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 six months ended June 30, 2020 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30,
|
|
|
|
|
2020
|
|
2019
|
Cash paid for amounts included in the measurement of lease liabilities
|
|
|
|
|
Operating cash flows used for finance leases
|
|
$
|
19
|
|
|
$
|
20
|
|
Operating cash flows used for operating leases
|
|
$
|
6,902
|
|
|
$
|
7,288
|
|
Financing cash flows used for finance leases
|
|
$
|
56
|
|
|
$
|
58
|
|
|
|
|
|
|
Right-of-use assets obtained in exchange for new finance lease liabilities
|
|
$
|
—
|
|
|
$
|
55
|
|
Right-of-use assets recorded upon adoption
|
|
N/A
|
|
$
|
35,939
|
|
Right-of-use assets obtained in exchange for new operating lease liabilities
|
|
$
|
4,322
|
|
|
$
|
4,100
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average remaining lease term - finance leases
|
|
3.2 years
|
|
4.0 years
|
Weighted average discount rate - finance leases
|
|
6.60
|
%
|
|
6.69
|
%
|
Weighted average remaining lease term - operating leases
|
|
3.2 years
|
|
2.9 years
|
Weighted average discount rate - operating leases
|
|
5.68
|
%
|
|
5.50
|
%
|
Maturities of the Company’s lease liabilities as of June 30, 2020 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Leases
|
|
Finance Leases
|
|
Total
|
Remainder of 2020
|
|
$
|
4,257
|
|
|
$
|
72
|
|
|
$
|
4,329
|
|
2021
|
|
9,404
|
|
|
151
|
|
|
9,555
|
|
2022
|
|
6,976
|
|
|
136
|
|
|
7,112
|
|
2023
|
|
4,476
|
|
|
245
|
|
|
4,721
|
|
2024
|
|
2,735
|
|
|
—
|
|
|
2,735
|
|
Thereafter
|
|
158
|
|
|
—
|
|
|
158
|
|
Total cash lease payments
|
|
28,006
|
|
|
604
|
|
|
28,610
|
|
Less: amounts representing interest
|
|
(2,556)
|
|
|
(73)
|
|
|
(2,629)
|
|
Total lease liabilities
|
|
$
|
25,450
|
|
|
$
|
531
|
|
|
$
|
25,981
|
|
NOTE 8 — Asset Retirement Obligation
The Company had a post-closure reclamation and site restoration obligation of $6,293 as of June 30, 2020. The following is a reconciliation of the total reclamation liability for asset retirement obligations.
|
|
|
|
|
|
Balance at December 31, 2019
|
$
|
6,142
|
|
|
|
Accretion expense
|
151
|
|
|
|
Balance at June 30, 2020
|
$
|
6,293
|
|
SMART SAND, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
NOTE 9 — Contingent Consideration
The Company recorded contingent consideration of $9,200 at June 1, 2018, related to its acquisition of its SmartSystems business. Each reporting period, the Company reassesses its inputs, including market comparable information and management assessments regarding potential future scenarios, and then discounts the liabilities to present value. The Company recorded adjustments to the fair value of contingent consideration in the amount of $0 and $575 for the three months ended June 30, 2020 and 2019, respectively, on the condensed consolidated income statements. The Company recorded adjustments to the fair value of contingent consideration in the amount of $1,020 and $1,542 for the six months ended June 30, 2020 and 2019, respectively, on the condensed consolidated income statements. The Company will continue to reassess earn-out calculations related to the contingent consideration in future periods.
The Company’s contingent consideration is remeasured at fair value on a recurring basis and is comprised of payments for production of silos and related equipment during the three-year period after the acquisition. Contingent liabilities are valued using significant inputs that are not observable in the market, which are defined as Level 3 inputs according to fair value measurement accounting. The Company used a probability-weighted average between 1 and 5 manufactured SmartDepot fleets over the remaining earnout period, as the basis of its fair value determination. The actual contingent consideration could vary from the determined amount based on the actual number of SmartDepot silos and related equipment produced and the timing thereof. The Company estimates the fair value of contingent liabilities using a Monte Carlo simulation-based, real option pricing methodology implementation of the Income Approach. This approach utilizes inputs including market comparable information and management assessments regarding potential future scenarios, and then discounts the liabilities to present value. The Company believes its estimates and assumptions are reasonable, however, there is significant judgment involved. The Company’s financial instruments remeasured and carried at fair value were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Contingent consideration
|
|
$
|
570
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
570
|
|
Total liabilities
|
|
$
|
570
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
570
|
|
|
|
|
|
|
|
|
|
|
The following table provides a summary of changes in the fair value of the Company’s Level 3 financial instruments for the six months ended June 30, 2020.
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2019
|
|
$
|
1,900
|
|
Payment of contingent consideration
|
|
(310)
|
|
Fair value adjustment
|
|
(1,020)
|
|
Balance as of June 30, 2020
|
|
$
|
570
|
|
|
|
|
SMART SAND, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
NOTE 10 — Revenue
Disaggregation of Revenue
The following table presents the Company’s revenues disaggregated by type and percentage of total revenues for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
|
|
|
2020
|
|
|
|
2019
|
|
|
|
2020
|
|
|
|
2019
|
|
|
|
Revenue
|
|
Percentage of Total Revenue
|
|
Revenue
|
|
Percentage of Total Revenue
|
|
Revenue
|
|
Percentage of Total Revenue
|
|
Revenue
|
|
Percentage of Total Revenue
|
Sand sales revenue
|
$
|
7,375
|
|
|
28
|
%
|
|
$
|
31,362
|
|
|
46
|
%
|
|
$
|
38,362
|
|
|
52
|
%
|
|
$
|
57,008
|
|
|
48
|
%
|
Shortfall revenue
|
14,000
|
|
|
54
|
%
|
|
16,283
|
|
|
24
|
%
|
|
15,307
|
|
|
21
|
%
|
|
22,039
|
|
|
18
|
%
|
Logistics revenue
|
4,731
|
|
|
18
|
%
|
|
20,296
|
|
|
30
|
%
|
|
19,925
|
|
|
27
|
%
|
|
40,669
|
|
|
34
|
%
|
Total revenues
|
$
|
26,106
|
|
|
100
|
%
|
|
$
|
67,941
|
|
|
100
|
%
|
|
$
|
73,594
|
|
|
100
|
%
|
|
$
|
119,716
|
|
|
100
|
%
|
The Company recorded $9,324 of deferred revenue on the balance sheet on December 31, 2019, of which $2,684 has been recognized in the six months ended June 30, 2020. Of the remaining amount, the Company expects to recognize $4,970 in 2020 and $1,670 in 2021.
NOTE 11 — Earnings Per Share
Basic net income per share of common stock is computed by dividing net income 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 income per share of common stock is computed by dividing the net 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. The number of shares underlying equity-based awards that were excluded from the calculation of diluted earnings per share as their effect would be anti-dilutive was 2,253 and 765 for the three months ended June 30, 2020 and 2019, respectively. The number of shares underlying equity-based awards that were excluded from the calculation of diluted earnings per share as their effect would be anti-dilutive was 2,253 and 765 for the six months ended June 30, 2020 and 2019, respectively. The following table reconciles the weighted-average common shares outstanding used in the calculation of basic net (loss) income per share to the weighted average common shares outstanding used in the calculation of diluted net income per share.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Weighted average common shares outstanding
|
39,644
|
|
|
40,074
|
|
|
39,867
|
|
|
40,035
|
|
Assumed conversion of restricted stock
|
—
|
|
|
99
|
|
|
—
|
|
|
82
|
|
Diluted weighted average common stock outstanding
|
39,644
|
|
|
40,173
|
|
|
39,867
|
|
|
40,117
|
|
NOTE 12 — Stock-Based Compensation
Equity Incentive Plans
In May 2012, the board of directors approved the 2012 Equity Incentive Plan (“2012 Plan”), which provides for the issuance of equity awards of up to a maximum of 440 shares of the Company’s common stock to employees, non-employee members of the board of directors, and consultants of the Company. During 2014, the 2012 Plan was amended to provide for
SMART SAND, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
the issuance of equity awards of up to 880 shares of the Company’s common stock. The awards can be issued in the form of incentive stock options, non-qualified stock options or restricted stock, and have expiration dates of 5 or 10 years after issuance, depending on whether the recipient already holds above 10% of the voting power of all classes of the Company’s shares. The exercise price will be based on the fair market value of the share on the date of issuance; vesting periods will be determined by the board of directors upon issuance of the equity award. Subsequent to the Company’s initial public offering, no additional equity awards were made under the 2012 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 equity awards of up to a maximum of 3,911 shares of the Company’s common stock to employees, non-employee members of the board of directors and consultants of the Company. Together the 2012 Plan and the 2016 Plan are referenced to as the “Plans”.
On April 3, 2020, the board of directors, upon recommendation of the compensation committee, adopted the Smart Sand, Inc. Amended and Restated 2016 Omnibus Incentive Plan (the “amended plan”). The amended plan increases the number of shares of common stock authorized for issuance by an additional 2,088 shares. The stockholders approved the amended plan on June 2, 2020.
During the six months ended June 30, 2020 and 2019, 0 and 335 shares of restricted stock were issued under the Plans, respectively. The grant date fair value per share of all the outstanding restricted stock was $2.44 - $19.00. 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. For equity awards issued under the 2012 Plan, the grant date fair value was calculated based on a weighted analysis of (i) publicly-traded companies in a similar line of business to the Company (market comparable method)—Level 2 inputs, and (ii) discounted cash flows of the Company—Level 3 inputs. The Company recognized, in operating expenses and cost of goods sold on the condensed consolidated income statements, $943 and $652 of compensation expense for the restricted stock during the three months ended June 30, 2020 and 2019, respectively. The Company recognized, in operating expenses and cost of goods sold on the condensed consolidated income statements, $1,968 and $2,196 of compensation expense for the restricted stock during the six months ended June 30, 2020 and 2019, respectively. At June 30, 2020, the Company had unrecognized compensation expense of $5,579 related to granted but unvested stock awards, which is to be recognized as follows:
|
|
|
|
|
|
|
|
|
Remainder of 2020
|
|
$
|
1,865
|
|
2021
|
|
2,327
|
|
2022
|
|
874
|
|
2023
|
|
513
|
|
2024
|
|
—
|
|
Total
|
|
$
|
5,579
|
|
The following table summarizes restricted stock activity under the Plans from December 31, 2019 through June 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted
Average
|
Unvested, December 31, 2019
|
2,618
|
|
|
$
|
6.91
|
|
Granted
|
—
|
|
|
$
|
—
|
|
Vested
|
(318)
|
|
|
$
|
11.84
|
|
Forfeited
|
(47)
|
|
|
$
|
13.86
|
|
Unvested, June 30, 2020
|
2,253
|
|
|
$
|
4.84
|
|
SMART SAND, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
NOTE 13 — 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.
On March 27, 2020, the President signed into law the Coronavirus Aid, Relief and Economic Security (“CARES”) Act which introduced and revised numerous provisions which include, but are not limited to, (a) a five-year carryback period for net operating losses arising in tax years beginning tax after December 31, 2017 and before January 1, 2021, (b) a technical correction to qualified improvement property for assets placed in service after 2017 through 2022 to allow for immediate depreciation to be claimed on these assets, and (c) temporary increases to the limitations on certain deductions such as interest expense and charitable contributions.
As a result of the CARES Act, during the quarter ended March 31, 2020, the Company recorded a discrete tax benefit of $821 related to the anticipated benefit received from the carryback of net operating losses to tax years with a 35% corporate tax rate. In addition, the Company remeasured certain deferred tax assets and liabilities based on the rates they are expected to reverse when carrying back the net operating losses.
For the three months ended June 30, 2020 and 2019, the effective tax rate was approximately 42.8% and 21.8%, respectively, based on the annual effective tax rate net of discrete federal and state taxes. For the six months ended June 30, 2020 and 2019, the effective tax rate was approximately 44.4% and 21.3%, respectively, based on the annual effective tax rate net of discrete federal and state taxes. For the three and six months ended June 30, 2020 and 2019, 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, carrybacks and state apportionment changes, among other items.
In assessing the realizability of deferred tax assets, the Company considered whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the period in which those temporary differences become deductible. At June 30, 2020 and December 31, 2019, based on the Company’s future income projections and reversal of taxable temporary differences, management determined it was more likely than not that the Company will be able to realize the benefits of the deductible temporary differences. As of June 30, 2020 and December 31, 2019, the Company determined no valuation allowance was necessary.
The Company has evaluated its tax positions taken as of June 30, 2020 and December 31, 2019 and believes all positions taken would be upheld under examination from income taxing authorities. Therefore, no liability for the effects of uncertain tax positions has been recorded in the accompanying consolidated balance sheets as of June 30, 2020 or December 31, 2019. The Company is open to examination by taxing authorities beginning with the 2014 tax year.
NOTE 14 — Concentrations
As of June 30, 2020, one customer accounted for 98% of the Company’s total accounts receivable. As of December 31, 2019, two customers accounted for 81% of the Company’s total accounts receivable.
During the three months ended June 30, 2020, 91% of the Company’s revenues were earned from two customers. During the three months ended June 30, 2019, 62% of the Company’s revenues were earned from three customers. During the six months ended June 30, 2020, 80% of the Company’s revenues were earned from four customers. During the six months ended June 30, 2019, 60% of the Company’s revenues were earned from three customers.
As of June 30, 2020, two vendors accounted for 29% of the Company’s accounts payable. As of December 31, 2019, one vendor accounted for 26% of the Company’s accounts payable.
During the three months ended June 30, 2020, three suppliers accounted for 50% of the Company’s cost of goods sold. During the three months ended June 30, 2019, two suppliers accounted for 53% of the Company’s cost of goods sold. During
SMART SAND, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
the six months ended June 30, 2020, three suppliers accounted for 57% of the Company’s cost of goods sold. During the six months ended June 30, 2019, three suppliers accounted for 64% of the Company’s cost of goods sold.
Currently, the Company’s inventory and operations are primarily located in Wisconsin. There is a risk of loss if there are significant public health, environmental, legal or economic changes to this geographic area. The Company primarily utilizes one third-party rail company to ship its products to customers from its plant. There is a risk of business loss if there are significant impacts to this third party’s operations.
NOTE 15 — Commitments and Contingencies
Future Minimum Commitments
The Company is obligated under certain contracts for minimum payments for the right to use land for extractive activities, which is not within the scope of leases under ASC 842. Future minimum annual commitments under such contracts at June 30, 2020 are as follows:
|
|
|
|
|
|
|
|
Remainder of 2020
|
$
|
256
|
|
2021
|
2,418
|
|
2022
|
2,466
|
|
2023
|
2,716
|
|
2024
|
2,469
|
|
Thereafter
|
30,117
|
|
Total
|
$
|
40,442
|
|
Litigation
In addition to the matters described below, we may be subject to various legal proceedings, claims and governmental inspections, audits or investigations arising out of the Company’s operations in the normal course of business, which cover matters such as general commercial, governmental and trade regulations, product liability, environmental, intellectual property, employment and other actions. Although the outcomes of these routine claims cannot be predicted with certainty, in the opinion of management, the ultimate resolution of these matters would not have a material adverse effect on the Company’s financial statements.
U.S. Well Services, LLC
On January 14, 2019, Smart Sand, Inc. (plaintiff) filed suit against U.S. Well Services, LLC (defendant) (“U.S. Well”) in the Superior Court of the State of Delaware in and for New Castle County (C.A. No. N19C-01-144-PRW [CCLD]). In the suit, plaintiff alleges that defendant is 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 and is seeking unspecified monetary damages and other appropriate relief. Plaintiff is also seeking a declaratory judgment that the relevant agreements continued in full force and effect (until the term expired on April 30, 2020) despite defendant’s purported notice of termination to the contrary. Defendant has filed an Answer, Affirmative Defenses and Amended Counterclaim seeking unspecified monetary damages and declaratory relief. The Company intends to both vigorously prosecute its claims and defend against U.S. Well’s counterclaims. At this time, the Company is unable to express an opinion as to the likely outcome of the matter.
The Company recorded $14,792 and $13,173 of revenue for the three months ended June 30, 2020 and 2019, respectively, related to U.S. Well. The Company recorded $17,170 and $15,550 of revenue for the six months ended June 30, 2020 and 2019, respectively, related to U.S. Well. As of June 30, 2020 and December 31, 2019, $54,592 and $37,422 of accounts and unbilled receivables, respectively, is attributable to U.S. Well. Amounts recorded as accounts and unbilled receivables do not represent the full amounts sought in this lawsuit.
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, 2019. We use EBITDA, Adjusted EBITDA and contribution margin herein as non-GAAP measures of our financial performance. For further discussion of EBITDA, Adjusted EBITDA and contribution margin, see the section entitled “Non-GAAP Financial Measures.” We define various terms to simplify the presentation of information in 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, 2019 and in this Form 10-Q. Our estimates and forward-looking statements are primarily based on our current expectations and estimates of future events and trends, which affect or may affect our business and operations. Although we believe that these estimates and forward-looking statements are based upon reasonable assumptions, they are subject to several risks and uncertainties and are made in light of information currently available to us. Important factors, in addition to the factors described in this quarterly report, may adversely affect our results as indicated in forward-looking statements. You should read this quarterly 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 quarterly 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 used to enhance hydrocarbon recovery rates in the hydraulic fracturing of oil and natural gas wells. We also offer proppant logistics and wellsite storage solutions through our SmartSystemsTM products. We currently market our products and services primarily to oil and natural gas exploration and production companies and oilfield service companies, sell our sand under a combination of take-or-pay contracts and spot sales in the open market, and provide wellsite proppant storage and management solutions services and equipment under flexible contract terms custom tailored to meet customers’ needs. 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 and the industry experience of our senior management team make us a highly attractive provider of frac sand and proppant logistics services from the mine to the wellsite.
We own and operate a frac sand mine and related processing facility near Oakdale, Wisconsin, at which we have approximately 316 million tons of proven recoverable sand reserves as of December 31, 2019. We incorporated in Delaware in July 2011 and began operations with 1.1 million tons of annual nameplate processing capacity in July 2012. After several expansions, our current annual nameplate processing capacity at our Oakdale facility is approximately 5.5 million tons of frac
SMART SAND, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)
sand. Our integrated Oakdale facility, with on-site rail infrastructure and wet and dry sand processing facilities, has access to two Class I rail lines and enables us to process and cost-effectively deliver products to our customers.
We operate a unit train capable transloading terminal in Van Hook, North Dakota to service the Bakken Formation in the Williston Basin. Since operations commenced in April 2018, we have been providing Northern White sand in-basin at this terminal to our contracted and spot sales customers.
We also offer to our customers portable wellsite proppant storage and management solutions through our SmartSystems products and services. Our SmartSystems products 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 SmartDepotXLTM silo systems, wellsite transload capabilities, 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 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 TrackerTM, which allows our SmartSystems customers to monitor silo-specific information, including location, proppant type and proppant inventory. We are currently developing a new transload technology to complement our existing solutions which allows for more efficient unloading of sand at the wellsite, which we anticipate will be able available during the second quarter.
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, principally for the following reasons:
We generally expect the price of frac sand to correlate with the level of drilling and completions activity for oil and natural gas. 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. The willingness of exploration and production companies to engage in drilling and completing new wells is determined by a number of factors, the most important of which are the prevailing and projected prices of oil and natural gas, the cost to drill, complete and operate a well, the availability and cost of capital and environmental and government regulations, as well as their ability to acquire the sand at the wellsite. We generally expect the level of drilling to correlate with long-term trends in commodity prices. Similarly, oil and natural gas production levels nationally and regionally tend to correlate with drilling activity.
Recently, oil prices declined to all-time lows as a result of decreased demand for oil from the COVID-19 coronavirus pandemic, as well as an increase in global oil supply driven by disagreements with respect to oil pricing between Russia and members of the Organization of the Petroleum Exporting Countries (“OPEC”), particularly Saudi Arabia. The COVID-19 coronavirus pandemic has caused a global decrease in all means of travel, the closure of borders between countries and a general slowing of economic activity worldwide which has decreased the demand for oil. In early March, discussions between Russia and Saudi Arabia deteriorated and the countries ended a three-year supply level agreement, which resulted in each country increasing its oil production. Subsequently, Russia and OPEC agreed to certain production cuts to mitigate the decline in the price of oil; however, such cuts may not be sufficient to stabilize the oil market if the decline in demand due to the COVID-19 coronavirus pandemic continues. Oil and natural gas prices are expected to continue to be depressed as a result of the increase of near-term supply and the decrease in overall demand caused by these events, and we cannot predict when prices will improve or stabilize.
In response to market conditions, we have reduced our total capital expenditure budget, primarily as a reduction to our SmartSystems manufacturing plans. We have also put in place several cost-cutting measures, including headcount reductions at our Oakdale and Saskatoon, Canada operating facilities, salary reductions and suspension of certain variable cash compensation programs for all employees, and reduced compensation for board members. We have also taken steps to limit cash outflows in the near-term by negotiating for deferred payments on certain of our operating leases, debt and minimum royalty payments. We have put in place multiple initiatives to protect the health and well-being of our workforce, including work-from-home arrangements for all employees that are able to do so and implementing social distancing requirements as prescribed by the federal, state and local government authorities.
SMART SAND, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)
SMART SAND, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)
GAAP Results of Operations
Three Months Ended June 30, 2020 Compared to Three Months Ended June 30, 2019
The following table summarizes our revenue and expenses for the periods indicated.
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|
|
Three Months Ended June 30,
|
|
|
|
Change
|
|
|
|
2020
|
|
2019
|
|
Dollars
|
|
Percentage
|
|
(in thousands)
|
|
|
|
|
|
|
Revenues
|
$
|
26,106
|
|
|
$
|
67,941
|
|
|
$
|
(41,835)
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|
|
(62)
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%
|
Cost of goods sold
|
11,906
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|
|
43,068
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|
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(31,162)
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|
|
(72)
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%
|
Gross profit
|
14,200
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|
|
24,873
|
|
|
(10,673)
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|
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(43)
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%
|
Operating expenses:
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|
|
|
|
|
|
|
Salaries, benefits and payroll taxes
|
2,155
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|
|
2,798
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(643)
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(23)
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%
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Depreciation and amortization
|
461
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|
655
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|
(194)
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(30)
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%
|
Selling, general and administrative
|
2,930
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|
|
2,790
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|
|
140
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|
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5
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%
|
Change in the estimated fair value of contingent consideration
|
—
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|
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(575)
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|
575
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|
|
(100)
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%
|
|
|
|
|
|
|
|
|
Total operating expenses
|
5,546
|
|
|
5,668
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|
|
(122)
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|
|
(2)
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%
|
Operating income
|
8,654
|
|
|
19,205
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|
|
(10,551)
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|
(55)
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%
|
Other income (expenses):
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|
|
|
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Interest expense, net
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(607)
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|
(994)
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|
|
387
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|
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(39)
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%
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Other income
|
63
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|
|
37
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|
|
26
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|
|
70
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%
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Total other expenses, net
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(544)
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|
(957)
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|
|
413
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|
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(43)
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%
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Income before income tax expense
|
8,110
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|
|
18,248
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|
|
(10,138)
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|
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(56)
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%
|
Income tax expense
|
3,470
|
|
|
3,972
|
|
|
(502)
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|
|
(13)
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%
|
Net income
|
$
|
4,640
|
|
|
$
|
14,276
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|
|
$
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(9,636)
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(67)
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%
|
Revenues
Revenues were $26.1 million for the three months ended June 30, 2020, during which time we sold approximately 208,000 tons of sand. Revenues for the three months ended June 30, 2019 were $67.9 million, during which time we sold approximately 741,000 tons of sand. The key factors contributing to the decrease in revenues for the three months ended June 30, 2020 as compared to the three months ended June 30, 2019 were as follows:
•Sand sales revenue decreased from $31.4 million for the three months ended June 30, 2019 to $7.4 million for the three months ended June 30, 2020 as a result of lower total volumes sold. The volumes sold during the second quarter of 2020 were negatively impacted by depressed oil prices driven by continued oversupply relative to the decreased demand due to the COVID-19 coronavirus pandemic.
•Logistics revenue, which includes freight for certain mine gate sand sales, railcar usage, logistics services, and SmartSystems rentals, was approximately $4.7 million for the three months ended June 30, 2020 compared to $20.3 million for the three months ended June 30, 2019. The decrease in logistics revenue was due primarily to depressed oil prices and the COVID-19 coronavirus pandemic.
•We had $14.0 million of contractual shortfall revenue for the three months ended June 30, 2020 compared to $16.3 million of contractual shortfall revenue for the three months ended June 30, 2019. 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.
SMART SAND, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)
Cost of Goods Sold
Cost of goods sold was $11.9 million and $43.1 million for the three months ended June 30, 2020 and 2019, respectively. Cost of goods sold decreased for the three months ended June 30, 2020 as compared to the same period in 2019, primarily due to lower overall sales volumes and expense reduction efforts put in place.
Gross Profit
Gross profit was $14.2 million and $24.9 million for the three months ended June 30, 2020 and 2019, respectively. The decrease in gross profit for the three months ended June 30, 2020 was primarily due to lower total volumes sold in the current period, partially offset by lower cost of goods sold.
Operating Expenses
Operating expenses were $5.5 million and $5.7 million for the three months ended June 30, 2020 and 2019, respectively. Salaries, benefits, and payroll taxes declined by $0.6 million due to headcount and salary reductions. There was no adjustment to the fair value of consideration in the current period and depreciation and amortization and selling, general and administrative expenses remained relatively constant year over year.
Interest Expense
We incurred $0.6 million and $1.0 million of net interest expense for the three months ended June 30, 2020 and 2019, respectively. The decrease in interest expense for the three months ended June 30, 2020 was primarily due to lower average interest rates and lower debt outstanding.
Income Tax Expense
For the three months ended June 30, 2020 and 2019, our effective tax rate was approximately 42.8% and 21.8%, respectively, based on the annual effective tax rate net of discrete federal and state taxes. The computation of the effective tax rate includes modifications from the statutory rate such as income tax credits, carrybacks and state apportionment changes, among other items.
Net Income
Net income was $4.6 million and $14.3 million for the three months ended June 30, 2020 and 2019, respectively. The decrease in net income for the three months ended June 30, 2020 as compared to net income for the same period in the prior year was primarily due to decreased total sales volumes, partially offset by lower cost of goods sold.
SMART SAND, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)
Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019
The following table summarizes our revenue and expenses for the periods indicated.
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|
|
|
|
|
|
|
|
|
Six Months Ended September 30,
|
|
|
|
Change
|
|
|
|
2020
|
|
2019
|
|
Dollars
|
|
Percentage
|
|
(in thousands)
|
|
|
|
|
|
|
Revenues
|
$
|
73,594
|
|
|
$
|
119,716
|
|
|
$
|
(46,122)
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|
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(39)
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%
|
Cost of goods sold
|
52,995
|
|
|
83,673
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|
|
(30,678)
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|
|
(37)
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%
|
Gross profit
|
20,599
|
|
|
36,043
|
|
|
(15,444)
|
|
|
(43)
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%
|
Operating expenses:
|
|
|
|
|
|
|
|
Salaries, benefits and payroll taxes
|
5,057
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|
|
5,508
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|
|
(451)
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|
|
(8)
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%
|
Depreciation and amortization
|
914
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|
|
1,331
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|
|
(417)
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|
|
(31)
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%
|
Selling, general and administrative
|
6,460
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|
|
5,590
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|
|
870
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|
|
16
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%
|
Change in the estimated fair value of contingent consideration
|
(1,020)
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|
|
(1,542)
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|
|
522
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|
|
(34)
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%
|
|
|
|
|
|
|
|
|
Total operating expenses
|
11,411
|
|
|
10,887
|
|
|
524
|
|
|
5
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%
|
Operating income
|
9,188
|
|
|
25,156
|
|
|
(15,968)
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|
|
(63)
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%
|
Other income (expenses):
|
|
|
|
|
|
|
|
Interest expense, net
|
(1,079)
|
|
|
(1,975)
|
|
|
896
|
|
|
(45)
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%
|
Other income
|
82
|
|
|
74
|
|
|
8
|
|
|
11
|
%
|
Total other expenses, net
|
(997)
|
|
|
(1,901)
|
|
|
904
|
|
|
(48)
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%
|
Income before income tax expense
|
8,191
|
|
|
23,255
|
|
|
(15,064)
|
|
|
(65)
|
%
|
Income tax expense
|
3,635
|
|
|
4,946
|
|
|
(1,311)
|
|
|
(27)
|
%
|
Net income
|
$
|
4,556
|
|
|
$
|
18,309
|
|
|
$
|
(13,753)
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|
|
(75)
|
%
|
Revenues
Revenues were $73.6 million for the six months ended June 30, 2020, during which time we sold approximately 964,000 tons of sand. Revenues for the six months ended June 30, 2019 were $119.7 million, during which time we sold approximately 1,389,000 tons of sand. The key factors contributing to the decrease in revenues for the six months ended June 30, 2020 as compared to the six months ended June 30, 2019 were as follows:
•Sand sales revenue decreased from $57.0 million for the six months ended June 30, 2019 to $38.4 million for the six months ended June 30, 2020 as a result of lower total volumes of sand sold. The volumes sold during the second quarter of 2020 were negatively impacted by depressed oil prices driven by continued oversupply relative to the decreased demand due to the COVID-19 coronavirus pandemic.
•Logistics revenue, which includes freight for certain mine gate sand sales, railcar usage, logistics services, and SmartSystems rentals, was approximately $19.9 million for the six months ended June 30, 2020 compared to $40.7 million for the six months ended June 30, 2019. The decrease in logistics revenue was due to lower total volumes sold.
•We had $15.3 million of contractual shortfall revenue for the six months ended June 30, 2020 compared to $22.0 million of contractual shortfall revenue for the six months ended June 30, 2019. 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.
Cost of Goods Sold
Cost of goods sold was $53.0 million and $83.7 million for the six months ended June 30, 2020 and June 30, 2019, respectively. Cost of goods sold decreased for the six months ended June 30, 2020 as compared to the same period in June 30,
SMART SAND, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)
2019, primarily due lower freight costs due to reduced total sales volumes driven by lower oil prices and due to oversupply and lower demand due to the COVID-19 coronavirus pandemic.
Gross Profit
Gross profit was $20.6 million and $36.0 million for the six months ended June 30, 2020 and June 30, 2019, respectively. The decrease in gross profit for the six months ended June 30, 2020 was primarily due to lower total sales volumes and shortfall revenue.
Operating Expenses
Operating expenses were $11.4 million and $10.9 million for the six months ended June 30, 2020 and June 30, 2019, respectively. Salaries, benefits and payroll taxes were reduced to $5.1 million, as compared to $5.5 million for the six months ended June 30, 2020 and June 30, 2019, respectively, as we reduced headcount and salaries for all employees. Depreciation and amortization decreased from $1.3 million for the six months ended June 30, 2019 to $0.9 million for the six months ended June 30, 2020 primarily as a result of reduced amortization of certain intangible assets that were previously impaired. Selling, general and administrative expenses increased from $5.6 million for the six months ended June 30, 2019 to $6.5 million for the six months ended June 30, 2020, primarily as a result of increased professional fees due primarily to ongoing litigation.
Interest Expense
We incurred $1.1 million and $2.0 million of net interest expense for the six months ended June 30, 2020 and June 30, 2019, respectively. The decrease in interest expense for the three months ended June 30, 2020 was primarily due to lower interest rates on lower average total debt outstanding.
Income Tax Expense
For the six months ended June 30, 2020 and June 30, 2019, our effective tax rate was approximately 44.4% and 21.3%, 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, carrybacks and state apportionment changes, among other items.
Net Income
Net income was $4.6 million and $18.3 million for the six months ended June 30, 2020 and 2019, respectively. The decrease in net income for the six months ended June 30, 2020 as compared to net income for the same period in the prior year was primarily due to lower total sales volumes and decreased shortfall revenue.
Non-GAAP Financial Measures
EBITDA, Adjusted EBITDA and contribution margin 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. Net income (loss) is the GAAP measure most directly comparable to EBITDA and Adjusted EBITDA and gross profit is the GAAP measure most directly comparable to contribution margin. 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 EBITDA, Adjusted EBITDA or contribution margin in isolation or as substitutes for an analysis of our results as reported under GAAP. Because EBITDA, Adjusted EBITDA and contribution margin 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.
EBITDA and Adjusted EBITDA
We define EBITDA as net income (loss), plus: (i) depreciation, depletion and amortization expense; (ii) income tax expense; (iii) interest expense; and (iv) franchise taxes. We define Adjusted EBITDA as EBITDA, plus: (i) gain or loss on sale
SMART SAND, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)
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;
•our ability to incur and service debt and fund capital expenditures; and
•our operating performance as compared to those of other companies in our industry without regard to the impact of financing methods or capital structure;
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 (loss) 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 (loss) for each of the periods indicated.
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|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
(in thousands)
|
|
|
|
|
|
|
Net income
|
$
|
4,640
|
|
|
$
|
14,276
|
|
|
$
|
4,556
|
|
|
$
|
18,309
|
|
Depreciation, depletion and amortization
|
5,450
|
|
|
6,590
|
|
|
10,937
|
|
|
12,893
|
|
Income tax expense
|
3,470
|
|
|
3,973
|
|
|
3,635
|
|
|
4,946
|
|
Interest expense
|
619
|
|
|
997
|
|
|
1,099
|
|
|
1,978
|
|
Franchise taxes
|
94
|
|
|
93
|
|
|
150
|
|
|
178
|
|
EBITDA
|
$
|
14,273
|
|
|
$
|
25,929
|
|
|
$
|
20,377
|
|
|
$
|
38,304
|
|
Gain (loss) on sale of fixed assets
|
275
|
|
|
(1)
|
|
|
275
|
|
|
(26)
|
|
Equity compensation (1)
|
842
|
|
|
685
|
|
|
1,768
|
|
|
1,384
|
|
Acquisition and development costs (2)
|
144
|
|
|
(577)
|
|
|
(678)
|
|
|
(1,524)
|
|
|
|
|
|
|
|
|
|
Cash charges related to restructuring and retention of employees
|
—
|
|
|
41
|
|
|
82
|
|
|
82
|
|
Accretion of asset retirement obligations
|
76
|
|
|
166
|
|
|
151
|
|
|
445
|
|
Adjusted EBITDA
|
$
|
15,610
|
|
|
$
|
26,243
|
|
|
$
|
21,975
|
|
|
$
|
38,665
|
|
(1)Represents the non-cash expenses for stock-based awards issued to our employees and employee stock purchase plan compensation expense.
(2)Includes $0 and $1,020 fair value adjustment of contingent consideration for the three and six months ended June 30, 2020, respectively, and $575 and $1,542 fair value adjustment of contingent consideration for the three and six months ended June 30, 2019, respectively.
____________________
Adjusted EBITDA was $15.6 million for the three months ended June 30, 2020 compared to $26.2 million for the three months ended June 30, 2019. The decrease in Adjusted EBITDA for the three months ended June 30, 2020, as compared to the corresponding period in the prior year, was primarily due to lower total volumes sold and decreased shortfall revenue in the current period.
SMART SAND, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)
Adjusted EBITDA was $22.0 million for the six months ended June 30, 2020 compared to $38.7 million for the six months ended June 30, 2019. The decrease in Adjusted EBITDA for the six months ended June 30, 2020, as compared to the corresponding period in the prior year, was primarily due to lower total volumes sold and lower shortfall revenue in the current period.
Contribution Margin
We also use contribution margin, which we define as total revenues less costs 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. Because 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.
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Three Months Ended
June 30,
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Six Months Ended
June 30,
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2020
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2019
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2020
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2019
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(in thousands)
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Revenue
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$
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26,106
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$
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67,941
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$
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73,594
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$
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119,716
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Cost of goods sold
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11,906
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43,068
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52,995
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83,673
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Gross profit
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14,200
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24,873
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20,599
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36,043
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Depreciation, depletion, and accretion of asset retirement obligations
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5,065
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6,101
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10,174
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12,007
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Contribution margin
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$
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19,265
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$
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30,974
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$
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30,773
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$
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48,050
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Contribution margin per ton
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$
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92.62
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$
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41.80
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$
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31.92
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$
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34.59
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Total tons sold
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208
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741
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964
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1,389
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Contribution margin was $19.3 million and $31.0 million, or $92.62 and $41.80 per ton sold, for the three months ended June 30, 2020 and 2019, respectively. The decrease in overall contribution margin was due primarily to lower total volumes sold. The higher contribution margin per ton in the current period was due to the contribution margin being spread over reduced total volumes sold during the period.
Contribution margin was $30.8 million and $48.1 million, or $31.92 and $34.59 per ton sold, for the six months ended June 30, 2020 and 2019, respectively. The decrease in contribution margin was due primarily to lower total tons sold in the current period. The contribution margin per ton sold was slightly lower for the six months ended June 30, 2020 as compared to the corresponding period in the prior year. The current period was negatively impacted by lower total volumes and decreased shortfall revenue.
Liquidity and Capital Resources
Our primary sources of liquidity are cash on hand, cash flow generated from operations and available borrowings under the ABL Credit Facility. As of June 30, 2020, cash on hand was $16.6 million and we had $8.0 million in undrawn availability on our ABL Credit Facility. With the decline in the price of frac sand and instability in the market, we have taken steps to
SMART SAND, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)
mitigate near term liquidity issues, including a reduction to our budgeted capital expenditures, primarily as a reduction to our SmartSystems manufacturing plans. We have also put in place several cost cutting measures, including headcount reductions at our Oakdale and Saskatoon operating facilities, salary reductions and suspension of certain variable cash compensation programs for all employees. We have also taken steps to limit cash outflows in the near-term by negotiating for deferred payments on certain of our operating leases, debt and minimum royalty payments. Based on our balance sheet, cash flows, current market conditions and information available to us at this time, we believe that we have sufficient liquidity and other available capital resources to meet our cash needs for the next twelve months.
Working Capital
The following table presents the components of our working capital as of June 30, 2020 compared to December 31, 2019.
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June 30, 2020
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December 31, 2019
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(in thousands)
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Total current assets
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$
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97,053
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$
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92,177
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Total current liabilities
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33,107
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40,018
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Working capital
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$
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63,946
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$
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52,159
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Our working capital was $63.9 million at June 30, 2020 compared to $52.2 million at December 31, 2019. The moderate increase in working capital was primarily due to cash collections and reductions in spending efforts as certain vendor and lease contracts were modified. As of June 30, 2020 and December 31, 2019, $54.6 million and $37.4 million, respectively, of total accounts and unbilled receivables is attributable to a customer with which we have pending litigation.
Summary Cash Flows for the Six Months Ended June 30, 2020 and June 30, 2019:
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Six Months Ended June 30,
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2020
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2019
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(in thousands)
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Net cash provided by operating activities
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$
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25,842
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$
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17,403
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Net cash used in investing activities
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$
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(6,423)
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$
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(13,869)
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Net cash provided by financing activities
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$
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(5,415)
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$
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(3,747)
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Net Cash Provided by Operating Activities
Net cash provided by operating activities was $25.8 million for the six months ended June 30, 2020, which included net income of $4.6 million, non-cash expenses of $13.5 million, and $7.7 million in changes in operating assets and liabilities.
Net cash provided by operating activities was $17.4 million for the six months ended June 30, 2019. Operating cash flows include net income of $18.3 million offset by cost of goods sold, general and administrative expenses and cash interest expense, adjusted for changes in working capital.
Net Cash Used in Investing Activities
Net cash used in investing activities was $6.4 million for the six months ended June 30, 2020, which was primarily for manufacturing of our SmartDepot silos.
Net cash used in investing activities was $13.9 million for the six months ended June 30, 2019, which was primarily for manufacturing of our SmartSystems.
SMART SAND, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)
Net Cash Used in Financing Activities
Net cash used in financing activities was $5.4 million for the six months ended June 30, 2020, which consisted primarily of $2.5 million of net repayments on our ABL Credit Facility, $1.6 million of net repayment for notes payable and finance leases, $1.0 million of share repurchases, and $0.3 million of payments of contingent consideration related to the manufacture of our SmartSystem equipment.
Net cash used in financing activities was $3.7 million for the six months ended June 30, 2019, which consisted primarily of $5.5 million of net repayments on our Credit Facility, $1.2 million of payments of contingent consideration related to the manufacture of our SmartSystem equipment, partially offset by $3.1 million of net proceeds from the issuance of notes payable.
Indebtedness
The follow summarizes the maturity of our debt:
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Oakdale Equipment Financing, Net
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ABL Credit Facility
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Notes Payable
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Finance Leases
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Total
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(in thousands)
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Remainder 2020
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$
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1,641
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$
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—
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$
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1,229
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$
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58
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$
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2,928
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2021
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3,435
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—
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3,086
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121
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6,642
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2022
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3,650
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—
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3,033
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116
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6,799
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2023
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3,877
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—
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2,100
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236
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6,213
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2024
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7,569
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—
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1,144
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—
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8,713
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Total
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$
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20,172
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$
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—
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$
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10,592
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$
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531
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$
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31,295
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Oakdale Equipment Financing
On December 13, 2019, we received net proceeds of $23.0 million in an equipment financing arrangement with Nexseer. Substantially all of our 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%. We used the net proceeds to repay in full and terminate the Former Credit Facility, pay transaction costs, and the remainder was used for working capital purposes. The Oakdale Equipment Financing matures on December 13, 2024.
ABL Credit Facility
On December 13, 2019, we entered into a $20.0 million five-year senior secured asset-based credit facility with Jefferies Finance LLC. The available borrowing amount under the ABL Credit Facility as of June 30, 2020 was $20.0 million and is based on our eligible accounts receivable and inventory. As of June 30, 2020, there were no amounts outstanding under the ABL Credit Facility and $8.0 million was available to be drawn. We use this facility primarily as a source for working capital needs. The weighted average interest rate on borrowings for the three and six months ended June 30, 2020 was 3.25%. As of June 30, 2020 and December 31, 2019, we were in compliance with all covenants.
Notes Payable
We have 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 our 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%.
Capital Requirements
The recent decline in oil prices resulting from a combination of oversupply from Russia and Saudi Arabia and reduced demand related to the COVID-19 coronavirus pandemic has led many exploration and production companies and oilfield
SMART SAND, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)
service companies to announce plans to slow or stop well completions activity. In response, we have reduced our total capital expenditure budget by up to $20 million for the year ended December 31, 2020, including a significant reduction in our SmartSystems manufacturing plans. We now estimate that full year 2020 capital expenditures will be less than $10.0 million. For the six months ended June 30, 2020, we spent approximately $6.4 million on capital expenditures.
Share Repurchases
We are authorized to repurchase shares through open market purchases at prevailing market prices or through privately negotiated transactions as permitted by securities laws and other legal requirements. On November 8, 2018, the Company announced that the board of directors authorized the Company to repurchase up to 2,000,000 shares of the Company’s common stock during the twelve-month period following the announcement of the share repurchase program. On September 11, 2019, the board of directors reauthorized the existing share repurchase program for an additional twelve months. At June 30, 2020, the maximum number of shares that the Company may repurchase under the current repurchase authority was 633,500 shares. There were no shares repurchased during the three months ended June 30, 2020.
The program allows the Company to repurchase shares at its discretion. Market conditions, price, corporate and regulatory requirements, alternative investment opportunities, and other economic conditions will influence the timing of the repurchase and the number of shares repurchased, if any. The program does not obligate the Company to repurchase any specific number of shares and, subject to compliance with applicable securities laws and other legal requirements, may be suspended or terminated at any time without prior notice.
Off-Balance Sheet Arrangements
We had outstanding performance bonds of $7.4 million and $7.9 million at June 30, 2020 and December 31, 2019, respectively.
Contractual Obligations
As of June 30, 2020, we had contractual obligations for the Oakdale Equipment Financing, ABL Credit Facility, notes payable, operating and finance leases, minimum payments for the rights to mine land, capital expenditures and asset retirement obligations.
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 at our wet processing plant. 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 are 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. During the fourth quarter of 2017, we finished construction of a new wet plant, which is an indoor facility that allows 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
SMART SAND, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)
where severe weather conditions may curtail drilling activities and, as a result, our sales volumes to those areas may be reduced during such severe weather periods.
Customer Concentration
For the six months ended June 30, 2020, revenue from Rice Energy (a subsidiary of EQT Corporation), U.S. Well Services, Liberty, and Calfrac accounted for 26.6%, 23.3%, 18.2%, and 11.8%, respectively, of total revenue. For the six months ended June 30, 2019, sales to Liberty, Rice Energy, and U.S. Well Services accounted for 26.7%, 20.8%, and 13.0%, respectively, of total revenue.
Critical Accounting Policies and Estimates
There have been no material changes in our critical accounting policies and procedures during the six months ended June 30, 2020.
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; 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 intangible assets and other long-lived assets); estimated cost of future asset retirement obligations; stock-based compensation; recoverability of deferred tax assets; inventory reserve; 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 coronavirus pandemic has caused a significant amount of volatility in the oilfield services sector and is expected to result in a continued depression of oil prices. Subsequently, Russia and OPEC agreed to certain production cuts, to mitigate the decline in the price of oil; however, such cuts may not be sufficient to stabilize the oil market if the decline in demand due to the COVID-19 coronavirus pandemic continues. We are actively monitoring these global events, but given the rapidly changing nature of these events, we are currently unable to estimate the impact of these events on our future financial position and results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have considered changes in our exposure to market risks during the six months ended June 30, 2020 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, 2019, filed with the SEC on February 26, 2020.
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
During the quarter ended June 30, 2020, the Company identified an error in costs of goods sold in the Company’s audited financial statements for the year ended December 31, 2018. The error related to a vendor rebate of $5,300 the company received during the current period, $1,800 of which related to expenses attributable to fiscal year 2018. As a result of the error, the Company reduced costs of goods sold by $1,800 and increased income tax expense by $387 in its audited financial statements for the year ended December 31, 2018, and increased prepaid expenses and other current assets by $1,800, increased deferred tax liability by $387 and increased retained earnings by $1,413 in its audited financial statements for the year ended December 31, 2019. Additionally, certain 2019 balance sheet items have been reclassified to conform to the current financial statement presentation. These reclassifications have no effect on previously reported net income.
Pursuant to the guidance of Staff Accounting Bulletin (“SAB”) No. 99, “Materiality”, the Company evaluated the materiality of these errors quantitatively and qualitatively and concluded that the errors described above were not material to any of its prior annual or quarterly financial statements or trends of financial results. However, due to reduced activity and the current economic environment, the errors could be considered material to the Company’s current period financial statements. As such, the Company has revised the prior period financial statements in accordance with SAB No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.” The Company expects to similarly revise previously presented historical financial statements for these immaterial errors in future filings, including the annual audited financial statements to be included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.
Management has determined that the omission of accounting for the vendor contract described above is a significant deficiency. Management has reassessed its internal control over financial reporting and added new review controls to ensure its contracts are evaluated and accounted for completely.
There have been no other changes in internal control over financial reporting for the quarter ended June 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.