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 ~~September 30, 2021~~March 31, 2022


☐			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 ☒ý

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 ~~November 2, 2021: 45,265,601~~May 4, 2022: 44,504,848

TABLE OF CONTENTS


		PAGE
PART I	FINANCIAL INFORMATION

ITEM 1.	Financial Statements	3
	Condensed Consolidated Balance Sheets as of ~~September 30, 2021~~March 31, 2022 (Unaudited) and December 31, ~~2020~~2021	3
	Condensed Consolidated ~~Income~~ Statements of Operations for the Three ~~and Nine~~ Months Ended ~~September 30,~~March 31, 2022 and 2021 ~~and 2020~~ (Unaudited)	4
	Condensed Consolidated Statements of Comprehensive (Loss) Income for the Three ~~and Nine~~ Months Ended ~~September 30,~~March 31, 2022 and 2021 ~~and 2020~~ (Unaudited)	5
	Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Three ~~and Nine~~ Months Ended ~~September 30,~~March 31, 2022 and 2021 ~~and 2020~~ (Unaudited)	6
	Condensed Consolidated Statements of Cash Flows for the ~~Nine~~Three Months Ended ~~September 30,~~March 31, 2022 and 2021 ~~and 2020~~ (Unaudited)	8
	Notes to the Condensed Consolidated Financial Statements (Unaudited)	9
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2118
ITEM 3.	Quantitative and Qualitative Disclosures about Market Risk	3628
ITEM 4.	Controls and Procedures	3628

PART II	OTHER INFORMATION	3729

ITEM 1.	Legal Proceedings	3729
ITEM 1A.	Risk Factors	3729
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3729
ITEM 3.	Defaults upon Senior Securities	3729
ITEM 4.	Mine Safety Disclosures	3729
ITEM 5.	Other Information	3829
ITEM 6.	Exhibits	3930

SIGNATURES		4031

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, ~~(the~~as 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, ~~(the~~as 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”). This facility was terminated on September 20, 2021.

“Exchange Act”						The Securities Exchange Act of 1934, as amended.

“Securities Act”						The Securities Act of 1933, as amended.



“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


		September 30, 2021		December 31, 2020			March 31, 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	$	36,678	$	11,725	Cash and cash equivalents	$	4,698	$	25,588
Accounts receivable	Accounts receivable	15,589		69,720		Accounts receivable	26,661		17,481
Unbilled receivables	Unbilled receivables	986		127		Unbilled receivables	1,515		1,884
Inventory	Inventory	15,381		19,136		Inventory	13,583		15,024
Prepaid expenses and other current assets	Prepaid expenses and other current assets	14,032		11,378		Prepaid expenses and other current assets	9,668		13,886
Total current assets	Total current assets	82,666		112,086		Total current assets	56,125		73,863
Property, plant and equipment, net	Property, plant and equipment, net	263,119		274,676		Property, plant and equipment, net	273,312		262,465
Operating lease right-of-use assets	Operating lease right-of-use assets	29,478		32,099		Operating lease right-of-use assets	29,506		29,828
Intangible assets, net	Intangible assets, net	7,659		8,253		Intangible assets, net	7,263		7,461
Other assets	Other assets	446		563		Other assets	364		402
Total assets	Total assets	$	383,368	$	427,677	Total assets	$	366,570	$	374,019
Liabilities and Stockholders’ Equity	Liabilities and Stockholders’ Equity					Liabilities and Stockholders’ Equity
Current liabilities:	Current liabilities:					Current liabilities:
Accounts payable	Accounts payable	$	4,825	$	3,268	Accounts payable	$	7,534	$	8,479
Accrued expenses and other liabilities	Accrued expenses and other liabilities	11,244		13,142		Accrued expenses and other liabilities	12,599		14,073
Deferred revenue, current	Deferred revenue, current	9,234		6,875		Deferred revenue, current	11,470		9,842

Long-term debt, net, current	Long-term debt, net, current	7,281		6,901		Long-term debt, net, current	7,171		7,127
Operating lease liabilities, current	Operating lease liabilities, current	7,405		7,077		Operating lease liabilities, current	9,426		9,029
Total current liabilities	Total current liabilities	39,989		37,263		Total current liabilities	48,200		48,550
Deferred revenue, net	Deferred revenue, net	7,215		3,482		Deferred revenue, net	3,627		6,428
Long-term debt, net	Long-term debt, net	16,974		22,445		Long-term debt, net	13,258		15,353
Operating lease liabilities, long-term	Operating lease liabilities, long-term	24,733		27,020		Operating lease liabilities, long-term	22,576		23,690
Deferred tax liabilities, long-term, net	Deferred tax liabilities, long-term, net	25,438		32,981		Deferred tax liabilities, long-term, net	18,259		22,434
Asset retirement obligation	Asset retirement obligation	16,291		14,996		Asset retirement obligation	24,626		16,155
Contingent consideration		—		180

Other non-current liabilities	Other non-current liabilities	508		503		Other non-current liabilities	42		249
Total liabilities	Total liabilities	131,148		138,870		Total liabilities	130,588		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; 43,567,743 issued and 41,850,938 outstanding at September 30, 2021; 43,193,394 issued and 41,575,129 outstanding at December 31, 2020		42		42
Treasury stock, at cost, 1,716,805 and 1,618,265 shares at September 30, 2021 and December 31, 2020, respectively		(4,427)		(4,134)
Common stock, 0.001 par value, 350,000,000 shares authorized; 43,935,779 issued and 42,102,378 outstanding at March 31, 2022; 43,567,743 issued and 41,962,863 outstanding at December 31, 2021						Common stock, 0.001 par value, 350,000,000 shares authorized; 43,935,779 issued and 42,102,378 outstanding at March 31, 2022; 43,567,743 issued and 41,962,863 outstanding at December 31, 2021	42		42
Treasury stock, at cost, 1,833,401 and 1,777,001 shares at March 31, 2022 and December 31, 2021, respectively						Treasury stock, at cost, 1,833,401 and 1,777,001 shares at March 31, 2022 and December 31, 2021, respectively	(4,662)		(4,535)
Additional paid-in capital	Additional paid-in capital	173,426		171,209		Additional paid-in capital	175,342		174,486
Retained earnings	Retained earnings	82,826		121,267		Retained earnings	64,670		70,593
Accumulated other comprehensive income		353		423
Accumulated other comprehensive (loss) income						Accumulated other comprehensive (loss) income	590		574
Total stockholders’ equity	Total stockholders’ equity	252,220		288,807		Total stockholders’ equity	235,982		241,160
Total liabilities and stockholders’ equity	Total liabilities and stockholders’ equity	$	383,368	$	427,677	Total liabilities and stockholders’ equity	$	366,570	$	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 September 30,				Nine Months Ended September 30,					Three Months Ended March 31,
		2021		2020		2021		2020				2022		2021
		(in thousands, except per share amounts)										(in thousands, except per share amounts)
Revenues:	Revenues:									Revenues:
Sand sales revenue	Sand sales revenue	$	31,343	$	12,445	$	83,291	$	50,809	Sand sales revenue		$	38,289	$	23,147
Shortfall revenue	Shortfall revenue	2,680		6,842		4,421		22,148		Shortfall revenue		1,915		1,741
Logistics revenue	Logistics revenue	456		4,122		3,856		24,046		Logistics revenue		1,401		2,562
Total revenue	Total revenue	34,479		23,409		91,568		97,003		Total revenue		41,605		27,450
Cost of goods sold	Cost of goods sold	36,526		18,227		100,952		71,221		Cost of goods sold		43,586		32,427
Gross profit	Gross profit	(2,047)		5,182		(9,384)		25,782		Gross profit		(1,981)		(4,977)
Operating expenses:	Operating expenses:									Operating expenses:
Salaries, benefits and payroll taxes	Salaries, benefits and payroll taxes	2,490		2,058		7,150		7,115		Salaries, benefits and payroll taxes		3,392		2,375
Depreciation and amortization	Depreciation and amortization	352		440		1,490		1,354		Depreciation and amortization		527		561
Selling, general and administrative	Selling, general and administrative	3,867		3,933		10,876		10,393		Selling, general and administrative		4,048		3,154
Bad debt expense		—		—		19,592		—
Change in the estimated fair value of contingent consideration		—		—		—		(1,020)

Total operating expenses	Total operating expenses	6,709		6,431		39,108		17,842		Total operating expenses		7,967		6,090
Operating (loss) income		(8,756)		(1,249)		(48,492)		7,940
Operating loss										Operating loss		(9,948)		(11,067)
Other income (expenses):	Other income (expenses):									Other income (expenses):
Gain on bargain purchase		—		39,889		—		39,889

Interest expense, net	Interest expense, net	(467)		(497)		(1,527)		(1,576)		Interest expense, net		(427)		(547)
Other income	Other income	1,792		80		5,457		162		Other income		212		198
Total other (expenses) income, net		1,325		39,472		3,930		38,475
(Loss) income before income tax (benefit) expense		(7,431)		38,223		(44,562)		46,415
Income tax (benefit) expense		(169)		1,941		(6,121)		5,576
Net (loss) income		$	(7,262)	$	36,282	$	(38,441)	$	40,839
Net (loss) income per common share:
Total other expenses, net										Total other expenses, net		(215)		(349)
Loss before income tax benefit										Loss before income tax benefit		(10,163)		(11,416)
Income tax benefit										Income tax benefit		(4,240)		(7,504)
Net loss										Net loss		$	(5,923)	$	(3,912)
Net loss per common share:										Net loss per common share:
Basic	Basic	$	(0.17)	$	0.91	$	(0.92)	$	1.02	Basic		$	(0.14)	$	(0.09)
Diluted	Diluted	$	(0.17)	$	0.91	$	(0.92)	$	1.02	Diluted		$	(0.14)	$	(0.09)
Weighted-average number of common shares:	Weighted-average number of common shares:									Weighted-average number of common shares:
Basic	Basic	41,850		39,973		41,743		39,903		Basic		42,087		41,629
Diluted	Diluted	41,850		39,973		41,743		39,903		Diluted		42,087		41,629

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

SMART SAND, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(UNAUDITED)


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended March 31,
		2021		2020		2021		2020				2022		2021
		(in thousands)										(in thousands)
Net (loss) income		$	(7,262)	$	36,282	$	(38,441)	$	40,839
Net loss										Net loss		$	(5,923)	$	(3,912)
Other comprehensive income:	Other comprehensive income:									Other comprehensive income:
Foreign currency translation adjustment	Foreign currency translation adjustment	(239)		96		(70)		317		Foreign currency translation adjustment		16		125
Comprehensive (loss) income		$	(7,501)	$	36,378	$	(38,511)	$	41,156
Comprehensive loss										Comprehensive loss		$	(5,907)	$	(3,787)

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)

~~Nine~~Three months ended ~~September 30, 2021~~March 31, 2022


		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	41,962,863		$	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	Restricted stock buy back	(48,077)	—		48,077	(140)		—				—				—					(140)		Restricted stock buy back	(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
Foreign currency translation adjustment		—	—		—	—		—				—				44					44
Vesting of restricted stock		162,253	—		—	—		—				—				—					—
Stock-based compensation		—	—		—	—		574				—				—					574
Employee stock purchase plan compensation		—	—		—	—		7				—				—					7
Balance at March 31, 2022																							Balance at March 31, 2022	42,102,378		$	42	1,833,401		$	(4,662)		$	175,342		$	64,670		$	590		$	235,982

Restricted stock buy back		(48,793)	—		48,793	(148)		—				—				—					(148)
Net loss		—	—		—	—		—				(27,267)				—					(27,267)
Balance at June 30, 2021		41,832,789	$	42	1,715,135	$	(4,422)	$	172,512			$	90,088			$	592				$	258,812
Foreign currency translation adjustment		—	—		—	—		—				—				(239)					(239)
Vesting of restricted stock		4,875	—		—	—		—				—				—					—
Stock-based compensation		—	—		—	—		879				—				—					879
Employee stock purchase plan compensation		—	—		—	—		10				—				—					10
Employee stock purchase plan issuance		14,944	—		—	—		25				—				—					25
Restricted stock buy back		(1,670)	—		1,670	(5)		—				—				—					(5)
Net loss		—	—		—	—		—				(7,262)				—					(7,262)
Balance at September 30, 2021		41,850,938	$	42	1,716,805	$	(4,427)	$	173,426			$	82,826			$	353				$	252,220

SMART SAND, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (continued)

(UNAUDITED)

~~Nine~~Three months ended ~~September 30, 2020~~March 31, 2021


		Common Stock			Treasury Stock			Additional Paid-in Capital								Accumulated Other Comprehensive (Loss) 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, 2019		40,234,451	$	40	740,957	$	(2,979)			$	165,223			$	83,313			$	(41)					$	245,556
Foreign currency translation adjustment		—	—		—	—		—				—				(163)					(163)
Vesting of restricted stock		139,947	—		—	—		—				—				—					—
Stock-based compensation		—	—		—	—		1,025				—				—					1,025
Employee stock purchase plan compensation		—	—		—	—		14				—				—					14
Employee stock purchase plan issuance		21,486	—		—	—		46				—				—					46
Restricted stock buy back		(10,468)	—		10,468	(14)		—				—				—					(14)
Shares repurchased		(778,300)	—		778,300	(1,000)		—				—				—					(1,000)
Net loss		—	—		—	—		—				(84)				—					(84)
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
Employee stock purchase plan issuance		—	—		—	—		—				—				—					—
Restricted stock buy back		(30,673)	—		30,673	(31)		—				—				—					(31)
Net income		—	—		—	—		—				4,641				—					4,641
Balance at June 30, 2020		39,754,071	$	40	1,560,398	$	(4,024)	$	167,263			$	87,870			$	180				$	251,329
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	—	—		—	—		—				—				96					96		Foreign currency translation adjustment	—		—		—		—			—			—			125			125
Acquisition stock issuance	Acquisition stock issuance	1,503,759	2		—	—		2,059				—				—					2,061		Acquisition stock issuance	14,430		—		—		—			20			—			—			20
Vesting of restricted stock	Vesting of restricted stock	6,375	—		—	—		—				—				—					—		Vesting of restricted stock	158,364		—		—		—			—			—			—			—
Stock-based compensation	Stock-based compensation	—	—		—	—		941				—				—					941		Stock-based compensation	—		—		—		—			678			—			—			678
Employee stock purchase plan compensation	Employee stock purchase plan compensation	—	—		—	—		3				—				—					3		Employee stock purchase plan compensation	—		—		—		—			7			—			—			7
Employee stock purchase plan issuance	Employee stock purchase plan issuance	18,148	—		—	—		16				—				—					16		Employee stock purchase plan issuance	19,483		—		—		—			17			—			—			17
Restricted stock buy back	Restricted stock buy back	(770)	—		770	(1)		—				—				—					(1)		Restricted stock buy back	(48,077)		—		48,077		(140)			—			—			—			(140)
Net income		—	—		—	—		—				36,282				—					36,282
Balance at September 30, 2020		41,281,583	$	42	1,561,168	$	(4,025)	$	170,282			$	124,152			$	276				$	290,727

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

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

SMART SAND, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)


		Nine Months Ended September 30,					Three Months Ended March 31,
		2021		2020			2022		2021
		(in thousands)					(in thousands)
Operating activities:	Operating activities:					Operating activities:
Net (loss) income		$	(38,441)	$	40,839
Net loss						Net loss	$	(5,923)	$	(3,912)
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	18,937		16,092		Depreciation, depletion and accretion of asset retirement obligation	6,568		6,375
Amortization of intangible assets	Amortization of intangible assets	596		596		Amortization of intangible assets	199		198
Loss on disposal of assets	Loss on disposal of assets	223		299		Loss on disposal of assets	—		2
Provision for bad debt		19,592		—

Amortization of deferred financing cost	Amortization of deferred financing cost	79		79		Amortization of deferred financing cost	26		26
Accretion of debt discount	Accretion of debt discount	140		138		Accretion of debt discount	47		47
Deferred income taxes	Deferred income taxes	(7,543)		238		Deferred income taxes	(4,175)		(7,691)
Stock-based compensation, net	Stock-based compensation, net	2,131		2,909		Stock-based compensation, net	826		678
Employee stock purchase plan compensation	Employee stock purchase plan compensation	24		29		Employee stock purchase plan compensation	5		7
Change in contingent consideration fair value		—		(1,020)
Gain on bargain purchase, net of cash acquired		—		(39,580)

Changes in assets and liabilities:	Changes in assets and liabilities:					Changes in assets and liabilities:
Accounts receivable	Accounts receivable	34,791		(7,029)		Accounts receivable	(5,411)		3,062
Unbilled receivables	Unbilled receivables	(1,113)		(4,491)		Unbilled receivables	(3,399)		(88)
Inventory	Inventory	3,755		306		Inventory	1,441		1,590
Prepaid expenses and other assets	Prepaid expenses and other assets	(1,886)		3,751		Prepaid expenses and other assets	3,835		1,140
Deferred revenue	Deferred revenue	6,092		3,912		Deferred revenue	(1,173)		2,191
Accounts payable	Accounts payable	1,564		(205)		Accounts payable	(193)		1,332
Accrued and other expenses	Accrued and other expenses	(1,397)		(607)		Accrued and other expenses	(1,335)		(1,043)
Income taxes payable		—		5,968
Net cash provided by operating activities		37,544		22,224
Net cash (used in) provided by operating activities						Net cash (used in) provided by operating activities	(8,662)		3,914
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	(6,976)		(7,444)		Purchases of property, plant and equipment	(3,768)		(2,213)
Proceeds from disposal of assets	Proceeds from disposal of assets	78		51		Proceeds from disposal of assets	—		(2)
Net cash used in investing activities	Net cash used in investing activities	(6,898)		(7,393)		Net cash used in investing activities	(10,315)		(2,215)
Financing activities:	Financing activities:					Financing activities:
Proceeds from the issuance of notes payable		—		952
Repayments of notes payable	Repayments of notes payable	(5,168)		(3,527)		Repayments of notes payable	(1,776)		(1,672)
Payments under equipment financing obligations		(92)		(87)
Payment of deferred financing and debt issuance costs		—		(20)
Proceeds from revolving credit facility		—		6,000
Repayment of revolving credit facility		—		(8,500)
Payments under finance leases						Payments under finance leases	(35)		(31)

Payment of contingent consideration	Payment of contingent consideration	(180)		(310)		Payment of contingent consideration	—		(180)
Proceeds from equity issuance		42		62
Employee stock purchase plan issuance						Employee stock purchase plan issuance	25		17
Purchase of treasury stock	Purchase of treasury stock	(294)		(1,046)		Purchase of treasury stock	(127)		(141)
Net cash used in financing activities	Net cash used in financing activities	(5,692)		(6,476)		Net cash used in financing activities	(1,913)		(2,007)
Net increase in cash and cash equivalents		24,954		8,355
Net decrease in cash and cash equivalents						Net decrease in cash and cash equivalents	(20,890)		(308)
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	$	36,679	$	10,994	Cash and cash equivalents at end of period	$	4,698	$	11,417
Supplemental disclosure of cash flow information	Supplemental disclosure of cash flow information					Supplemental disclosure of cash flow information
Capitalized expenditures in accounts payable and accrued expenses	Capitalized expenditures in accounts payable and accrued expenses	$	267	$	157	Capitalized expenditures in accounts payable and accrued expenses	$	157	$	1,097
Issuance of acquisition common stock						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 sand supply and services company, offering complete mine to wellsite proppant supply, logistics and storage solutions. ~~The Company is engaged in~~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 and~~industry. 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 commenced mining operations at its Oakdale, Wisconsin facility in July 2012. Through multiple expansions at Oakdale, ~~and~~ the acquisition ~~in September 2020~~ of the Utica, Illinois facility in September 2020, and the recent acquisition in March 2022 of the Blair, Wisconsin mine and processing ~~facilities,~~facility, which is currently idled, the Company has current annual processing capacity of approximately ~~7.1~~10.0 million tons.

The Company ~~provides complete logistics solutions through its frac sand facilities with access~~acquired rights in 2018 to ~~three Class I rail lines and its in-basin~~operate a unit train capable transloading terminal in Van Hook, North Dakota to service the Bakken Formation in the Williston Basin. In 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.~~ Formations, which became operational in January 2022.

The Company ~~expects this terminal to become operational in the fourth quarter of 2021. These~~provides complete logistics solutions ~~enable~~through its frac sand facilities with direct access to four Class I rail lines, and has the ~~Company~~ability to ~~cost-effectively deliver products to its customers anywhere in~~access 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 ~~2020~~2021 Form 10-K, filed with the Securities 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 SEC 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, ~~2020~~2021 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.

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 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~~

~~SMART SAND, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(IN THOUSANDS, EXCEPT PER SHARE DATA)~~

~~(UNAUDITED)~~

~~identified~~including 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 ~~decreased~~decrease in demand related to the coronavirus (“COVID-19”) pandemic caused dramatic swings in oil prices and significant volatility in the oilfield service sector since March 2020. 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 three~~As of December 31, 2021 and ~~nine months ended September 30, 2021,~~March 31, 2022, the Company ~~recorded $1,674 and $5,026, respectively, of employee retention credits in other income on its consolidated income statements and~~had included $1,180 in prepaid expenses and other current assets on the consolidated balance ~~sheet as of September 30, 2021.~~sheet. 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 Combination~~Acquisition

~~Eagle Proppants Holdings~~Asset Acquisition Blair Facility

On ~~September 18, 2020,~~March 4, 2022, the Company entered into ~~an Equity~~a Membership Interest Purchase ~~and Sale~~ Agreement (the “Purchase Agreement”) with ~~Eagle Materials~~Hi-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 subsidiary~~interest of ~~Eagle (“Eagle Proppants Holdings”),~~Blair from ~~Eagle~~HCR for aggregate ~~non-cash~~cash 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 stock~~adjustments 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.~~Agreement (the “Transaction”).

The primary assets of ~~Eagle Proppants Holdings and its subsidiaries include a~~Blair consist of an idle frac sand mine and related processing facility located in ~~Utica, Illinois and a transload~~Blair, Wisconsin. The Blair facility, ~~in nearby Peru, Illinois. The Utica facility has~~once operational, will have approximately ~~1.6~~2.9 million tons of total annual processing capacity and ~~has~~contains an onsite, unit train capable rail terminal with access to the ~~BNSF rail line through~~Class 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 property plant and equipment in the amount of $8,281.

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~~	$	~~2,060~~6,450
Net working capital ~~adjustment~~adjustments and capitalized costs	$		2097
Total purchase consideration	$	~~2,080~~6,547

~~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~~

~~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~~

~~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 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

SMART SAND, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(IN THOUSANDS, EXCEPT PER SHARE DATA)

(UNAUDITED)

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. The Company’s allocation of the purchase price was complete as of December 31, 2020.

NOTE 4 — Inventory

Inventory consisted of the following:


		September 30, 2021		December 31, 2020			March 31, 2022		December 31, 2021
Raw material	Raw material	$	176	$	428	Raw material	$	716	$	293
Work in progress	Work in progress	5,789		10,465		Work in progress	1,708		3,082
Finished goods	Finished goods	5,475		4,400		Finished goods	6,540		7,269
Spare parts	Spare parts	3,941		3,843		Spare parts	4,619		4,380
Total inventory	Total inventory	$	15,381	$	19,136	Total inventory	$	13,583	$	15,024

NOTE 5 — Property, Plant and Equipment, net

Net property, plant and equipment consisted of:


		September 30, 2021		December 31, 2020			March 31, 2022		December 31, 2021
Machinery, equipment and tooling	Machinery, equipment and tooling	$	30,456	$	29,002	Machinery, equipment and tooling	$	32,390	$	30,813
SmartSystems	SmartSystems	27,159		22,352		SmartSystems	27,544		27,343
Vehicles	Vehicles	3,014		2,893		Vehicles	3,173		3,066
Furniture and fixtures	Furniture and fixtures	1,326		1,302		Furniture and fixtures	1,329		1,325
Plant and building	Plant and building	199,958		199,867		Plant and building	200,099		199,958
Real estate properties	Real estate properties	6,496		6,458		Real estate properties	6,496		6,496
Railroad and sidings	Railroad and sidings	27,703		27,703		Railroad and sidings	33,591		27,703
Land and land improvements	Land and land improvements	33,155		33,040		Land and land improvements	40,152		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	2,455		2,123		Deferred mining costs	2,455		2,455
Construction in progress	Construction in progress	6,894		7,489		Construction in progress	6,043		9,574
		366,788		359,664			389,532		372,363
Less: accumulated depreciation and depletion	Less: accumulated depreciation and depletion	103,669		84,988		Less: accumulated depreciation and depletion	116,220		109,898
Total property, plant and equipment, net	Total property, plant and equipment, net	$	263,119	$	274,676	Total property, plant and equipment, net	$	273,312	$	262,465

Depreciation expense was ~~$6,111~~$6,362 and ~~$5,328~~$6,177 for the three months ended ~~September 30,~~March 31, 2022 and 2021, ~~and 2020, respectively, and $18,325 and $15,856 for the nine months ended September 30, 2021 and 2020,~~ respectively.

1211

SMART SAND, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(IN THOUSANDS, EXCEPT PER SHARE DATA)

(UNAUDITED)

NOTE 6 — Accrued and Other Expenses

Accrued and other expenses were comprised of the following:


		September 30, 2021		December 31, 2020			March 31, 2022		December 31, 2021
Employee related expenses	Employee related expenses	$	1,168	$	1,048	Employee related expenses	$	2,020	$	806

Accrued equipment		—		55
Accrued equipment expense						Accrued equipment expense	29		58
Accrued professional fees	Accrued professional fees	980		1,129		Accrued professional fees	441		691
Accrued royalties	Accrued royalties	2,380		2,624		Accrued royalties	2,875		2,701
Accrued freight and delivery charges	Accrued freight and delivery charges	1,770		2,901		Accrued freight and delivery charges	2,098		2,164
Accrued real estate tax	Accrued real estate tax	2,046		1,637		Accrued real estate tax	1,486		1,010
Accrued utilities	Accrued utilities	862		748		Accrued utilities	1,927		1,264
Sales tax liability	Sales tax liability	723		1,386		Sales tax liability	877		665
Income tax payable						Income tax payable	—		2,332
Other accrued liabilities	Other accrued liabilities	1,315		1,614		Other accrued liabilities	846		2,382
Total accrued liabilities	Total accrued liabilities	$	11,244	$	13,142	Total accrued liabilities	$	12,599	$	14,073

NOTE 7 — Debt

The current portion of long-term debt consists of the following:


		September 30, 2021		December 31, 2020			March 31, 2022		December 31, 2021
Oakdale Equipment Financing	Oakdale Equipment Financing	$	3,760	$	3,600	Oakdale Equipment Financing	$	3,870	$	3,814
Finance leases	Finance leases	120		123		Finance leases	114		117
Notes Payable	Notes Payable	3,401		3,178		Notes Payable	3,187		3,196
Long-term debt, net, current	Long-term debt, net, current	$	7,281	$	6,901	Long-term debt, net, current	$	7,171	$	7,127

Long-term debt, net of current portion consists of the following:


		September 30, 2021		December 31, 2020			March 31, 2022		December 31, 2021
ABL Credit Facility	ABL Credit Facility	$	—	$	—	ABL Credit Facility	$	—	$	—
Oakdale Equipment Financing, net	Oakdale Equipment Financing, net	12,536		15,236		Oakdale Equipment Financing, net	10,665		11,608

Finance Leases	Finance Leases	263		351		Finance Leases	205		234
Notes Payable	Notes Payable	4,175		6,858		Notes Payable	2,388		3,511
Long-term debt, net	Long-term debt, net	$	16,974	$	22,445	Long-term debt, net	$	13,258	$	15,353

1312

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		$	—	$	1,160	$	1,056	$	38	$	2,254
2022		—		4,638		3,387		137		8,162
Remainder of 2022												Remainder of 2022	$	—	$	3,479	$	2,525	$	98	$	6,102
2023	2023	—		4,638		2,371		245		7,254		2023	—		4,639		2,073		245		6,957
2024	2024	—		6,888		807		—		7,695		2024	—		6,888		807		—		7,695
2025	2025	—		1,724		187		—		1,911		2025	—		1,724		187		—		1,911
2026 and thereafter		—		—		355		—		355
2026												2026	—		—		181		—		181
2027 and thereafter												2027 and thereafter	—		—		175		—		175
Total minimum payments	Total minimum payments	—		19,048		8,163		420		27,631		Total minimum payments	—		16,730		5,948		343		23,021
Amount representing interest	Amount representing interest	—		(2,158)		(587)		(37)		(2,782)		Amount representing interest	—		(1,694)		(373)		(24)		(2,091)
Amount representing unamortized lender fees	Amount representing unamortized lender fees	—		(594)		0		—		(594)		Amount representing unamortized lender fees	—		(501)		0		—		(501)
Present value of payments	Present value of payments							383				Present value of payments							319
Less: current portion	Less: current portion	—		(3,760)		(3,401)		(120)		(7,281)		Less: current portion	—		(3,870)		(3,187)		(114)		(7,171)
Total long-term debt, net	Total long-term debt, net	$	—	$	12,536	$	4,175	$	263	$	16,974	Total long-term debt, net	$	—	$	10,665	$	2,388	$	205	$	13,258

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 ~~September 30, 2021~~March 31, 2022 was ~~$17,764~~$17,861 and is based on the Company’s eligible accounts receivable and inventory, as described in the ABL Credit Agreement. As of ~~September 30, 2021,~~March 31, 2022, there were 0 amounts outstanding under the ABL Credit Facility, ~~$1,232~~$1,000 letters of credit and ~~$16,532~~$16,861 was available to be drawn. As of ~~September 30, 2021~~March 31, 2022 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’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~~right-of-use assets and lease liabilities on the consolidated balance sheet were as follows:

SMART SAND, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(IN THOUSANDS, EXCEPT PER SHARE DATA)

(UNAUDITED)


	Balance Sheet Location	March 31, 2022		December 31, 2021
Right-of-use assets
Operating	Operating right-of-use assets	$	29,506	$	29,828
Financing	Property, plant and equipment, net	194		262
Total right-of use assets		$	29,700	$	30,090

Lease liabilities
Operating	Operating lease liabilities, current and long-term portions	$	32,002	$	32,719
Financing	Long-term debt, current and long-term portions	319		351
Total lease liabilities		$	32,321	$	33,070

Operating lease costs are recorded as a single expense on the statement of ~~Eagle Proppants Holdings,~~operations and allocated to the ~~Company,~~right-of-use assets and the related lease liabilities as ~~borrower, also entered into a Loan Agreement with Eagle,~~depreciation expense and interest expense, respectively. Lease cost recognized in the consolidated statement of operations for the three months ended March 31, 2022 and 2021 was as ~~lender, secured by certain property rights~~follows:


	Three Months Ended March 31,
		2022		2021
Finance lease cost
Amortization of right-of-use assets		$	35	$	35
Interest on lease liabilities		6		8
Operating lease cost		2,807		2,887
Short-term lease cost		324		—


Total lease cost		$	3,172	$	2,930

Other information related to the Company’s leasing activity for the three months ended March 31, 2022 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. This facility was terminated on September 20, 2021 ~~and there were no borrowings under this facility.~~is as follows:


	Three months ended March 31,
	2022			2021
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows used for finance leases	$	6		$	8
Operating cash flows used for operating leases	$	3,202		$	2,078
Financing cash flows used for finance leases	$	35		$	31


Right-of-use assets obtained in exchange for new operating lease liabilities	$	1,995		$	—


Weighted average remaining lease term - finance leases	1.4 years			2.4 years
Weighted average discount rate - finance leases	6.60		%	6.60		%
Weighted average remaining lease term - operating leases	3.4 years			3.7 years
Weighted average discount rate - operating leases	5.81		%	5.78		%

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 September 30, 2021 December 31, 2020
Right-of-use assets
   Operating Operating right-of-use assets $ 29,478 $ 32,099
   Financing Property, plant and equipment, net 262 373
Total right-of use assets $ 29,740 $ 32,472
Lease liabilities
   Operating Operating lease liabilities, current and long-term portions $ 32,138 $ 34,097
   Financing Long-term debt, current and long-term portions 383 474
Total lease liabilities $ 32,521 $ 34,571

Operating lease costs are recorded as a single expense on the income statement 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 for the three and nine months ended September 30, 2021 and 2020 was as follows:

Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020
Finance lease cost
Amortization of right-of-use assets $ 35 $ 35 $ 105 $ 104
Interest on lease liabilities 7 9 22 28
Operating lease cost 2,610 2,729 8,375 9,824
Short-term lease cost 86 4 120 238
Total lease cost $ 2,738 $ 2,777 $ 8,622 $ 10,194

~~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 nine months ended September 30, 2021 and 2020 is as follows:~~
Nine months ended September 30,
2021 2020
Cash paid for amounts included in the measurement of lease liabilities
   Operating cash flows used for finance leases $ 22 $ 28
   Operating cash flows used for operating leases $ 7,680 $ 9,158
   Financing cash flows used for finance leases $ 92 $ 85
Right-of-use assets obtained in exchange for new operating lease liabilities $ 4,401 $ 13,936
Weighted average remaining lease term - finance leases 1.9 years 2.9 years
Weighted average discount rate - finance leases 6.60 % 6.60 %
Weighted average remaining lease term - operating leases 3.8 years 3.7 years
Weighted average discount rate - operating leases 5.81 % 5.71 %

Maturities of the Company’s lease liabilities as of ~~September 30, 2021~~March 31, 2022 are as follows:


		Operating Leases		Finance Leases		Total			Operating Leases		Finance Leases		Total
Remainder of 2021		$	1,632	$	38	$	1,670
2022		9,857		137		9,994
Remainder of 2022								Remainder of 2022	$	7,789	$	98	$	7,887
2023	2023	9,098		245		9,343		2023	11,020		245		11,265
2024	2024	7,519		—		7,519		2024	8,448		—		8,448
2025	2025	3,773		—		3,773		2025	3,898		—		3,898
2026								2026	2,872		—		2,872
Thereafter	Thereafter	4,450		—		4,450		Thereafter	1,579		—		1,579
Total cash lease payments	Total cash lease payments	36,329		420		36,749		Total cash lease payments	35,606		343		35,949
Less: amounts representing interest	Less: amounts representing interest	(4,191)		(37)		(4,228)		Less: amounts representing interest	(3,604)		(24)		(3,628)
Total lease liabilities	Total lease liabilities	$	32,138	$	383	$	32,521	Total lease liabilities	$	32,002	$	319	$	32,321

NOTE 9 — Asset Retirement Obligation

The Company had a post-closure reclamation and site restoration obligation of ~~$16,291~~$24,626 as of ~~September 30, 2021.~~March 31, 2022. The following is a reconciliation of the total reclamation liability for asset retirement obligations.


Balance at December 31, ~~2020~~2021	$	~~14,996~~16,155
Additions and revisions of prior estimates	~~737~~8,281
Accretion expense	~~558~~190

Balance at ~~September 30, 2021~~March 31, 2022	$	~~16,291~~24,626

~~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 September 30,								Nine Months Ended September 30,									Three Months Ended March 31,
		2021				2020				2021				2020						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
Sand sales revenue	Sand sales revenue	$	31,343	91	%	$	12,445	53	%	$	83,291	91	%	$	50,809	52	%	Sand sales revenue			$	38,289	92	%	$	23,147	85	%
Shortfall revenue	Shortfall revenue	2,680		8	%	6,842		29	%	4,421		5	%	22,148		23	%	Shortfall revenue			1,915		5	%	1,741		6	%
Logistics revenue	Logistics revenue	456		1	%	4,122		18	%	3,856		4	%	24,046		25	%	Logistics revenue			1,401		3	%	2,562		9	%
Total revenue	Total revenue	$	34,479	100	%	$	23,409	100	%	$	91,568	100	%	$	97,003	100	%	Total revenue			$	41,605	100	%	$	27,450	100	%

The Company recorded ~~$10,357~~$16,270 of deferred revenue on the balance sheet on December 31, ~~2020,~~2021, of which ~~$6,875~~$3,307 has been recognized in the ~~nine~~three months ended ~~September 30, 2021.~~March 31, 2022. Of the remaining amount, the Company expects to recognize no$7,472 more through December 31, ~~2021~~2022 and the remainder through 2023.

~~NOTE 11 — Earnings Per Share~~SMART SAND, INC.

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 nine months ended September 30, 2021. Because their effect would be anti-dilutive, 2,237 shares of common stock underlying equity-based awards were excluded from the calculation of diluted earnings per share for both three and nine months ended September 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.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(IN THOUSANDS, EXCEPT PER SHARE DATA)

(UNAUDITED)

NOTE 1211 — 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 Company’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. During the ~~nine~~three months ended ~~September 30,~~March 31, 2022 and 2021, ~~and 2020, 1,982~~15 and 0 shares of restricted stock were issued under the 2016 Plan, respectively. The grant date fair value per share of all the outstanding restricted stock was ~~$2.44~~$1.78 - $7.79. 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, $879~~statement of operations, $826 and ~~$941~~$678 of compensation expense for the restricted stock during the three months ended ~~September 30,~~March 31, 2022 and 2021, ~~and 2020, respectively. The Company recognized, in operating~~

~~SMART SAND, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(IN THOUSANDS, EXCEPT PER SHARE DATA)~~

~~(UNAUDITED)~~

expenses and cost of goods sold on the condensed consolidated income statements, $2,131 and $2,910 of compensation expense for the restricted stock during the nine months ended September 30, 2021 and 2020, respectively. There is no impact to the cash flows of the Company related to stock-based compensation expense. At ~~September 30, 2021,~~March 31, 2022, the Company had unrecognized compensation expense of ~~$7,201~~$5,314 related to granted but unvested stock awards, which is to be recognized as follows:


Remainder of 2021		$	1,022
2022		2,632
Remainder of 2022				Remainder of 2022	$	1,824
2023	2023	1,917		2023	1,891
2024	2024	1,158		2024	1,136
2025	2025	472		2025	463
2026				2026	—
Total	Total	$	7,201	Total	$	5,314

The following table summarizes restricted stock activity under the Plans from December 31, ~~2020~~2021 through ~~September 30, 2021:~~March 31, 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	1,982	$	2.88	Granted	15	$	1.78
Vested	Vested	(325)	$	8.31	Vested	(180)	$	3.21
Forfeited	Forfeited	(138)	$	6.26	Forfeited	(513)	$	2.64
Unvested, September 30, 2021		3,405	$	3.04
Unvested, March 31, 2022					Unvested, March 31, 2022	2,473	$	3.12

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.

SMART SAND, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(IN THOUSANDS, EXCEPT PER SHARE DATA)

(UNAUDITED)

For the three months ended ~~September 30,~~March 31, 2022 and 2021, ~~and 2020,~~ the effective tax rate was approximately ~~2.3%~~41.7% and 5.1%, respectively, based on the annual effective tax rate net of discrete federal and state taxes. For the nine months ended September 30, 2021 and 2020, the effective tax rate was approximately 13.7% and 12.0%65.7%, respectively, based on the annual effective tax rate net of discrete federal and state taxes. For the three ~~and nine~~ months ended ~~September 30,~~March 31, 2022 and 2021, ~~and 2020,~~ 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 $2,172~~ for uncertain tax positions included in ~~deferred tax liabilities, long-term, net on~~ its consolidated balance sheet as of ~~September 30, 2021,~~March 31, 2022, related to its depletion deduction methodology, and a corresponding increase to the income tax expense on its condensed consolidated ~~income statements.~~statement of operations. There was no$2,163 liability for uncertain tax positions as of December 31, ~~2020.~~2021 and there was no material change for the three months ended March 31, 2022.

As of ~~September 30, 2021,~~March 31, 2022, the Company ~~determine~~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

~~SMART SAND, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(IN THOUSANDS, EXCEPT PER SHARE DATA)~~

~~(UNAUDITED)~~

assets, which is included in the deferred tax liabilities, long-term, net on its consolidated balance sheet, ~~in the amount of $1,305,~~ 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 ~~statements.~~tax expense on its consolidated statements of operations and there was no material change for the three months ended March 31, 2022.

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 returns are the subject of any audit or investigation by taxing authorities.

NOTE 1413 — Concentrations

As of ~~September 30, 2021, two~~March 31, 2022, four customers accounted for ~~55%~~66% 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 during the second quarter of 2021 as described in Note 15.~~two customers.

During the three months ended ~~September 30, 2021, 50%~~March 31, 2022, 52% of the Company’s revenues were earned from three customers. During the three months ended ~~September 30, 2020, 85% of the Company’s revenues were earned from three customers. During the nine months ended September 30,~~March 31, 2021, ~~68% of the Company’s revenues were earned from four customers. During the nine months ended September 30, 2020, 69%~~74% of the Company’s revenues were earned from three customers.

As of ~~September 30, 2021,~~March 31, 2022, one vendor accounted for ~~23%~~14% of the Company’s accounts payable. As of December 31, ~~2020, three vendors~~2021, one vendor accounted for ~~42%~~19% of the Company’s accounts payable.

During the three months ended ~~September 30, 2021,~~March 31, 2022, one supplier accounted for ~~23%~~14% of the Company’s cost of goods sold. During the three months ended ~~September 30, 2020,~~March 31, 2021, two suppliers accounted for 70% of the Company’s cost of goods sold. During the nine months ended September 30, 2021, one supplier accounted for 22% of the Company’s cost of goods sold. During the nine months ended September 30, 2020, two suppliers accounted for 64%49% 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 ~~this~~these geographic 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 September 30, 2021 are as follows:
Remainder of 2021 $ 1,554
2022 2,467
2023 2,573
2024 2,469
2025 2,462
Thereafter 26,886
Total $ 38,411

Litigation

~~In addition to the matters described below, we~~We 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

~~SMART SAND, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(IN THOUSANDS, EXCEPT PER SHARE DATA)~~

~~(UNAUDITED)~~

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 take-or-pay Master Product Purchase Agreement and coterminous Railcar Usage Agreement. The trial took place in December 2020. 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 ~~September 30, 2021~~March 31, 2022 was ~~$9,478.~~$17,296.

2017

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, ~~2020~~2021 contained in our Annual Report on Form 10-K. We use contribution margin, EBITDA, Adjusted EBITDA and free cash flow herein as non-GAAP measures of our financial performance. For further discussion of contribution margin, EBITDA, Adjusted EBITDA and free cash flow, see the section entitled “Non-GAAP Financial Measures.” We define various terms to simplify the presentation of information in this 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 Report, may adversely affect our results as indicated in forward-looking statements. You should read this Report 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 Report 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 sand supply and services company, offering complete mine to wellsite proppant supply and logistics solutions to our 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 ~~terminal~~terminals 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 and~~through long-term contracts or spot sales in the open ~~market, and~~market. 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,

SMART SAND, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(UNAUDITED)

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.~~services.

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~~acquisitions, we currently have 7.1 million tons of ~~frac sand. Our mine and related~~capacity with the ability to expand annual processing ~~facility near Oakdale, Wisconsin, at which we have~~capacity to approximately

10.0 million

~~SMART SAND, INC.~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS~~

~~OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~

~~(UNAUDITED)~~

~~315 million~~ tons of ~~proven recoverable~~sand. Additionally, we believe the quality of our sand, ~~reserves as~~the geographic locations of ~~December 31, 2020, has approximately 5.5 million tons of annual~~our mining and processing ~~capacity. This integrated facility, with on-site rail infrastructure~~assets, and ~~wet and dry sand processing facilities, has onsite~~our logistics access to all Class 1 rail lines provides us with the ~~Canadian Pacific Class I rail line~~opportunity to maximize our customer bases 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 130 million tons of proven and probable sand reserves as of December 31, 2020, and has approximately 1.6 million tons of annual processing capacity. This 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.~~sales opportunities.

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. In ~~September 2021,~~January 2022, we ~~acquired the rights to construct and operate~~began operations at an additional unit train capable transloading terminal in Waynesburg, Pennsylvania to service the Appalachian Basin, including the Marcellus and Utica Formations. ~~We expect this terminal to become operational in the fourth quarter of 2021.~~ These terminals allow us to offer more efficient and sustainable delivery options to 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.

We recently 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 and insulate us from some of the effects of price swings in the oil and gas industry.

~~Business Combination~~Recent 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 Oil~~all 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 through ~~the nine months ended September~~ 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, however the prices of frac sand remained depressed during 2021 as supply remained out of balance with demand even though market activity was improving. As we enter 2022, supply and demand fundamentals have continued to ~~be depressed due to overbuilt capacity~~

SMART SAND, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(UNAUDITED)

improve and during the quarter, frac sand prices began recovering from historic lows. However, we cannot predict ~~when frac~~if 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

~~SMART SAND, INC.~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS~~

~~OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~

~~(UNAUDITED)~~

that Northern White ~~frac~~ sand has logistical advantages in the ~~Marcellus,~~Appalachian, Bakken, and western basins of Colorado and Wyoming. 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 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 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.

2320

SMART SAND, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(UNAUDITED)

GAAP Results of Operations

Three Months Ended ~~September 30, 2021~~March 31, 2022 Compared to Three Months Ended ~~September 30, 2020~~March 31, 2021

The following table summarizes our revenue and expenses for the periods indicated.
Three Months Ended September 30, Change
2021 2020 Dollars Percentage

Revenues:
Sand sales revenue $ 31,343 $ 12,445 $ 18,898 152 %
Shortfall revenue 2,680 6,842 (4,162) (61) %
Logistics revenue 456 4,122 (3,666) (89) %
Total revenue 34,479 23,409 11,070 47 %
Cost of goods sold 36,526 18,227 18,299 100 %
Gross profit (2,047) 5,182 (7,229) (140) %
Operating expenses:
Salaries, benefits and payroll taxes 2,490 2,058 432 21 %
Depreciation and amortization 352 440 (88) (20) %
Selling, general and administrative 3,867 3,933 (66) (2) %
Total operating expenses 6,709 6,431 278 4 %
Operating (loss) income (8,756) (1,249) (7,507) 601 %
Other income (expenses):
Gain on bargain purchase — 39,889 (39,889) Not meaningful
Interest expense, net (467) (497) 30 (6) %
Other income 1,792 80 1,712 2,140 %
Total other (expenses) income, net 1,325 39,472 (38,147) (97) %
(Loss) income before income tax (benefit) expense (7,431) 38,223 (45,654) (119) %
Income tax (benefit) expense (169) 1,941 (2,110) (109) %
Net (loss) income $ (7,262) $ 36,282 $ (43,544) (120) %


	Three Months Ended March 31,				Change
	2022		2021		Dollars		Percentage
	(in thousands)
Revenues:
Sand sales revenue	$	38,289	$	23,147	15,142		65	%
Shortfall revenue	1,915		1,741		174		10	%
Logistics revenue	1,401		2,562		(1,161)		(45)	%
Total revenue	41,605		27,450		14,155		52	%
Cost of goods sold	43,586		32,427		11,159		34	%
Gross profit	(1,981)		(4,977)		2,996		(60)	%
Operating expenses:
Salaries, benefits and payroll taxes	3,392		2,375		1,017		43	%
Depreciation and amortization	527		561		(34)		(6)	%
Selling, general and administrative	4,048		3,154		894		28	%


Total operating expenses	7,967		6,090		1,877		31	%
Operating loss	(9,948)		(11,067)		1,119		(10)	%
Other income (expenses):

Interest expense, net	(427)		(547)		120		(22)	%
Other income	212		198		14		7	%
Total other expenses, net	(215)		(349)		134		(38)	%
Loss before income tax benefit	(10,163)		(11,416)		1,253		(11)	%
Income tax benefit	(4,240)		(7,504)		3,264		(43)	%
Net loss	$	(5,923)	$	(3,912)	$	(2,011)	51	%

Revenues

Revenues were ~~$34.5~~$41.6 million for the three months ended ~~September 30, 2021,~~March 31, 2022, during which time we sold approximately ~~790,000~~852,000 tons of sand. Revenues for the three months ended ~~September 30, 2020~~March 31, 2021 were ~~$23.4~~$27.5 million, during which time we sold approximately ~~309,000~~760,000 tons of sand. The key factors contributing to the increase in revenues for the three months ended ~~September 30, 2021~~March 31, 2022 as compared to the three months ended ~~September 30, 2020~~March 31, 2021 were as follows:

•Sand sales revenue increased from ~~$12.4~~$23.1 million for the three months ended ~~September 30, 2020~~March 31, 2021 to ~~$31.3~~$38.3 million for the three months ended ~~September 30, 2021~~March 31, 2022 as a result of ~~higher~~an increase in total volumes ~~sold. The volumes~~ sold ~~during~~of approximately 12%. In addition to an increase in our volume, the ~~third quarter~~65% increase in our revenue is also attributable to higher average sales price of ~~2020 were negatively impacted by depressed oil prices driven by oversupply relative to the decreased demand due to the COVID-19 coronavirus pandemic.~~our sand.

•We had ~~$2.7~~$1.9 million contractual shortfall revenue for the three months ended ~~September 30, 2021~~March 31, 2022 compared to ~~$6.8~~$1.7 million of contractual shortfall revenue for the three months ended ~~September 30, 2020.~~March 31, 2021. Our customer contracts

~~SMART SAND, INC.~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS~~

~~OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~

~~(UNAUDITED)~~

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.

SMART SAND, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(UNAUDITED)

•Logistics revenue, which includes freight for certain mine gate sand sales, railcar usage, logistics services, and SmartSystems rentals, was approximately ~~$0.5~~$1.4 million for the three months ended ~~September 30, 2021~~March 31, 2022 compared to ~~$4.1~~$2.6 million for the three months ended ~~September 30, 2020.~~March 31, 2021. The decrease in logistics revenue was due to the shift from mine gate sales to in-basin sales, which include transportation and any other handling services.

Cost of Goods Sold

Cost of goods sold was ~~$36.5~~$43.6 million and ~~$18.2~~$32.4 million for the three months ended ~~September 30,~~March 31, 2022 and March 31, 2021, ~~and 2020,~~ respectively. The increase was primarily due to higher ~~volumes sold and increased~~ freight ~~cost due to the~~costs driven by a shift of sales to more in-basin deliveries. In 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 we remain focused on other cost-saving measures.

Gross Profit

Gross profit was $(2.0) million ~~for the three months ended September 30, 2021, compared to $5.2~~and $(5.0) million for the three months ended ~~September 30, 2020.~~March 31, 2022 and March 31, 2021, respectively. The ~~decline~~decrease in ~~profitability~~the loss for the three months ended ~~September 30, 2021~~March 31, 2022 as compared to the three months ended ~~September 30, 2020~~March 31, 2021 was primarily due to ~~decreased shortfall revenue and lower~~higher sales volumes, higher average sales price of our sand relative to ~~our~~the cost to produce and deliver ~~sand~~products to our ~~customers.~~customers and increased efficiencies that come with producing higher volumes of sand.

Operating Expenses

Operating expenses were ~~$6.7~~$8.0 million and $6.1 million for the three months ended ~~September 30,~~March 31, 2022 and March 31, 2021, ~~as compared~~respectively. Salaries, benefits and payroll taxes increased to ~~$6.4~~$3.4 million for the three months ended ~~September 30, 2020. Salaries, benefits and payroll taxes were $2.5~~March 31, 2022 as compared to $2.4 million for the three months ended ~~September 30,~~March 31, 2021, due primarily to accrued bonuses as ~~compared to $2.1~~management has reinstated a formal employee bonus plan based on company performance for 2022. Depreciation and amortization decreased slightly from $0.6 million for the three months ended ~~September 30, 2020. Depreciation and amortization was also relatively consistent at $0.4~~March 31, 2021 to $0.5 million for the three months ended ~~September 30, 2021 and 2020.~~March 31, 2022. Selling, general and administrative expenses ~~remained consistent at $3.9~~were $4.0 million for the three months ended ~~September 30, 2020 and $3.9~~March 31, 2022 compared to $3.2 million for the three months ended ~~September 30,~~March 31, 2021.

~~Other Income~~

We qualified for federal government assistance through employee retention credit provisions of the Consolidated Appropriations Act of 2021. During the three months ended September 30, 2021, the Company recorded $1.7 million of employee retention credits. The ~~calculation of the credit is based on employees continued employment~~increase in 2022 was primarily driven by higher travel costs post-COVID-19, increased royalty expense due to higher total volumes sold and ~~represents a portion of the wages paid to them. For income tax purposes, the credit will result in decreased expense~~development costs related to ~~the wages it offsets in the period received. There was a change in existing legislation and we do not expect to continue to qualify for the employee retention credit in the fourth quarter of 2021.~~our Waynesburg terminal.

Interest Expense

We incurred $0.4 million and $0.5 million of net interest expense for ~~each of~~ the three months ended ~~September 30,~~March 31, 2022 and March 31, 2021, ~~and 2020,~~ respectively. We continue to reduce debt levels and decrease interest expense through scheduled amortizing payments.

Income Tax ~~Expense~~(Benefit)

For the three months ended ~~September 30,~~March 31, 2022 and March 31, 2021, ~~and 2020,~~ our effective tax rate was approximately ~~2.3%~~41.7% and ~~5.1%~~65.7%, 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.

As of ~~September 30, 2021,~~March 31, 2022, we have recorded ~~$2.2 million of~~a liability for uncertain tax positions included ~~in deferred tax liabilities, long-term, net~~ on our balance sheet, related to our depletion deduction methodology. As of ~~September 30, 2021,~~March 31, 2022, we ~~have~~ determined it is more likely than not that itwe 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 statement of operations.

Net Loss

Net loss was $(5.9) million for the three months ended March 31, 2022 as compared to the net loss of $(3.9) million for the three months ended March 31, 2021. Gross profit improved however, operating expenses increased in the current period relative to the prior year period. Discrete income tax items created a lower tax benefit in the current period relative to the prior period.

2522

SMART SAND, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(UNAUDITED)

~~the amount of $1.3 million, and a corresponding increase to the income tax expense on our condensed consolidated income statements.~~

~~Net (Loss) Income~~

Net loss was $(7.3) million for the three months ended September 30, 2021 as compared to net income of $36.3 million for the three months ended September 30, 2020. The net loss for the three months ended September 30, 2021 is primarily attributable to continued low average selling prices relative to our cost to produce and deliver products to our customers. Net income for the three months ended September 30, 2020 was primarily due to the gain on bargain purchase related to our acquisition of Eagle Proppants Holdings.

~~Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020~~

~~The following table summarizes our revenue and expenses for the periods indicated.~~
Nine Months Ended September 30, Change
2021 2020 Dollars Percentage
(in thousands)
Revenues:
Sand sales revenue $ 83,291 $ 50,809 32,482 64 %
Shortfall revenue 4,421 22,148 (17,727) (80) %
Logistics revenue 3,856 24,046 (20,190) (84) %
Total revenue 91,568 97,003 (5,435) (6) %
Cost of goods sold 100,952 71,221 29,731 42 %
Gross profit (9,384) 25,782 (35,166) (136) %
Operating expenses:
Salaries, benefits and payroll taxes 7,150 7,115 35 — %
Depreciation and amortization 1,490 1,354 136 10 %
Selling, general and administrative 10,876 10,393 483 5 %
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 39,108 17,842 21,266 119 %
Operating (loss) income (48,492) 7,940 (56,432) (711) %
Other income (expenses):
Gain on bargain purchase — 39,889 (39,889) Not meaningful
Interest expense, net (1,527) (1,576) 49 (3) %
Other income 5,457 162 5,295 3,269 %
Total other (expenses) income, net 3,930 38,475 (34,545) (90) %
(Loss) income before income tax (benefit) expense (44,562) 46,415 (90,977) (196) %
Income tax (benefit) expense (6,121) 5,576 (11,697) (210) %
Net (loss) income $ (38,441) $ 40,839 $ (79,280) (194) %

~~Revenues~~

Revenues were $91.6 million for the nine months ended September 30, 2021, during which time we sold approximately 2,317,000 tons of sand. Revenues for the nine months ended September 30, 2020 were $97.0 million, during which time we sold approximately 1,273,000 tons of sand. The key factors contributing to the decrease in revenues for the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020 were as follows:

~~SMART SAND, INC.~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS~~

~~OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~

~~(UNAUDITED)~~

•Sand sales revenue increased from $50.8 million for the nine months ended September 30, 2020 to $83.3 million for the nine months ended September 30, 2021 as a result of higher total volumes sold, partially offset by lower prices compared to the prior period. The volumes sold during the third quarter of 2020 were negatively impacted by depressed oil prices driven by the oversupply caused by decreased demand due to the COVID-19 pandemic.

•We had $4.4 million of contractual shortfall revenue for the nine months ended September 30, 2021 compared to $22.1 million of contractual shortfall revenue for the nine months ended September 30, 2020. 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 $3.9 million for the nine months ended September 30, 2021 compared to $24.0 million for the nine months ended September 30, 2020. The decrease in logistics revenue was due to the shift from mine gate sales to in-basin sales, which include transportation and any other handling services.

~~Cost of Goods Sold~~

Cost of goods sold was $101.0 million and $71.2 million for the nine months ended September 30, 2021 and September 30, 2020, 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 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 nine months of 2021 to support increased sales activity, though we remain focused on other cost-saving measures.

~~Gross Profit~~

Gross profit was $(9.4) million and $25.8 million for the nine months ended September 30, 2021 and September 30, 2020, respectively. The decline in profitability for the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020 was primarily due to decreased shortfall revenue and low average sales price of our sand relative to the cost to produce and deliver products to our customers.

~~Operating Expenses~~

Operating expenses were $39.1 million and $17.8 million for the nine months ended September 30, 2021 and September 30, 2020, respectively. We recorded $19.6 million as non-cash bad debt expense, 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 increased to $7.2 million for the three months ended September 30, 2021 as compared to $7.1 million for the nine months ended September 30, 2020. Depreciation and amortization increased slightly from $1.4 million for the nine months ended September 30, 2020 to $1.5 million for the nine months ended September 30, 2021. Selling, general and administrative expenses were $10.9 million for the nine months ended September 30, 2021 compared to $10.4 million for the nine months ended September 30, 2020. The nine months ended September 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 nine months ended September 30, 2021, the Company recorded $5.0 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. Unless there is a change in existing legislation, we expect to continue to qualify for the employee retention credit for approximately $1.7 million for the fourth quarter of 2021.

~~Interest Expense~~

We incurred $1.5 million and $1.6 million of net interest expense for the nine months ended September 30, 2021 and September 30, 2020, respectively. We continue to reduce debt levels and decrease interest expense through scheduled amortizing payments.

~~SMART SAND, INC.~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS~~

~~OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~

~~(UNAUDITED)~~

~~Income Tax (Benefit) Expense~~

For the nine months ended September 30, 2021 and September 30, 2020, our effective tax rate was approximately 13.7% and 12.0%, 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.

As of September 30, 2021, we have recorded $2.2 million of uncertain tax positions included in deferred tax liabilities, long-term, net on our balance sheet, related to our depletion deduction methodology. As of September 30, 2021, we determined it is more likely than not that it will not be able to fully realize the benefits of certain existing deductible temporary differences and have recorded a valuation allowance against the deferred tax liabilities, long-term, net on our balance sheet in the amount of $1.3 million, and a corresponding increase to the income tax expense on our condensed consolidated income statements.

~~Net (Loss) Income~~

Net loss was $(38.4) million for the nine months ended September 30, 2021 as compared to the net income of $40.8 million for the nine months ended September 30, 2020. The difference was primarily due to non-cash bad debt expense recorded against the residual balance of accounts receivable that were previously the subject of litigation recorded in 2021 combined with lower average sale prices per ton of our sand, substantially lower shortfall revenue in the current period, and the gain on bargain purchase related to our acquisition of Eagle Proppants Holdings in September 2020.

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 cost 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 March 31,
		2022		2021
		(in thousands, except per ton amounts)
Revenue		$	41,605	$	27,450
Cost of goods sold		43,586		32,427
Gross profit		(1,981)		(4,977)
Depreciation, depletion, and accretion of asset retirement obligations		6,231		6,013
Contribution margin		$	4,250	$	1,036
Contribution margin per ton		$	4.99	$	1.36
Total tons sold		852		760

Contribution margin was $4.3 million and $1.0 million, or $4.99 and $1.36 per ton sold, for the three months ended March 31, 2022 and 2021, respectively. The increase in overall contribution margin and contribution margin per ton was due primarily higher sales volumes, higher average sales prices and cost efficiencies realized from higher production volumes.

2823

SMART SAND, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(UNAUDITED)

~~margin to gross profit.~~
Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020
(in thousands, except per ton amounts)
Revenue $ 34,479 $ 23,409 $ 91,568 $ 97,003
Cost of goods sold 36,526 18,227 100,952 71,221
      Gross profit (2,047) 5,182 (9,384) 25,782
Depreciation, depletion, and accretion of asset retirement obligations 6,145 5,177 18,009 15,351
      Contribution margin $ 4,098 $ 10,359 $ 8,625 $ 41,133
      Contribution margin per ton $ 5.19 $ 33.52 $ 3.72 $ 32.31
Total tons sold 790 309 2,317 1,273

Contribution margin was $4.1 million and $10.4 million, or $5.19 and $33.52 per ton sold, for the three months ended September 30, 2021 and 2020, respectively. The decrease in contribution margin and contribution margin per ton was due primarily to $4.2 million higher shortfall revenue in the prior period and low average sale price relative to our cost to produce and deliver sand to our customers in the current period.

Contribution margin was $8.6 million and $41.1 million, or $3.72 and $32.31 per ton sold, for the nine months ended September 30, 2021 and 2020, respectively. The decrease in overall contribution margin and contribution margin per ton was due primarily to $17.7 million higher shortfall revenue in the prior period and low average sale price relative to our cost to produce and deliver sand to our customers 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 income for each of the periods indicated.


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended March 31,
		2021		2020		2021		2020				2022		2021
		(in thousands)										(in thousands)
Net (loss) income		$	(7,262)	$	36,282	$	(38,441)	$	40,839
Net loss										Net loss		$	(5,923)	$	(3,912)
Depreciation, depletion and amortization	Depreciation, depletion and amortization	6,165		5,529		18,941		16,466		Depreciation, depletion and amortization		6,568		6,460
Income tax (benefit) expense		(169)		1,941		(6,121)		5,576
Income tax benefit										Income tax benefit		(4,240)		(7,504)
Interest expense	Interest expense	484		506		1,554		1,605		Interest expense		434		555
Franchise taxes	Franchise taxes	42		63		237		212		Franchise taxes		60		98
EBITDA	EBITDA	$	(740)	$	44,321	$	(23,830)	$	64,698	EBITDA		$	(3,101)	$	(4,303)
Loss on sale of fixed assets	Loss on sale of fixed assets	281		(27)		223		248		Loss on sale of fixed assets		—		2
Equity compensation (1)	Equity compensation (1)	784		832		2,050		2,600		Equity compensation (1)		674		685
Employee retention credit (2)		(1,674)		—		(5,026)		—

Acquisition and development costs ~~(3)~~	Acquisition and development costs ~~(3)~~	—		823		17		145		Acquisition and development costs ~~(3)~~		337		23
Gain on bargain purchase		—		(39,889)		—		(39,889)
Cash charges related to restructuring and retention of employees		8		—		9		82

Accretion of asset retirement obligations	Accretion of asset retirement obligations	332		88		558		239		Accretion of asset retirement obligations		190		114
Adjusted EBITDA	Adjusted EBITDA	$	(1,009)	$	6,148	$	(25,999)	$	28,123	Adjusted EBITDA		$	(1,900)	$	(3,479)

(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 statements for the three and nine months ended September 30, 2021.~~

~~(3)~~The three and nine months ended September 30, 2020 include acquisition cost of $817 and $875, respectively. The nine months ended September 2020 was offset by $1,020 fair value adjustment of contingent consideration.

~~____________________~~

Adjusted EBITDA was ~~$(1.0)~~$(1.9) million for the three months ended ~~September 30, 2021~~March 31, 2022 compared to ~~$6.1~~$(3.5) million for the three months ended ~~September 30, 2020.~~March 31, 2021. The ~~decrease~~increase in Adjusted EBITDA was primarily due to ~~$4.2 million less shortfall revenue in the current period and low~~higher sales volumes, higher average ~~sale prices of our sand relative to the cost to produce and deliver it despite having higher overall volumes in the current period.~~

Adjusted EBITDA was $(26.0) million for the nine months ended September 30, 2021 compared to $28.1 million for the nine months ended September 30, 2020. The decrease in Adjusted EBITDA 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, $17.7 million less shortfall revenue in the current period and lower average sale prices

SMART SAND, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(UNAUDITED)

sales price of our sand relative to the cost to produce and deliver products to our customers, ~~despite having~~as well as increased efficiencies that come with producing higher ~~overall~~ volumes ~~in the current period.~~of sand.

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.
Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020
(in thousands, except per ton amounts)
Net cash provided by operating activities $ 1,064 $ (3,618) $ 37,544 $ 22,224
Purchases of property, plant and equipment (1,933) (1,021) (6,976) (7,393)
Free cash flow $ (869) $ (4,639) $ 30,568 $ 14,831


	Three Months Ended March 31,
		2022		2021
		(in thousands, except per ton amounts)
Net cash (used in) provided by operating activities		$	(8,662)	$	3,914
Acquisition of Blair facility		(6,547)		—
Purchases of property, plant and equipment		(3,768)		(2,213)
Free cash flow		$	(18,977)	$	1,701

Free cash flow was ~~$(0.9)~~$(19.0) million for the three months ended ~~September 30, 2021~~March 31, 2022 compared to ~~$(4.6)~~$1.7 million for the three months ended ~~September 30, 2020.~~March 31, 2021. The ~~increase~~decrease in free cash flow was primarily attributable to ~~cash collections from higher sand volumes sold to customers, offset by lower average sale prices~~purchase of ~~our sand recognized~~Blair for $6.5 million, increase in accounts receivable, repayment of tax refund IRS mistakenly provided in prior period of $2.3 million, and increase in capital expenditures in the three months ended ~~September 30, 2021~~March 31, 2022 compared to the three months ended ~~September 30, 2020.~~

~~Free cash flow was $30.6 million for~~March 31, 2021. We expect the nine months ended September 30, 2021 compared to $14.8 million for the nine months ended September 30, 2020. The increase in free cash flow was primarily attributable to cash collections from higher sand volumes sold to customers, including the $35.0 million cash payment received under the Settlement Agreement, offset by lower average sale prices of our sand recognizedinvestments made in the ~~nine months ended September 30, 2021 compared to~~current period will be cash-generating assets in the nine months ended September 30, 2020. Capital expenditures for the nine months ended September 30, 2021, compared to the same period in 2020, were lower as we continue to focus on maintaining positive cash flow.

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 ~~September 30, 2021,~~March 31, 2022, cash on hand was ~~$36.7~~$4.7 million and we had ~~$16.5~~$16.9 million in undrawn availability on our ABL Credit 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, completion of our new Waynesburg terminal to service the Marcellus and other capital projects.

~~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 September 30, 2021 compared to December 31, 2020.
September 30, 2021 December 31, 2020
(in thousands)
Total current assets $ 82,666 $ 112,086
Total current liabilities 39,989 37,263
Working capital $ 42,677 $ 74,823

~~SMART SAND, INC.~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS~~

~~OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~

~~(UNAUDITED)~~

Our working capital was $42.7 million at September 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 2021 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.

~~Summary~~Material Cash ~~Flows for the Nine Months Ended September 30, 2021 and September 30, 2020:~~
Nine Months Ended September 30,
2021 2020
(in thousands)
Net cash provided by operating activities 37,544 22,224
Net cash used in investing activities (6,898) (7,393)
Net cash used in financing activities (5,692) (6,476)

~~Net Cash Provided by Operating Activities~~

Net cash provided by operating activities was $37.5 million for the nine months ended September 30, 2021, which included net loss of $(38.4) million, net non-cash items of $34.2 million, the $35.0 million cash payment received under the Settlement Agreement, and a decrease of $6.8 million in other operating assets and liabilities.

Net cash provided by operating activities was $22.2 million for the nine months ended September 30, 2020, which included net income of $40.8 million, non-cash expenses of $(20.2) million, and $1.6 million in changes in operating assets and liabilities.

~~Net Cash Used in Investing Activities~~

~~Net cash used in investing activities was $6.9 million for the nine months ended September 30, 2021, which was primarily for manufacturing of our SmartSystems equipment.~~

~~Net cash used in investing activities was $7.4 million for the nine months ended September 30, 2020, which was primarily for manufacturing of our SmartSystems equipment.~~

~~Net Cash Used in Financing Activities~~

Net cash used in financing activities was $5.7 million for the nine months ended September 30, 2021, which consisted primarily of $5.3 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.

Net cash used in financing activities was $6.5 million for the nine months ended September 30, 2020, which consisted primarily of $2.5 million of net repayments on our ABL Credit Facility, $2.7 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.

~~SMART SAND, INC.~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS~~

~~OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~

~~(UNAUDITED)~~

~~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 $ — $ 1,160 $ 1,056 $ 38 $ 2,254
2022 — 4,638 3,387 137 $ 8,162
2023 — 4,638 2,371 245 $ 7,254
2024 — 6,888 807 — $ 7,695
2025 — 1,724 187 — $ 1,911
2026 and thereafter — — 355 — 355
Total minimum payments — 19,048 8,163 420 27,631

~~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 September 30, 2021 was $17.8 million and is based on our eligible accounts receivable and inventory. As of September 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 $16.5 million was available to be drawn. There were no borrowings during the three and nine months ended September 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%.

Requirements

Capital Requirements

We expect full year ~~2021~~2022 capital expenditures to be between ~~$14~~$25.0 million and ~~$16~~$30.0 million, which we anticipate will primarily support ~~incremental growth in our SmartSystems products~~efficiency projects at Oakdale and ~~services,~~Utica, capital related to the ~~completion of our new~~ Waynesburg terminal and acquisition and incremental capital to ~~service~~purchase the ~~Appalachian Basin~~Blair mine and ~~maintenance~~processing facility, acquired on March 4, 2022, and ~~efficiency improvements at our mining facilities. These expenditures exclude any potential acquisitions.~~to bring it online over the course of the year. We expect to fund these capital expenditures with cash from operations, equipment financing options available to us or borrowings under the ABL Credit ~~Facility.~~Facility or other financing sources, such as equipment finance providers. For the ~~nine~~three months ended ~~September 30, 2021,~~March 31, 2022, we spent approximately ~~$7.0~~$3.8 million on capital expenditures.

~~Off-Balance Sheet Arrangements~~

~~We had outstanding performance bonds of $9.5 million and $10.0 million at September 30, 2021 and December 31, 2020, respectively.~~

3325

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 March 31, 2022 was $14.5 million. Minimum cash payments on this facility for the remainder of 2022 are anticipated to be $3.5 million. Our various notes payable are primarily secured by our manufactured SmartSystems equipment. Total debt under these notes payable as of March 31, 2022 was $5.6 million. Minimum cash payments on these notes payable for the remainder of 2022 are anticipated to be $2.5 million. There were no borrowings outstanding on our ABL Credit Facility as of March 31, 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 March 31, 2022 were $32.0 million. Minimum cash payments on operating leases for the remainder of 2022 are anticipated to be $7.8 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 $17.3 million and $8.6 million at March 31, 2022 and December 31, 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 ~~September 30, 2021,~~March 31, 2022, we had contractual obligations for the ABL Credit Facility, Oakdale Equipment Financing, notes payable, 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 ~~nine~~three months ended September 30, 2021, revenue from EQT Corporation, Halliburton Energy Services, Liberty, and Enerplus accounted for 26.1%, 18.2%, 13.0%, and 10.6%, respectively, of total revenue. For the nine months ended September 30, 2020,March 31, 2022, revenue from Rice Energy (a subsidiary of EQT Corporation), ~~Liberty,~~Halliburton, and ~~U.S. Well Services~~Olympus accounted for ~~29.4%~~24.4%, ~~20.5%~~17.2%, and ~~18.9%~~10.0%, respectively, of total revenue. For the three months ended March 31, 2021, revenue from Rice Energy (a subsidiary of EQT Corporation), Halliburton, and Calfrac accounted for 35.1%, 25.5%, and 13.7%, respectively, of total revenue.

Critical Accounting Policies and Estimates

There have been no material changes in our critical accounting policies and procedures during the ~~nine~~three months ended ~~September 30, 2021.~~March 31, 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 identified~~including intangible assets, fixed assets, and ~~other long-lived assets);~~inventory; estimated cost of future asset retirement obligations; fair values of acquired assets and assumed

~~SMART SAND, INC.~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS~~

~~OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~

~~(UNAUDITED)~~

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 COVID-19 pandemic caused a significant amount of volatility in the oilfield services sector during 2020 and frac sand prices in particular have remained depressed, despite recent increases in oil prices. 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.

3527

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We have considered changes in our exposure to market risks during the ~~nine~~three months ended ~~September 30, 2021~~March 31, 2022 and have determined that there have been no 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 ~~September 30, 2021~~March 31, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

3628

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 1514 - Commitments and Contingencies - Litigation of the notes to the condensed consolidated financial statements in this Form 10-Q for the three ~~and nine~~ months ended ~~September 30, 2021.~~March 31, 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 months ended ~~September 30, 2021,~~March 31, 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, 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.

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

~~The information set forth below is included herewith for the purpose of providing the disclosure required under “Item 1.01 Entry into a Material Definitive Agreement”and “Item 9.01 Financial Statements and Exhibits” of Form 8-K.~~

On November 9, 2021, the Company entered into an Open Market Sale Agreement (the “Sale Agreement”) with Clearlake Capital Partners II (Master), L.P. (the “Selling Stockholder”) and Jefferies LLC (the “Sales Agent”). Pursuant to the terms of the Sale Agreement, (i) the Company may sell, from time to time, shares of its common stock having an aggregate value of up to $25,000,000 and (ii) the Selling Stockholder may sell, from time to time, up to 10,920,445 shares of the Company’s common stock. The sales, if any, of shares of common stock made under the Sale Agreement may be made in sales deemed to be “at-the-market” offerings as defined in Rule 415 under the Securities Act, including sales made directly on the Nasdaq Global Select Market, on any other existing trading market for the Company’s common stock, or to or through a market maker. Sales of shares of the Company’s common stock may also be made by any method permitted by law, including, but not limited to, in privately negotiated transactions. The Sales Agent will use its commercially reasonable efforts consistent with normal trading and sales practices to solicit offers to purchase shares of the Company’s common stock, on mutually agreed terms between the Sales Agent and the Company or the Selling Stockholder, as applicable.. The Company intends to use the net proceeds from the offering, after deducting the Sales Agent’s commissions and the Company’s offering expenses, for general corporate purposes, which may include repayment of indebtedness, financing of future acquisitions and capital expenditures and additions to working capital. The Company will not receive any proceeds from the sale of shares of the Company’s common stock, if any, by the Selling Stockholder, including pursuant to any forward sale agreement.

The Company and the Selling Stockholder, as applicable, will pay the Sales Agent a commission of three percent (3.0%) of the aggregate gross proceeds the Company or the Selling Stockholder, as applicable, receive from each sale of shares of the Company’s common stock, which may come in the form of a reduction to the amounts received by the Selling Stockholder in settlement of any forward sale agreement. In addition, the Company has agreed to reimburse Jefferies for certain fees and disbursements of its counsel in an amount not to exceed $75,000 in connection with entry into the sales agreement, in addition to certain ongoing disbursements of its legal counsel. The Company and the Selling Stockholder have no obligation to sell any shares under the Sale Agreement, and may at any time suspend the offering of shares under the Sale Agreement.

We have been advised that the Selling Stockholder may enter into one or more forward sale agreements in respect of the sale of up to 10,920,445 shares of our common stock with the Sales Agent and/or one of its affiliates (which we refer to in such capacity as the forward counterparty). We have been advised that, in order to hedge its obligations under any forward sale agreement, if consummated, the forward counterparty may borrow shares of our common stock from the Selling Stockholder or from unrelated stock lenders, and the forward counterparty or its affiliates will sell those shares short (i) in privately negotiated transactions, (ii) as block transactions or (ii) by any other method permitted by law deemed to be an “at the market offering” as defined in Rule 415(a)(4) under the Securities Act, including sales made directly on the Nasdaq Global Select Market or sales made into any other existing trading market of the Company’s common stock.

The Sale Agreement contains customary representations and warranties of the parties and indemnification and contribution provisions under which the Company, the Selling Stockholder and the Sales Agent have agreed to indemnify each other against certain liabilities, including liabilities under the Securities Act.

The Shares will be offered and sold pursuant to a shelf registration statement on Form S-3 (File No. 333-251915), which was filed with the SEC on January 6, 2021 and was deemed effective on January 19, 2021.

The foregoing description of the Sale Agreement is not complete and is qualified in its entirety by reference to the full text of such agreement, a copy of which is filed herewith as Exhibit 10.1 to this Report and is incorporated herein by reference.

~~The legal opinion and consent of Latham & Watkins LLP relating to the Shares being offered is filed as Exhibit 5.1 and 23.1, respectively, to this Report .~~None.

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ITEM 6. EXHIBITS


2.1						Membership Interest Purchase Agreement, dated March 4, 2022, by and among Smart Sand Inc., Hi-Crush Inc. and Hi-Crush Blair LLC (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the SEC on March 8, 2022.
3.1						Second Amended and Restated Certificate of Incorporation of Smart Sand, Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on November 15, 2016)
3.2						Second Amended and Restated Bylaws of Smart Sand, Inc. (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed with the SEC on November 15, 2016)
5.1*						~~Opinion of Latham & Watkins LLP~~
10.1*						~~Open Market Sale Agreement, dated as of~~ ~~November~~ 9 ~~, 2021, by and among Smart Sand, Inc., Clearlake Capital Partners II (Master), L.P. and Jefferies LLC~~
~~10.2~~						Master Product Purchase Agreement, dated effective August 1, 2021, by and between Smart Sand, Inc. and EQT Production Company (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on August 4, 2021)
23.1*						~~Consent of Latham & Watkins LLP (included in Exhibit 5.1)~~
31.1*						Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*						Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*†						Certification Pursuant to 18 U.S.C. adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2*†						Certification Pursuant to 18 U.S.C. adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
95.1*						Mine Safety Disclosure Exhibit
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 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.

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Signatures

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.


	Smart Sand, Inc.

~~November 9, 2021~~May 11, 2022	By:	/s/ Charles E. Young
		Charles E. Young, Chief Executive Officer
		(Principal Executive Officer)


	Smart Sand, Inc.

~~November 9, 2021~~May 11, 2022	By:	/s/ Lee E. Beckelman
		Lee E. Beckelman, Chief Financial Officer
		(Principal Financial Officer)

4031