements. Estimates and forward-looking statements speak only as of the date they were made, and, except to the extent required by law, we undertake no obligation to update, to revise or to review any estimate and/or forward-looking statement because of new information, future events or other factors. Estimates and forward-looking statements involve risks and uncertainties and are not guarantees of future performance. As a result of the risks and uncertainties described above, the estimates and forward-looking statements discussed in this quarterly reportReport might not occur and our future results, level of activity, performance or achievements may differ materially from those expressed in these forward-looking statements due to, including, but not limited to, the factors mentioned above, and the differences may be material and adverse. Because of these uncertainties, you should not place undue reliance on these forward-looking statements.
Overview
The Company
We are a fully integrated frac and industrial sand supply and services company, offeringcompany. The Company offers complete mine to wellsite proppant supply and logistics solutions to our frac sand customers. We produce low-cost, high quality Northern White frac sand, which is a premium sand used as proppant used to enhance hydrocarbon recovery rates in the hydraulic fracturing of oil and natural gas wells.wells and for a variety of industrial applications. We also offer proppant logistics solutions to our customers through our in-basin transloading terminalterminals and our SmartSystemsTM wellsite proppant storage capabilities. In late 2021, we created our Industrial Products Solutions (“IPS”) business in order to diversify our customer base and markets we serve by offering sand for industrial uses. We market our products and services as one operating segment, primarily to oil and natural gas exploration and production companies, and oilfield service companies.companies, and industrial manufacturers. We sell our sand under a combination of contract andthrough long-term contracts or spot sales in the open market, andmarket. We provide wellsite proppant storage solutions services and equipment under flexible contract terms custom tailored to meet the needs of our customers. We believe that, among other things, the size and favorable geologic characteristics of our sand reserves, the strategic location and logistical advantages of our facilities, our proprietary SmartDepotTM portable wellsite proppant storage silos, SmartPathTM transloader, and the industry experience of our senior management team make us as a highly attractive provider of frac sand and proppant logistics services from the mine to the wellsite.
We incorporated in Delaware in July 2011 and began operations with 1.1 million tons of annual processing capacity in July 2012. After several expansions and an acquisition, our current operational annual processing capacity is approximately 7.1 million tons of frac sand. Our mine and related processing facility near Oakdale, Wisconsin, at which we have approximately
SMART SAND, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)
315 million tonsstorage silos and SmartPathTM transloader, access to all Class I rail lines, and the industry experience of proven recoverableour senior management team make us as a highly attractive provider of sand reserves as of December 31, 2020, has approximately 5.5and logistics services.
We incorporated in Delaware in July 2011 and began operations at our Oakdale facility with 1.1 million tons of annual processing capacity. This integrated facility,capacity in July 2012. We currently have 7.1 million tons of annual capacity at our Oakdale and Utica facilities with on-site rail infrastructure and wet and dry sandthe ability to expand annual processing facilities, has onsite accesscapacity to the Canadian Pacific Class I rail line and access to the Union Pacific Class I rail line through the Byron, Wisconsin transload facility located nearby. Our mine and processing facility in Utica, Illinois, has approximately 13010.0 million tons of proven and probable sand reserves as of December 31, 2020, and has approximately 1.6 million tons of annual processing capacity. Thisshould we bring the Blair facility has access to the BNSF Class I rail line through the Peru, Illinois transload facility located nearby. We began operating the Utica, Illinois mine and Peru, Illinois transload facility in October 2020.online.
We operate a unit train capable transloading terminal in Van Hook, North Dakota to service the Bakken Formation in the Williston Basin. We operate this terminal under a long-term agreement with Canadian Pacific Railway to service the Van Hook terminal directly along with the other key oil and natural gas exploration and production basins of North America. We provide Northern White sand in-basinIn January 2022, we began operations at thisan additional unit train capable transloading terminal which allowsin Waynesburg, Pennsylvania to service the Appalachian Basin, including the Marcellus and Utica Formations. These terminals allow us to offer more efficient and sustainable delivery options to customers operating in the Bakken Formation in the Williston Basin.our customers.
We also offer to our customers portable wellsite proppant storage and management solutions through our SmartSystems products and services. Our SmartSystems provide our customers with the capability to unload, store and deliver proppant at the wellsite, as well as the ability to rapidly set up, takedown and transport the entire system. This capability creates efficiencies, flexibility, enhanced safety and reliability for customers. Through our SmartSystems wellsite proppant storage solutions, we offer the SmartDepot and SmartDepotXL™ silo systems, SmartPath transloader, and our rapid deployment trailers. Our SmartDepot silos include passive and active dust suppression technology, along with the capability of a gravity-fed operation. Our self-contained SmartPath transloader is a mobile sand transloading system designed to work with bottom dump trailers and features a drive over conveyor, surge bin, and dust collection system, and we believe the system has the ability to keep up with any hydraulic fracturing operation. Our rapid deployment trailers are designed for quick setup, takedown and transportation of the entire SmartSystem, and detach from the wellsite equipment, which allows for removal from the wellsite during operation. We have also developed a proprietary software program, the SmartSystem Tracker™, which allows our SmartSystems customers to monitor silo-specific information, including location, proppant type and proppant inventory. We believe that our SmartSystems reduce tracking and related fuel consumption for our customers, helping them meet their goals to reduce their carbon footprint in their daily operations.
In the fourth quarter of 2021 we started our IPS business whereby we offer our sand to customers for various industrial purposes, such as glass, foundry, building products, filtration, geothermal, renewables, ceramics, turf & landscape, retail, and recreation. While we are still in the early stages of this business, we believe that as it grows, it will provide us with the ability to diversify our sales into more stable, consumer-driven products to help mitigate price volatility in the oil and gas industry.
Business CombinationRecent Acquisitions
On September 18, 2020,March 4, 2022, we entered into a Membership Interest Purchase Agreement (the “Purchase Agreement”) with Hi-Crush Inc., a Delaware corporation (“HCR”), and Hi-Crush Blair LLC, a Delaware limited liability company and wholly-owned subsidiary of HCR (“Blair”) pursuant to which we acquired Eagle Oilall of the issued and Gas Proppants Holdings LLC (“Eagle Proppants Holdings”),outstanding limited liability company interest of Blair from HCR for aggregate cash consideration of approximately $2.1 million. The estimated aggregate fair value of the net assets acquired was $41.7$6.5 million, which exceeded the total consideration and resulted in a bargain purchase gain of $39.6 million on the acquisition date.
The Utica, Illinois mining and processing assets were idle at the date of acquisition; we started mining and selling sand out of this location in the fourth quarter of 2020.subject to customary working capital adjustments.
Market Trends
Our historical results of operations and cash flows are not indicative of results of operations and cash flows to be expected in the future.
In recent years, the increasing supply of sand, particularly in-basin sand, relative to demand, has led to a continued depression of frac sand prices. During most of 2020, demand for frac sand declined significantly as a result of decreased demand for oil and natural gas as a result of the ongoing effects of the coronavirus (“COVID-19”) pandemic, which caused a global decrease in all means of travel, the closure of borders between countries and a general slowing of economic activity worldwide. Activity in the oil and gas industry began to rebound in the fourth quarter of 2020 and the first half ofthrough 2021 as the global distribution of COVID-19 vaccines ramped up and travel restrictions lessened. We have seen an increase in the volume of sand sold since the global economy began reopening, howeverHowever, the prices of frac sand remained depressed during 2021 as supply remained out of balance with demand even though market activity was improving. Through the first six months of 2022, supply and demand fundamentals have continued to be depressedimprove and frac sand prices began recovering from previous historic lows.
SMART SAND, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)
Additionally, the ongoing conflict in the Ukraine has also contributed to dramatic swings in oil and natural gas prices and significant volatility in the oilfield service sector. However, we cannot predict when fracif this trend will continue or if sand prices will increase, decrease or stabilize.
Northern White frac sand, which is found predominantly in Wisconsin and limited portions of Minnesota, Illinois, and Missouri, is considered a premium proppant due to its favorable physical characteristics. While we anticipate that regional sand will continue to affect the demand for Northern White sand in some of the oil and natural gas producing basins in which we operate, we believe there will continue to be demand for our high-quality Northern White frac sand. In particular, we believe that Northern White frac sand has logistical advantages in the Marcellus,Appalachian basin, Bakken andbasin, the western basins of Colorado, Wyoming, and
SMART SAND, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)
Wyoming. in Canada. We expect demand for our frac sand to continue to be supported by customers who are focused on long-term well performance and ultimate recovery of reserves from the oil and natural gas wells they are completing as well as those interested in the efficiency of their logistics supply chain and delivery of sand to the wellsite. Additionally, we believe market trends continue to support increased proppant usage per well drilled due to operator focus on well efficiencies through increasing lengths of drilling laterals, use of simul-fracking techniques and other well enhancement strategies. As the amount of sand per well continues to increase, we believe the delivery of sand to the operating basins by rail in bulk shipments to terminals in close proximity to drilling activity provides more sustainable and efficient delivery of sand to meet a customer’s long term proppant needs. Finally, we believe that the adoption of our SmartSystems in the marketplace, which has a smaller footprint on customer sites than other sand storage solutions, will allow us to sell more sand when packaged with our last mile solutions. We believe the combination of our high quality Northern White sand delivered in bulk to in basin terminals and ultimately delivered to the wellsite through our SmartSystems wellsite proppant storage solutions provides our customers efficient and sustainable sand supply to the wellsite that will reduce trucking and related fuel consumption for our customers, helping them to meet their goals to reduce their carbon footprint in their daily operations.
Demand in the IPS business is relatively stable as customers are spread over a wide range of industries including glass, foundry, building products, filtration, geothermal, renewables, ceramics, turf & landscape, retail, recreation and more. The IPS business is primarily influenced by macroeconomic drivers such as consumer demand and population growth. We began our diversification into the IPS business in late 2021 and we expect to see continued growth throughout North America.
SMART SAND, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)
GAAP Results of Operations
Three Months Ended June 30, 20212022 Compared to Three Months Ended June 30, 20202021
The following table summarizes our revenue and expenses for the periods indicated. | | | Three Months Ended June 30, | | Change | | Three Months Ended June 30, | | Change |
| | 2021 | | 2020 | | Dollars | | Percentage | | 2022 | | 2021 | | Dollars | | Percentage |
| | | | | | | | | | | | |
Revenues: | Revenues: | | Revenues: | |
Sand sales revenue | Sand sales revenue | $ | 28,801 | | | $ | 7,375 | | | $ | 21,426 | | | 291 | % | Sand sales revenue | $ | 67,111 | | | $ | 28,801 | | | $ | 38,310 | | | 133 | % |
Shortfall revenue | — | | | 14,000 | | | (14,000) | | | (100) | % | |
| Logistics revenue | Logistics revenue | 838 | | | 4,731 | | | (3,893) | | | (82) | % | Logistics revenue | 1,603 | | | 838 | | | 765 | | | 91 | % |
Total revenue | Total revenue | 29,639 | | | 26,106 | | | 3,533 | | | 14 | % | Total revenue | 68,714 | | | 29,639 | | | 39,075 | | | 132 | % |
Cost of goods sold | Cost of goods sold | 31,999 | | | 11,906 | | | 20,093 | | | 169 | % | Cost of goods sold | 59,743 | | | 31,999 | | | 27,744 | | | 87 | % |
Gross profit | Gross profit | (2,360) | | | 14,200 | | | (16,560) | | | (117) | % | Gross profit | 8,971 | | | (2,360) | | | 11,331 | | | (480) | % |
Operating expenses: | Operating expenses: | | Operating expenses: | |
Salaries, benefits and payroll taxes | Salaries, benefits and payroll taxes | 2,285 | | | 2,155 | | | 130 | | | 6 | % | Salaries, benefits and payroll taxes | 3,225 | | | 2,285 | | | 940 | | | 41 | % |
Depreciation and amortization | Depreciation and amortization | 577 | | | 461 | | | 116 | | | 25 | % | Depreciation and amortization | 563 | | | 577 | | | (14) | | | (2) | % |
Selling, general and administrative | Selling, general and administrative | 3,855 | | | 2,930 | | | 925 | | | 32 | % | Selling, general and administrative | 3,795 | | | 3,855 | | | (60) | | | (2) | % |
Bad debt expense | Bad debt expense | 19,592 | | | — | | | 19,592 | | | Not meaningful | Bad debt expense | 1 | | | 19,592 | | | (19,591) | | | (100) | % |
| Total operating expenses | Total operating expenses | 26,309 | | | 5,546 | | | 20,763 | | | 374 | % | Total operating expenses | 7,584 | | | 26,309 | | | (18,725) | | | (71) | % |
Operating (loss) income | (28,669) | | | 8,654 | | | (37,323) | | | (431) | % | |
Operating income (loss) | | Operating income (loss) | 1,387 | | | (28,669) | | | 30,056 | | | (105) | % |
Other income (expenses): | Other income (expenses): | | Other income (expenses): | |
| Interest expense, net | Interest expense, net | (513) | | | (607) | | | 94 | | | (15) | % | Interest expense, net | (406) | | | (513) | | | 107 | | | (21) | % |
Other income | Other income | 3,467 | | | 63 | | | 3,404 | | | 5,403 | % | Other income | 56 | | | 3,467 | | | (3,411) | | | (98) | % |
Total other expenses, net | 2,954 | | | (544) | | | 3,498 | | | (643) | % | |
(Loss) income before income tax expense | (25,715) | | | 8,110 | | | (33,825) | | | (417) | % | |
Income tax expense | 1,552 | | | 3,470 | | | (1,918) | | | (55) | % | |
Net (loss) income | $ | (27,267) | | | $ | 4,640 | | | $ | (31,907) | | | (688) | % | |
Total other income (expenses), net | | Total other income (expenses), net | (350) | | | 2,954 | | | (3,304) | | | (112) | % |
Income (loss) before income tax expense (benefit) | | Income (loss) before income tax expense (benefit) | 1,037 | | | (25,715) | | | 26,752 | | | (104) | % |
Income tax expense (benefit) | | Income tax expense (benefit) | 1,127 | | | 1,552 | | | (425) | | | (27) | % |
Net loss | | Net loss | $ | (90) | | | $ | (27,267) | | | $ | 27,177 | | | (100) | % |
Revenues
Revenues were $29.6$68.7 million for the three months ended June 30, 2021,2022, during which time we sold approximately 767,0001,196,000 tons of sand. Revenues for the three months ended June 30, 20202021 were $26.1$29.6 million, during which time we sold approximately 208,000767,000 tons of sand. The key factors contributing to the increase in revenues for the three months ended June 30, 20212022 as compared to the three months ended June 30, 20202021 were as follows:
•Sand sales revenue increased from $7.4 million for the three months ended June 30, 2020 to $28.8 million for the three months ended June 30, 2021 as a result of higher total volumes sold. The volumes sold during the second quarter of 2020 were negatively impacted by depressed oil prices driven by oversupply relative to the decreased demand due to the COVID-19 coronavirus pandemic. Sand sales during the second quarter of 2021 were negatively impacted by the continued depression of frac sand prices due to oversupply.
•We had no contractual shortfall revenue$67.1 million or 133% for the three months ended June 30, 2021 compared2022 as a result of an increase in total volumes sold of approximately 56% and higher average sale prices of our sand. Higher demand relative to $14.0supply for oil and natural gas has led to increased prices in oil and natural gas which we believe has led to increased demand for frac sand resulting in higher sand prices.
•Logistics revenue, which includes freight for certain mine gate sand sales, railcar usage, logistics services, and SmartSystems rentals, was approximately $1.6 million of contractual shortfall revenue for the three months ended June 30, 2020. Our customer contracts dictate whether2022 compared to $0.8 million for the three months ended June 30, 2021. The increase in logistics revenue was due to a higher utilization of our SmartSystems fleet.
SMART SAND, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)
shortfall is earned quarterly or at the end of their respective contract year. We recognize revenue to the extent of the unfulfilled minimum contracted quantity at the shortfall price per ton as stated in the contract.
•Logistics revenue, which includes freight for certain mine gate sand sales, railcar usage, logistics services, and SmartSystems rentals, was approximately $0.8 million for the three months ended June 30, 2021 compared to $4.7 million for the three months ended June 30, 2020. The decrease in logistics revenue was due to the shift of sales to more in-basin shipments, which includes transportation and any other handling services, rather than mine gate shipments.
Cost of Goods Sold
Cost of goods sold was $32.0$59.7 million and $11.9$32.0 million for the three months ended June 30, 20212022 and 2020,2021, respectively. The increase was primarily due to higher volumes sold in the current period and increasedthe related increase in production costs and freight costs that accompany higher volumes. Additionally, higher labor costs and utilities have also contributed to an increase in cost due to the shift of sales to more in-basin deliveries. During the second quarter of 2020, headcount reductions and other cost savings measures were implemented as a result of the onset of COVID-19. Headcount has since increased to support the increased sales activity, though the Company remains focused on other cost-saving measures.goods sold.
Gross Profit
Gross profit was $9.0 million for the three months ended June 30, 2022, compared to $(2.4) million for the three months ended June 30, 2021, compared to $14.2 million for the three months ended June 30, 2020.2021. The declineincrease in profitability for the three months ended June 30, 20212022 as compared to the three months ended June 30, 20202021 was primarily due to decreased shortfall revenuehigher sales volumes and lowerhigher average sales pricesale prices of our sand.sand relative to the cost to produce and deliver products to our customers.
Operating Expenses
Operating expenses were $26.3$7.6 million and $5.5$26.3 million for the three months ended June 30, 2022 and 2021, and 2020, respectively. WeFor the three months ended June 30, 2021, we recorded $19.6 million as non-cash bad debt expense in the current period,of $19.6 million, which is the difference between the $54.6 million accounts receivable balance that was subject to litigation and the $35.0 million cash payment received under the Settlement Agreement and Release, dated as of June 28, 2021 (the “Settlement Agreement”), by and between the Company and U.S. Well Services, LLC (“U.S. Well”). Salaries, benefits and payroll taxes were relatively consistent atincreased to $3.2 million for the three months ended June 30, 2022 as compared to $2.3 million for the three months ended June 30, 2021, due primarily to accrued bonuses as comparedmanagement has reinstated a formal employee bonus plan based on company performance for 2022 and increased staffing to $2.2 million for the three months ended June 30, 2020.support our IPS business segment. Depreciation and amortization was also relatively consistentremained constant at $0.5 million for the three months ended June 30, 2020 as compared to $0.6 million for the three months ended June 30, 2022 and 2021. Selling, general and administrative expenses increased from $2.9were $3.8 million for the three months ended June 30, 20202022 compared to $3.9 million for the three months ended June 30, 2021, primarily due to costs related to our newly acquired Illinois operating facilities and headcount increases compared to the prior period, which included reduced headcount and salaries for all employees due to COVID-19.2021.
Other Income
WeIn 2021 we qualified for federal government assistance through employee retention credit provisions of the Consolidated Appropriations Act of 2021. During the three months ended June 30, 2021, the Companywe recorded $3.4 million ofin employee retention credits. The calculation of the credit is based on employees continued employment and represents a portion of the wages paid to them. For income tax purposes, the credit will result in decreased expense related to the wages it offsets in the period received. We expect to continue to qualifycredits, whereas for the three months ended June 30, 2022, we did not record any employee retention credit for approximately $1.7 million for each of the remaining quarters of 2021.credits.
Interest Expense
We incurred $0.5$0.4 million and $0.6$0.5 million of net interest expense for the three months ended June 30, 2022 and 2021, and 2020, respectively. The decrease in interest expense for the three months ended June 30, 2021 was primarily due to lower total debt outstanding.
Income Tax Expense (Benefit)
For the three months ended June 30, 20212022 and 2020,2021, our effective tax rate was approximately 108.7% and (6.0)% and 42.8%, respectively, based on the annual effective tax rate net of discrete federal and state taxes. The computation of the effective tax rate includes modifications from the statutory rate such as income tax credits, tax depletion deduction, carrybacks, and state apportionment changes, among other items. We
As of June 30, 2022, we have recorded a liability of $2.7 million for uncertain tax positions included in
SMART SAND, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)
deferred tax liabilities, long-term, net on our balance sheet, as of June 30, 2021, related to our depletion deduction methodology,methodology. As of June 30, 2022, we determined that it is more likely than not that we will not be able to fully realize the benefits of certain existing deductible temporary differences and have recorded a partial valuation allowance against the gross deferred tax assets, which is included in liabilities, long-term, net on our balance sheet, and a corresponding increase to the income tax expense on our condensed consolidated income statementsstatement of operations.
Net Loss
Net loss was $(0.1) million for the three months ended June 30, 2021.
Net (Loss) Income
Net2022 as compared to net loss wasof $(27.3) million for the three months ended June 30, 2021 as compared2021. The decrease in net loss is attributable to net incomean increase in total volumes sold and higher average sale prices of $4.6 million forour sand. Additionally, the three months ended June 30, 2020. The difference was primarilyalso due to non-cash bad debt expense recorded against the residual balance of accounts receivable that were previously the subject of litigation combined with lower average sale prices per ton of our sand and $14.0 million less shortfall revenue in the current period.
Six Months Ended June 30, 2021 Compared to Six Months Ended June 30, 2020
The following table summarizes our revenue and expenses for the periods indicated. | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, | | Change |
| 2021 | | 2020 | | Dollars | | Percentage |
| (in thousands) | | | | |
Revenues: | | | | | | | |
Sand sales revenue | 51,948 | | | 38,362 | | | 13,586 | | | 35 | % |
Shortfall revenue | 1,741 | | | 15,307 | | | (13,566) | | | (89) | % |
Logistics revenue | 3,400 | | | 19,925 | | | (16,525) | | | (83) | % |
Total revenue | 57,089 | | | 73,594 | | | (16,505) | | | (22) | % |
Cost of goods sold | 64,426 | | | 52,995 | | | 11,431 | | | 22 | % |
Gross profit | (7,337) | | | 20,599 | | | (27,936) | | | (136) | % |
Operating expenses: | | | | | | | |
Salaries, benefits and payroll taxes | 4,660 | | | 5,057 | | | (397) | | | (8) | % |
Depreciation and amortization | 1,138 | | | 914 | | | 224 | | | 25 | % |
Selling, general and administrative | 7,009 | | | 6,460 | | | 549 | | | 8 | % |
Bad debt expense | 19,592 | | | — | | | 19,592 | | | Not meaningful |
Change in the estimated fair value of contingent consideration | — | | | (1,020) | | | 1,020 | | | (100) | % |
| | | | | | | |
Total operating expenses | 32,399 | | | 11,411 | | | 20,988 | | | 184 | % |
Operating income | (39,736) | | | 9,188 | | | (48,924) | | | (532) | % |
Other income (expenses): | | | | | | | |
| | | | | | | |
Interest expense, net | (1,060) | | | (1,079) | | | 19 | | | (2) | % |
Other income | 3,665 | | | 82 | | | 3,583 | | | 4,370 | % |
Total other expenses, net | 2,605 | | | (997) | | | 3,602 | | | (361) | % |
(Loss) income before income tax (benefit) expense | (37,131) | | | 8,191 | | | (45,322) | | | (553) | % |
Income tax (benefit) expense | (5,952) | | | 3,635 | | | (9,587) | | | (264) | % |
Net (loss) income | $ | (31,179) | | | $ | 4,556 | | | $ | (35,735) | | | (784) | % |
Revenues
Revenues were $57.1 million for the sixthree months ended June 30, 2021, during which time we sold approximately 1,527,000 tons of sand. Revenues for the six months ended June 30, 2020 were $73.6 million, during which time we sold approximately 964,000 tons of sand. The key factors contributing to the decrease in revenues for the six months ended June 30, 2021 as compared to the six months ended June 30, 2020 were as follows:2021.
SMART SAND, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)
•
Six Months Ended June 30, 2022 Compared to Six Months Ended June 30, 2021
Sand salesThe following table summarizes our revenue increased from $38.4and expenses for the periods indicated. | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, | | Change |
| 2022 | | 2021 | | Dollars | | Percentage |
| (in thousands) | | | | |
Revenues: | | | | | | | |
Sand sales revenue | $ | 105,400 | | | $ | 51,948 | | | 53,452 | | | 103 | % |
Shortfall revenue | 1,915 | | | 1,741 | | | 174 | | | 10 | % |
Logistics revenue | 3,004 | | | 3,400 | | | (396) | | | (12) | % |
Total revenue | 110,319 | | | 57,089 | | | 53,230 | | | 93 | % |
Cost of goods sold | 103,329 | | | 64,426 | | | 38,903 | | | 60 | % |
Gross profit | 6,990 | | | (7,337) | | | 14,327 | | | (195) | % |
Operating expenses: | | | | | | | |
Salaries, benefits and payroll taxes | 6,617 | | | 4,660 | | | 1,957 | | | 42 | % |
Depreciation and amortization | 1,090 | | | 1,138 | | | (48) | | | (4) | % |
Selling, general and administrative | 7,843 | | | 7,009 | | | 834 | | | 12 | % |
Bad debt expense | 1 | | | 19,592 | | | (19,591) | | | (100) | % |
| | | | | | | |
Total operating expenses | 15,551 | | | 32,399 | | | (16,848) | | | (52) | % |
Operating income (loss) | (8,561) | | | (39,736) | | | 31,175 | | | (78) | % |
Other income (expenses): | | | | | | | |
| | | | | | | |
Interest expense, net | (833) | | | (1,060) | | | 227 | | | (21) | % |
Other income | 268 | | | 3,665 | | | (3,397) | | | (93) | % |
Total other income (expenses), net | (565) | | | 2,605 | | | (3,170) | | | (122) | % |
Loss before income tax benefit | (9,126) | | | (37,131) | | | 28,005 | | | (75) | % |
Income tax benefit | (3,113) | | | (5,952) | | | 2,839 | | | (48) | % |
Net loss | $ | (6,013) | | | $ | (31,179) | | | $ | 25,166 | | | (81) | % |
Revenues
Revenues were $110.3 million for the six months ended June 30, 20202022, during which time we sold approximately 2,048,000 tons of sand. Revenues for the six months ended June 30, 2021 were $57.1 million, during which time we sold approximately 1,527,000 tons of sand. The key factors contributing to the increase in revenues for the six months ended June 30, 2022 as compared to the six months ended June 30, 2021 were as follows:
•Sand sales revenue increased from $51.9 million for the six months ended June 30, 2021 to $105.4 million for the six months ended June 30, 2022 as a result of higheran increase in total volumes sold partially offset by lowerof approximately 34%. In addition to an increase in our volume, the 103% increase in our revenue is also attributable to higher average sale prices comparedof our sand. Sand prices have increased due to the prior period. The volumes sold during the second quarter of 2020 were negatively impacted by depressed oil pricesa shift in supply and demand, which we believe is driven by the oversupply caused by decreased demand due to the COVID-19 coronavirus pandemic.increased prices in oil and natural gas.
•We had $1.9 million contractual shortfall revenue for the six months ended June 30, 2022 compared to $1.7 million of contractual shortfall revenue for the six months ended June 30, 2021 compared to $15.3 million of contractual shortfall revenue for the six months ended June 30, 2020.2021. Our customer contracts dictate whether shortfall is earned quarterly or at the end of their respective contract year. We recognize revenue to the extent of the unfulfilled minimum contracted quantity at the shortfall price per ton as stated in the contract.
•Logistics revenue, which includes freight for certain mine gate sand sales, railcar usage, logistics services, and SmartSystems rentals, was approximately $3.4$3.0 million for the six months ended June 30, 20212022 compared to $19.9 $3.4
SMART SAND, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)
million for the six months ended June 30, 2020.2021. The decrease in logistics revenue was due to the shift offrom mine gate sales to more in-basin shipments,sales, which includesinclude transportation and any other handling services, rather than mine gate shipments.partially offset by higher utilization of our SmartSystems fleet.
Cost of Goods Sold
Cost of goods sold was $64.4$103.3 million and $53.0$64.4 million for the six months ended June 30, 20212022 and June 30, 2020,2021, respectively. The increase was primarily due to higher volumes sold and increased freight cost due to the shift of sales to more in-basin deliveries. During the second quarter of 2020, headcount reductions and other cost savings measures were implemented as a result of the onset of COVID-19. Headcount has increased in the first six monthscurrent period and the related increase in production costs and freight costs that accompany higher volumes. Additionally higher labor costs and utilities have also contributed to an increase in cost of 2021 to support increased sales activity, though the Company remains focused on other cost-saving measures.goods sold.
Gross Profit
Gross profit was $(7.3)$7.0 million and $20.6$(7.3) million for the six months ended June 30, 20212022 and June 30, 2020,2021, respectively. The declineimprovement in profitabilitythe gross profit for the six months ended June 30, 20212022 as compared to the six months ended June 30, 20202021 was primarily due to decreased shortfall revenuehigher sales volumes and lowerhigher average sales pricesale prices of our sand.
Operating Expensessand relative to the cost to produce and deliver products to our customers.
Operating expenses were $32.4$15.6 million and $11.4$32.4 million for the six months ended June 30, 20212022 and June 30, 2020,2021, respectively. WeFor the six months ended June 30, 2021, we recorded $19.6 million as non-cash bad debt expense of $19.6 million, which is the difference between the $54.6 million accounts receivable balance that was subject to litigation and the $35.0 million cash payment received under the Settlement Agreement. Salaries, benefits and payroll taxes were reducedincreased to $4.7 million for the three months ended June 30, 2021 as compared to $5.1$6.6 million for the six months ended June 30, 2020. Depreciation and amortization increased from $0.92022 as compared to $4.7 million for the six months ended June 30, 20202021, due primarily to accrued bonuses as management has reinstated a formal employee bonus plan based on company performance for 2022 and increased staffing to support our IPS business segment. Depreciation and amortization remained constant at $1.1 million for the six months ended June 30, 2022 and June 30, 2021. Selling, general and administrative expenses increased to $7.8 million for the six months ended June 30, 2022 compared to $7.0 million for the six months ended June 30, 2021, primarily as a resultdriven by higher travel costs post-COVID-19, increased royalty expense due to higher total volumes sold and development costs related to our Waynesburg terminal.
Interest Expense
We incurred $0.8 million and $1.1 million of the addition of the Illinois operating facilities acquired in September 2020. Selling, general and administrative expenses were $7.0 millionnet interest expense for the six months ended June 30, 2021 compared to $6.5 million for the six months ended June 30, 2020. The six months ended June 30, 2020 included a $1.0 million gain on contingent consideration.
Other Income
We qualified for federal government assistance through employee retention credit provisions of the Consolidated Appropriations Act of 2021. During the six months ended2022 and June 30, 2021, the Company recorded $3.4 million of employee retention credits. The calculation of the credit is based on employees continued employment and represents a portion of the wages paid to them. For income tax purposes, the credit will result in decreased expense related to the wages it offsets in the period received.respectively. We expect to continue to qualify for the employee retention credit for approximately $1.7 million for each of the remaining quarters of 2021.
Interest Expense
We incurred $1.1 million of netreduce debt levels and decrease interest expense for each of the six months ended June 30, 2021 and June 30, 2020, respectively.through scheduled amortizing payments.
SMART SAND, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)
Income Tax (Benefit) ExpenseBenefit
For the six months ended June 30, 20212022 and June 30, 2020,2021, our effective tax rate was approximately 16.0%34.1% and 44.4%16.0%, respectively, based on the annual effective tax rate net of discrete federal and state taxes. The computation of the effective tax rate includes modifications from the statutory rate such as income tax credits, tax depletion deduction, carrybacks, and state apportionment changes, among other items. We
As of June 30, 2022, we have recorded a liability of $2.7 million for uncertain tax positions included inon our balance sheet, related to our depletion deduction methodology. As of June 30, 2022, we determined that it is more likely than not that we will not be able to fully realize the benefits of certain existing deductible temporary differences and have recorded a partial valuation allowance against the gross deferred tax assets, which is included in liabilities, long-term, net on our balance sheet, as of June 30, 2021, related to our depletion deduction methodology, and a corresponding increase to the income tax expense on our condensed consolidated income statementsstatement of operations.
Net Loss
Net loss was $(6.0) million for the six months ended June 30, 2021.
Net (Loss) Income
Net2022 as compared to net loss wasof $(31.2) million for the six months ended June 30, 2021 as compared2021. The decrease in net loss is attributable to the net incomean increase in total volumes sold and higher average sale prices of $4.6 million for the six months ended June 30, 2020. The difference was primarily dueour sand in addition to non-cash bad debt expense recorded against the residual balance of accounts receivable that were previously the subject of litigation combined with lower average sale prices per ton of our sand and substantially lower shortfall revenue in the current period.June 30, 2021.
SMART SAND, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)
Non-GAAP Financial Measures
Contribution margin, EBITDA, Adjusted EBITDA and free cash flow are not financial measures presented in accordance with GAAP. We believe that the presentation of these non-GAAP financial measures will provide useful information to investors in assessing our financial condition and results of operations. Gross profit is the GAAP measure most directly comparable to contribution margin, net income is the GAAP measure most directly comparable to EBITDA and Adjusted EBITDA and net cash provided by operating activities is the GAAP measure most directly comparable to free cash flow. Our non-GAAP financial measures should not be considered as alternatives to the most directly comparable GAAP financial measures. Each of these non-GAAP financial measures has important limitations as analytical tools because they exclude some but not all items that affect the most directly comparable GAAP financial measures. You should not consider contribution margin, EBITDA, Adjusted EBITDA or free cash flow in isolation or as substitutes for an analysis of our results as reported under GAAP. Because contribution margin, EBITDA, Adjusted EBITDA and free cash flow may be defined differently by other companies in our industry, our definitions of these non-GAAP financial measures may not be comparable to similarly titled measures of other companies, thereby diminishing their utility.
Contribution Margin
We use contribution margin, which we define as total revenues less costscost of goods sold excluding depreciation, depletion and accretion of asset retirement obligations, to measure our financial and operating performance. Contribution margin excludes other operating expenses and income, including costs not directly associated with the operations of our business such as accounting, human resources, information technology, legal, sales and other administrative activities.
We believe that reporting contribution margin and contribution margin per ton sold provides useful performance metrics to management and external users of our financial statements, such as investors and commercial banks, because these metrics provide an operating and financial measure of our ability, as a combined business, to generate margin in excess of our operating cost base.
Gross profit is the GAAP measure most directly comparable to contribution margin. Contribution margin should not be considered an alternative to gross profit presented in accordance with GAAP. Since contribution margin may be defined differently by other companies in our industry, our definition of contribution margin may not be comparable to similarly titled measures of other companies, thereby diminishing its utility. The following table presents a reconciliation of contribution margin to gross profit. | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| (in thousands, except per ton amounts) |
Revenue | $ | 68,714 | | | $ | 29,639 | | | $ | 110,319 | | | $ | 57,089 | |
Cost of goods sold | 59,743 | | | 31,999 | | | 103,329 | | | 64,426 | |
Gross profit | 8,971 | | | (2,360) | | | 6,990 | | | (7,337) | |
Depreciation, depletion, and accretion of asset retirement obligations | 6,283 | | | 5,851 | | | 12,514 | | | 11,864 | |
Contribution margin | $ | 15,254 | | | $ | 3,491 | | | $ | 19,504 | | | $ | 4,527 | |
Contribution margin per ton | $ | 12.75 | | | $ | 4.55 | | | $ | 9.52 | | | $ | 2.96 | |
Total tons sold | 1,196 | | | 767 | | | 2,048 | | | 1,527 | |
Contribution margin was $15.3 million and $3.5 million, or $12.75 and $4.55 per ton sold, for the three months ended June 30, 2022 and 2021, respectively. For the six months ended contribution margin was $19.5 million and $4.5 million, or $9.52 and $2.96 per ton sold, for the six months ended June 30, 2022 and 2021, respectively. The increase in overall contribution margin and contribution margin per ton was due primarily higher sales volumes and higher average sale prices relative to the cost to produce and deliver products to our customers.
SMART SAND, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)
margin to gross profit. | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
| (in thousands, except per ton amounts) |
Revenue | $ | 29,639 | | | $ | 26,106 | | | $ | 57,089 | | | $ | 73,594 | |
Cost of goods sold | 31,999 | | | 11,906 | | | 64,426 | | | 52,995 | |
Gross profit | (2,360) | | | 14,200 | | | (7,337) | | | 20,599 | |
Depreciation, depletion, and accretion of asset retirement obligations | 5,851 | | | 5,065 | | | 11,864 | | | 10,174 | |
Contribution margin | $ | 3,491 | | | $ | 19,265 | | | $ | 4,527 | | | $ | 30,773 | |
Contribution margin per ton | $ | 4.55 | | | $ | 92.62 | | | $ | 2.96 | | | $ | 31.92 | |
Total tons sold | 767 | | | 208 | | | 1,527 | | | 964 | |
Contribution margin was $3.5 million and $19.3 million, or $4.55 and $92.62 per ton sold, for the three months ended June 30, 2021 and 2020, respectively. The decrease in contribution margin and contribution margin per ton was due primarily to $14.0 million higher shortfall revenue in the prior period and lower average sale prices of our sand recognized in the current period.
Contribution margin was $4.5 million and $30.8 million, or $2.96 and $31.92 per ton sold, for the six months ended June 30, 2021 and 2020, respectively. The decrease in overall contribution margin and contribution margin per ton was due primarily to $13.6 million higher shortfall revenue in the prior period and lower average sale prices of our sand recognized in the current period.
EBITDA and Adjusted EBITDA
We define EBITDA as net income, plus: (i) depreciation, depletion and amortization expense; (ii) income tax expense (benefit); (iii) interest expense; and (iv) franchise taxes. We define Adjusted EBITDA as EBITDA, plus: (i) gain or loss on sale of fixed assets or discontinued operations; (ii) integration and transition costs associated with specified transactions; (iii) equity compensation; (iv) acquisition and development costs; (v) non-recurring cash charges related to restructuring, retention and other similar actions; (vi) earn-out, contingent consideration obligations and other acquisition and development costs; and (vii) non-cash charges and unusual or non-recurring charges. Adjusted EBITDA is used as a supplemental financial measure by management and by external users of our financial statements, such as investors and commercial banks, to assess:
•the financial performance of our assets without regard to the impact of financing methods, capital structure or historical cost basis of our assets;
•the viability of capital expenditure projects and the overall rates of return on alternative investment opportunities;opportunities;
•our ability to incur and service debt and fund capital expenditures;expenditures;
•our operating performance as compared to those of other companies in our industry without regard to the impact of financing methods or capital structure; and
•our debt covenant compliance, as Adjusted EBITDA is a key component of critical covenants to the ABL Credit Facility.
SMART SAND, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)
We believe that our presentation of EBITDA and Adjusted EBITDA will provide useful information to investors in assessing our financial condition and results of operations. Net income is the GAAP measure most directly comparable to EBITDA and Adjusted EBITDA. EBITDA and Adjusted EBITDA should not be considered alternatives to net income presented in accordance with GAAP. Because EBITDA and Adjusted EBITDA may be defined differently by other companies in our industry, our definitions of EBITDA and Adjusted EBITDA may not be comparable to similarly titled measures of other companies, thereby diminishing their utility. The following table presents a reconciliation of EBITDA and Adjusted EBITDA to net incomeloss for each of the periods indicated. | | | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2021 | | 2020 | | 2021 | | 2020 | | 2022 | | 2021 | | 2022 | | 2021 |
| | (in thousands) | | (in thousands) |
Net (loss) income | $ | (27,267) | | | $ | 4,640 | | | $ | (31,179) | | | $ | 4,556 | | |
Net loss | | Net loss | $ | (90) | | | $ | (27,267) | | | $ | (6,013) | | | $ | (31,179) | |
Depreciation, depletion and amortization | Depreciation, depletion and amortization | 6,317 | | | 5,450 | | | 12,777 | | | 10,937 | | Depreciation, depletion and amortization | 6,658 | | | 6,317 | | | 13,225 | | | 12,777 | |
Income tax (benefit) expense | 1,552 | | | 3,470 | | | (5,952) | | | 3,635 | | |
Income tax expense (benefit) | | Income tax expense (benefit) | 1,127 | | | 1,552 | | | (3,113) | | | (5,952) | |
Interest expense | Interest expense | 515 | | | 619 | | | 1,070 | | | 1,099 | | Interest expense | 417 | | | 515 | | | 851 | | | 1,070 | |
Franchise taxes | Franchise taxes | 97 | | | 94 | | | 195 | | | 150 | | Franchise taxes | 131 | | | 97 | | | 191 | | | 195 | |
EBITDA | EBITDA | $ | (18,786) | | | $ | 14,273 | | | $ | (23,089) | | | $ | 20,377 | | EBITDA | $ | 8,243 | | | $ | (18,786) | | | $ | 5,141 | | | $ | (23,089) | |
Loss on sale of fixed assets | (60) | | | 275 | | | (58) | | | 275 | | |
Gain on sale of fixed assets | | Gain on sale of fixed assets | (16) | | | (60) | | | (16) | | | (58) | |
Equity compensation (1) | Equity compensation (1) | 581 | | | 842 | | | 1,266 | | | 1,768 | | Equity compensation (1) | 636 | | | 581 | | | 1,311 | | | 1,266 | |
Employee retention credit (2) | (3,352) | | | — | | | (3,352) | | | — | | |
| Acquisition and development costs (3) | Acquisition and development costs (3) | (5) | | | 144 | | | 18 | | | (678) | | Acquisition and development costs (3) | — | | | (5) | | | 337 | | | 18 | |
| Cash charges related to restructuring and retention of employees | — | | | — | | | — | | | 82 | | |
Accretion of asset retirement obligations | Accretion of asset retirement obligations | 111 | | | 76 | | | 225 | | | 151 | | Accretion of asset retirement obligations | 190 | | | 111 | | | 379 | | | 225 | |
Adjusted EBITDA | Adjusted EBITDA | $ | (21,511) | | | $ | 15,610 | | | $ | (24,990) | | | $ | 21,975 | | Adjusted EBITDA | $ | 9,159 | | | $ | (21,511) | | | $ | 7,258 | | | $ | (24,990) | |
(1)Represents the non-cash expenses for stock-based awards issued to our employees and employee stock purchase plan compensation expense.
(2)Employee retention credit is part of the Consolidated Appropriations Act of 2021 and is recorded in other income on the income statementsAdjusted EBITDA was $9.2 million for the three and six months ended June 30, 2021.
(3)The three and six months ended June 30, 2021 includes acquisition and development costs of $(5) and $18. The three and six months ended June 30, 2020 includes $0 and $1,020 fair value adjustment of contingent consideration.
____________________
Adjusted EBITDA was2022 compared to $(21.5) million for the three months ended June 30, 2021 compared to $15.62021. Adjusted EBITDA was $7.3 million for the threesix months ended June 30, 2020. The decrease in Adjusted EBITDA for the three months ended June 30, 2021, as2022 compared to the corresponding period in the prior year, was primarily due to non-cash bad debt expense of $19.6 million in the current period related to collecting less than the amount recorded as a receivable from the settlement of litigation, $14.0 million less shortfall revenue in the current period and lower average sale prices of our sand recognized despite having higher overall volumes in the current period.
Adjusted EBITDA was $(25.0) million for the six months ended June 30, 2021 compared to $22.0 million for the six months ended June 30, 2020.2021. The decreaseincrease in Adjusted EBITDA for the six months ended June 30, 2021, as compared to the corresponding period in the prior year, was primarily due to $19.6 million of non-cash bad debt expense in the current period related to collecting less than the amount recorded as a receivable from the settlement of litigation, $13.6 million less shortfall revenue in the current periodhigher sales volumes, and lowerhigher average sale prices of our sand recognized despite having higher overall volumes inrelative to the current period.cost to produce and deliver products to our customers.
SMART SAND, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)
Free Cash Flow
Free cash flow, which we define as net cash provided by operating activities less purchases of property, plant and equipment, is used as a supplemental financial measure by our management and by external users of our financial statements, such as investors and commercial banks, to measure the liquidity of our business.
SMART SAND, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)
Net cash provided by operating activities is the GAAP measure most directly comparable to free cash flows. Free cash flows should not be considered an alternative to net cash provided by operating activities presented in accordance with GAAP. Because free cash flows may be defined differently by other companies in our industry, our definition of free cash flows may not be comparable to similarly titled measures of other companies, thereby diminishing its utility. The following table presents a reconciliation of free cash flows to net cash provided by operating activities, thereby diminishing its utility. The following table presents a reconciliation of contribution margin to gross profit.activities. | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
| (in thousands, except per ton amounts) |
Net cash provided by operating activities | $ | 32,566 | | | $ | 13,781 | | | $ | 36,480 | | | $ | 25,842 | |
Purchases of property, plant and equipment | (2,830) | | | (2,238) | | | (5,043) | | | (6,423) | |
Free cash flow | $ | 29,736 | | | $ | 11,543 | | | $ | 31,437 | | | $ | 19,419 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| (in thousands, except per ton amounts) |
Net cash (used in) provided by operating activities | $ | (2,287) | | | $ | 32,566 | | | $ | (10,949) | | | $ | 36,480 | |
Acquisition of Blair facility | — | | | — | | | (6,547) | | | — | |
Purchases of property, plant and equipment | (1,369) | | | (2,830) | | | (5,137) | | | (5,043) | |
Free cash flow | $ | (3,656) | | | $ | 29,736 | | | $ | (22,633) | | | $ | 31,437 | |
Free cash flow was $(3.7) million for the three months ended June 30, 2022 compared to $29.7 million for the three months ended June 30, 2021 compared to $11.52021.
Free cash flow was $(22.6) million for the threesix months ended June 30, 2020. The increase in free cash flow was primarily attributable to cash collections from customers, including the $35.0 million cash payment received under the Settlement Agreement, offset by lower average sale prices of our sand recognized in the three months ended June 30, 20212022 compared to the three months ended June 30, 2020.
Free cash flow was $31.4 million for the six months ended June 30, 2021 compared to $19.4 million for the six months ended June 30, 2020.2021. The increasedecrease in free cash flow was primarily attributable to cash collections from customers, including the $35.0purchase of Blair for $6.5 million, cash payment received under the Settlement Agreement, offset by lower average sale pricesincrease in accounts receivable, repayment of our sand recognizedtax refund IRS mistakenly provided in prior period of $2.3 million, and increase in unbilled receivables in the six months ended June 30, 20212022 compared to the six months ended June 30, 2020. Capital expenditures for2021. We expect that the six months ended June 30, 2021, compared toinvestments made in the samecurrent period will be cash-generating assets in 2020, were lower as we continue to focus on maintaining positive cash flow.
the future.
Liquidity and Capital Resources
Our primary sources of liquidity are cash flow generated from operations and availability under our ABL Credit Facility and other equipment financing sources. As of June 30, 2021,2022, cash on hand was $39.3$2.1 million and we had $12.9$16.0 million in undrawn availability on our ABL Credit Facility and $5.0 million in undrawn availability on the Acquisition Liquidity Support Facility.
Based on our balance sheet, cash flows, current market conditions, and information available to us at this time, we believe that we have sufficient liquidity and other available capital resources, to meet our cash needs for the next twelve months, including continued investment in our SmartSystems wellsite proppant storage solutions and other capital projects.
SMART SAND, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)
Working Capital
Working capital is a measure of our ability to pay our liabilities as they become due. The following table presents the components of our working capital as of June 30, 2021 compared to December 31, 2020. | | | | | | | | | | | |
| June 30, 2021 | | December 31, 2020 |
| (in thousands) |
Total current assets | $ | 81,666 | | | $ | 112,086 | |
Total current liabilities | 34,585 | | | 37,263 | |
Working capital | $ | 47,081 | | | $ | 74,823 | |
Our working capital was $47.1 million at June 30, 2021 compared to $74.8 million at December 31, 2020. The decrease in working capital was primarily due to the removal of $19.6 million of accounts receivable to non-cash bad debt expense, related to collecting less than the amount recorded as a receivable from the settlement of litigation, reduced inventory levels related to the increased sales volume activity in the quarter and a decline in profitability as frac sand prices continue to be depressed as a result of oversupply. As of December 31, 2020, $54.6 million of accounts receivable was attributable to U.S. Well and subject to ongoing litigation. The Company settled the litigation for a $35.0 million cash payment, which was collected during the second quarter of 2021.months.
SummaryMaterial Cash Flows for the Six Months Ended June 30, 2021 and June 30, 2020: | | | | | | | | | | | |
| Six Months Ended June 30, |
| 2021 | | 2020 |
| (in thousands) |
Net cash provided by operating activities | $ | 36,480 | | | $ | 25,842 | |
Net cash used in investing activities | $ | (5,041) | | | $ | (6,423) | |
Net cash (used in) provided by financing activities | $ | (3,886) | | | $ | (5,415) | |
Net Cash Provided by Operating Activities
Net cash provided by operating activities was $36.5 million for the six months ended June 30, 2021, which included net loss of $(31.2) million, net non-cash items of $28.1 million, the $35.0 million cash payment received under the Settlement Agreement, and a decrease of $4.6 million in other operating assets and liabilities.
Net cash provided by operating activities was $25.8 million for the six months ended June 30, 2020, which included net loss of $4.6 million, non-cash expenses of $13.5 million, and $7.8 million in changes in operating assets and liabilities.
Net Cash Used in Investing Activities
Net cash used in investing activities was $5.0 million for the six months ended June 30, 2021, which was primarily for manufacturing of our SmartSystems equipment.
Net cash used in investing activities was $6.4 million for the six months ended June 30, 2020, which was primarily for manufacturing of our SmartSystems equipment.
Net Cash (Used in) Provided By Financing Activities
Net cash used in financing activities was $3.9 million for the six months ended June 30, 2021, which consisted primarily of $3.4 million of net repayment for notes payable and finance leases, $0.3 million of share repurchases, and $0.2 million of payments of contingent consideration related to the manufacture of our SmartSystems equipment.
SMART SAND, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)
Net cash used in financing activities was $5.4 million for the six months ended June 30, 2020, which consisted primarily of $2.5 million of net repayments on our ABL Credit Facility, $1.6 million of net repayment for notes payable and finance leases, $1.0 million of share repurchases, and $0.3 million of payments of contingent consideration related to the manufacture of our SmartSystems equipment.
Indebtedness
The follow summarizes the maturity of our debt: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| ABL Credit Facility | | Oakdale Equipment Financing | | Notes Payable | | Finance Leases | | Total |
| (in thousands) |
Remainder of 2021 | $ | — | | | $ | 2,319 | | | $ | 1,888 | | | $ | 75 | | | $ | 4,282 | |
2022 | — | | | 4,638 | | | 3,551 | | | 137 | | | $ | 8,326 | |
2023 | — | | | 4,638 | | | 2,405 | | | 245 | | | $ | 7,288 | |
2024 | — | | | 6,888 | | | 807 | | | — | | | $ | 7,695 | |
2025 | — | | | 1,724 | | | 187 | | | — | | | $ | 1,911 | |
2026 and thereafter | — | | | — | | | 355 | | | — | | | 355 | |
Total minimum payments | — | | | 20,207 | | | 9,193 | | | 457 | | | 29,857 | |
ABL Credit Facility
In December 2019, we entered into a $20.0 million five-year senior secured asset-based credit facility with Jefferies Finance LLC. The available borrowing amount under the ABL Credit Facility as of June 30, 2021 was $14.1 million and is based on our eligible accounts receivable and inventory. As of June 30, 2021, the Company was in compliance with all covenants under the ABL Credit Facility and there were no amounts outstanding under the ABL Credit Facility, $1.2 million letters of credit and $12.9 million was available to be drawn. There were no borrowings during the three and six months ended June 30, 2021.
Oakdale Equipment Financing
In December 2019, we entered into a $23.0 million equipment financing arrangement with Nexseer, secured by substantially all of the assets at our Oakdale facility. The Oakdale Equipment Financing amortizes over 5 years and bears interest at 5.79%.
Notes Payable
We have entered into various financing arrangements secured primarily by our manufactured SmartSystems equipment. Title to the equipment is held by the financial institutions as collateral, though the equipment is included in the Company’s property plant and equipment. In June 2020, we executed a note payable to defer certain near-term minimum royalty payments. All notes payable bear interest at rates between 4.00% and 7.49%.
Acquisition Liquidity Support Facility
In connection our acquisition of Eagle Proppants Holdings, the Company, as borrower, also entered into a Loan Agreement with Eagle, as lender, secured by certain property rights and assets of the acquired business, whereby the Company may draw loans in an aggregate amount up to $5.0 million during the twelve month period ending September 18, 2021. There have been no borrowings on this facility.
SMART SAND, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)
Requirements
Capital Requirements
We expect full year 20212022 capital expenditures to be between $10$20.0 million and $12$25.0 million, which we anticipate will primarily support incremental growth in our SmartSystems productsefficiency projects at Oakdale and services and maintenance and efficiency improvements at our mining facilities. These expenditures exclude any potential acquisitions.Utica, capital related to the Waynesburg terminal. We expect to fund these capital expenditures with cash from operations, equipment financing options available to us or borrowings under the ABL Credit Facility or Acquisition Liquidity Support Facility.other financing sources, such as equipment finance providers. For the six months ended June 30, 2021,2022, we spent approximately $5.0$5.1 million on capital expenditures.
SMART SAND, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)
Indebtedness
We have several debt facilities, including the Oakdale Equipment Financing, various notes payable and our ABL Credit Facility. Our Oakdale Equipment Financing is secured by substantially all of the assets at our Oakdale facility. The balance on this facility as of June 30, 2022 was $13.6 million. Minimum cash payments on this facility for the remainder of 2022 are anticipated to be $2.3 million. Our various notes payable are primarily secured by our manufactured SmartSystems equipment. Total debt under these notes payable as of June 30, 2022 was $4.7 million. Minimum cash payments on these notes payable for the remainder of 2022 are anticipated to be $1.6 million. There was $3.0 million outstanding on our ABL Credit Facility as of June 30, 2022.
Operating Leases
We use leases primarily to procure certain office space, railcars and heavy equipment as part of its operations. The majority of our lease payments are fixed and determinable. Our operating lease liabilities as of June 30, 2022 were $33.2 million. Minimum cash payments on operating leases for the remainder of 2022 are anticipated to be $5.9 million.
Mineral Rights Property
The Company is obligated under certain contracts for minimum payments for the right to use land for extractive activities. The annual minimum payments under these contracts are approximately $2.5 million per year in the aggregate for the next 15 years.
Off-Balance Sheet Arrangements
We had outstanding performance bonds of $9.5$17.7 million and $10.0$8.6 million at June 30, 20212022 and December 31, 2020,2021, respectively. The increase in performance bonds is due primarily to the acquisition of the Blair facility and the assumption of performance bonds related to its potential future reclamation obligations.
Contractual Obligations
As of June 30, 2021,2022, we had contractual obligations for the ABL Credit Facility, Oakdale Equipment Financing, notes payable, Acquisition Liquidity Support Facility, operating and finance leases, minimum payments for the rights to mine land, capital expenditures, asset retirement obligations, and other commitments to municipalities for maintenance.
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.
Seasonality
Our business is affected to some extent by seasonal fluctuations in weather that impact the production levels for a portion of our wet sand processing capacity. While our dry plants are able to process finished product volumes evenly throughout the year, our excavation and our wet sand processing activities have historically been limited to primarily non-winter months. As a consequence, we have experienced lower cash operating costs in the first and fourth quarter of each calendar year, and higher cash operating costs in the second and third quarter of each calendar year when we overproduced to meet demand in the winter months. These higher cash operating costs were capitalized into inventory and expensed when these tons are sold, which can lead to us having higher overall cost of production in the first and fourth quarters of each calendar year as we expense inventory costs that were previously capitalized. We have indoor wet processing facilities at each of our plant locations, which allow us to produce wet sand inventory year-round to support a portion of our dry sand processing capacity, which may reduce certain of the effects of this seasonality. We may also sell frac sand for use in oil and natural gas producing basins where severe weather
SMART SAND, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)
conditions may curtail drilling activities and, as a result, our sales volumes to those areas may be reduced during such severe weather periods.
Customer Concentration
For the six months ended June 30, 2022, revenue from EQT Production Corporation, Halliburton Energy Services, and Encino Energy accounted for 28.3%, 18.7%, and 10.1%, respectively, of total revenue. For the six months ended June 30, 2021, revenue from Rice Energy (a subsidiarypredecessor of EQT Production Corporation), Halliburton Energy Services, and Enerplus accounted for 30.9%, 21.8%, and 13.0%, respectively, of total revenue. For the six months ended June 30, 2020, sales to Rice Energy (a subsidiary of EQT Corporation), U.S. Well Services, Liberty, and Calfrac accounted for 26.6%, 23.3%, 18.2%, and 11.8%, respectively, of total revenue.
SMART SAND, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)
Critical Accounting Policies and Estimates
There have been no material changes in our critical accounting policies and procedures during the six months ended June 30, 2021.2022.
Use of Estimates
The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Significant estimates used in the preparation of these financial statements include, but are not limited to: existing sand reserves and their impact on calculating the depletion expense under the units-of-production method; depreciation and amortization associated with property, plant and equipment and definite-lived intangible assets; impairment considerations of assets, (including impairment of identifiedincluding intangible assets, fixed assets, and other long-lived assets);inventory; estimated cost of future asset retirement obligations; fair values of acquired assets and assumed liabilities; stock-based compensation; recoverability of deferred tax assets; inventory reserve; and the collectability of receivables; and certain liabilities.
Actual results could differ from management’s best estimates as additional information or actual results become available in the future, and those differences could be material. The decreases in demand related to COVID-19 pandemic in 2020 and 2021 and the ongoing conflict in Ukraine have caused adramatic swings in oil and natural gas prices and significant amount of volatility in the oilfield servicesservice sector during 2020 and frac sand prices in particular have remained depressed, despite recent increases in oil prices.since. We continue to actively monitor the global impact of current events, but we are currently unable to estimate the impact of these events on our future financial position and results of operations or give any assurances that these events will not have a material adverse effect on our financial position or results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
The majority of our debt is financed under fixed interest rates. Borrowings under the ABL Credit Facility bear interest at a rate per annum equal to an applicable margin, plus, at our option, either a LIBOR rate or an alternate base rate (“ABR”). The applicable margin is 2.00% for LIBOR loans and 1.00% for ABR loans. The balance on our ABL Credit Facility as of June 30, 2022 was $3.0 million. We do not believe this represents a material interest rate risk.
We have considered other changes in our exposure to market risks during the six months ended June 30, 20212022 and have determined that there have been no additional material changes to our exposure to market risks from those described in our Annual Report on Form 10-K for the year ended December 31, 2020,2021, filed with the SEC on March 3, 2021.8, 2022.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Report. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of such date, our disclosure controls and procedures were effective.
Changes in Internal Control Over Financial Reporting
There have been no changes in internal control over financial reporting for the quarter ended June 30, 20212022 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
From time to time we may be involved in litigation relating to claims arising out of our operations in the normal course of business. The disclosure called for by Part II, Item 1 regarding our legal proceedings is incorporated by reference herein from Part I, Item 1. Note 15 - Commitments and Contingencies - Litigation of the notes to the condensed consolidated financial statements in this Form 10-Q for the three and six months ended June 30, 2021.2022.
ITEM 1A. RISK FACTORS
There have been no material changes to the risk factors described in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2020.2021.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the three monthsquarter ended June 30, 2021,2022, no shares were sold by the Company without registration under the Securities Act of 1933, as amended.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
We are committed to maintaining a culture that prioritizes mine safety. We believe that our commitment to safety, the environment and the communities in which we operate is critical to the success of our business. Our sand mining operations are subject to mining safety regulation. The U.S. Mining Safety and Health Administration (“MSHA”) is the primary regulatory organization governing frac sand mining and processing. Accordingly, MSHA regulates quarries, surface mines, underground mines and the industrial mineral processing facilities associated with and located at quarries and mines. The mission of MSHA is to administer the provisions of the Federal Mine Safety and Health Act of 1977 and to enforce compliance with mandatory miner safety and health standards. As part of MSHA’s oversight, representatives perform at least two unannounced inspections annually for each above-ground facility.
We are also subject to regulations by the U.S. Occupational Safety and Health Administration, (“OSHA”) which has promulgated rules for workplace exposure to respirable silica for several other industries. Respirable silica is a known health hazard for workers exposed over long periods. MSHA is expected to adopt similar rules as part of its “Long Term Items” for rulemaking. Airborne respirable silica is associated with work areas at our site and is monitored closely through routine testing and MSHA inspection. If the workplace exposure limit is lowered significantly, we may be required to incur certain capital expenditures for equipment to reduce this exposure. We also adhere to NISA’s respiratory protection program, and ensures that workers are provided with fitted respirators and ongoing radiological monitoring.
Our operations are subject to the Federal Mine Safety and Health Act of 1977, as amended by the Mine Improvement and New Emergency Response Act of 2006, which imposes stringent health and safety standards on numerous aspects of mineral extraction and processing operations, including the training of personnel, operating procedures, operating equipment, and other matters. Our failure to comply with such standards, or changes in such standards or the interpretation or enforcement thereof, could have a material adverse effect on our business and financial condition or otherwise impose significant restrictions on our ability to conduct mineral extraction and processing operations. 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 has also increased in recent years. 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 (17 CFR 229.104) is included in Exhibit 95.1 to this Report.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS | | | | | | | | |
3.1 | | |
3.2 | | |
10.110.1* | | |
31.1* | | |
31.2* | | |
32.1*† | | |
32.2*† | | |
95.1* | | |
101.INS | | Extracted XBRL Instance Document - the instance document does not appear in the Interactive Data File as XBRL tags are embedded in the Inline XBRL document. |
101.SCH* | | XBRL Taxonomy Extension Schema |
101.CAL* | | XBRL Taxonomy Extension Calculation Linkbase |
101.DEF* | | XBRL Taxonomy Extension Definition Linkbase |
101.LAB* | | XBRL Taxonomy Extension Label Linkbase |
101.PRE* | | XBRL Taxonomy Extension Presentation Linkbase |
104* | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
| | | | | |
* | Filed Herewith. |
† | This certification is deemed not filed for purposes of section 18 of the Securities Exchange Act, of 1934, as amended (the “Exchange Act”), or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act. |
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this reportReport to be signed on its behalf by the undersigned, thereunto duly authorized. | | | | | | | | |
| Smart Sand, Inc. |
| | |
August 4, 20219, 2022 | By: | /s/ Charles E. Young |
| | Charles E. Young, Chief Executive Officer |
| | (Principal Executive Officer) |
| | | | | | | | |
| Smart Sand, Inc. |
| | |
August 4, 20219, 2022 | By: | /s/ Lee E. Beckelman |
| | Lee E. Beckelman, Chief Financial Officer |
| | (Principal Financial Officer) |