Smart Sand(US:SND)2020-08-04 21:53Part I Financial Statements The company's Q2 2020 financial statements reflect significant declines in revenue and net income, with increased operating cash flow Condensed Consolidated Balance Sheets As of June 30, 2020, total assets slightly decreased, while cash and cash equivalents significantly increased, and total liabilities declined Balance Sheet Summary (in thousands) | Account | June 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Total Current Assets | $97,053 | $92,177 | | Cash and cash equivalents | $16,643 | $2,639 | | Total Assets | $359,234 | $363,403 | | Total Current Liabilities | $33,107 | $40,018 | | Long-term debt, net | $24,865 | $28,240 | | Total Liabilities | $107,906 | $117,847 | | Total Stockholders' Equity | $251,328 | $245,556 | Condensed Consolidated Income Statements The company experienced significant year-over-year declines in Q2 2020 revenues and net income, primarily due to lower sales volumes Income Statement Comparison (in thousands, except per share amounts) | Metric | Q2 2020 | Q2 2019 | Change | Six Months 2020 | Six Months 2019 | Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Revenues | $26,106 | $67,941 | -62% | $73,594 | $119,716 | -39% | | Gross Profit | $14,200 | $24,873 | -43% | $20,599 | $36,043 | -43% | | Operating Income | $8,654 | $19,205 | -55% | $9,188 | $25,156 | -63% | | Net Income | $4,640 | $14,276 | -67% | $4,556 | $18,309 | -75% | | Diluted EPS | $0.12 | $0.36 | -67% | $0.11 | $0.46 | -76% | Condensed Consolidated Statements of Cash Flows For the six months ended June 30, 2020, operating cash flow increased, investing activities decreased, and financing activities primarily involved debt repayments Cash Flow Summary for Six Months Ended June 30 (in thousands) | Cash Flow Activity | 2020 | 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $25,842 | $17,403 | | Net cash used in investing activities | ($6,423) | ($13,869) | | Net cash provided by (used in) financing activities | ($5,415) | ($3,747) | | Net increase (decrease) in cash | $14,004 | ($213) | | Cash and cash equivalents at end of period | $16,643 | $1,253 | Notes to the Condensed Consolidated Financial Statements Notes detail the impact of COVID-19 and low oil prices, revenue disaggregation, significant customer concentration, and a corrected prior-period accounting error - The company's business is significantly impacted by low oil prices due to the COVID-19 pandemic and a global supply increase. In response, the company has reduced capital expenditures, implemented headcount and salary reductions, and deferred some payments3637 Disaggregation of Revenue - Q2 2020 vs Q2 2019 (in thousands) | Revenue Type | Q2 2020 | % of Total | Q2 2019 | % of Total | | :--- | :--- | :--- | :--- | :--- | | Sand sales revenue | $7,375 | 28% | $31,362 | 46% | | Shortfall revenue | $14,000 | 54% | $16,283 | 24% | | Logistics revenue | $4,731 | 18% | $20,296 | 30% | | Total revenues | $26,106 | 100% | $67,941 | 100% | - The company has significant customer concentration. As of June 30, 2020, one customer accounted for 98% of total accounts receivable. For Q2 2020, two customers accounted for 91% of revenues103104 - The company is in litigation with U.S. Well Services over a take-or-pay contract. As of June 30, 2020, $54.6 million of accounts and unbilled receivables were attributable to this customer112113 Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q2 2020 revenue decline due to lower sales volumes, cost-cutting measures, reduced capital expenditures, and liquidity, while noting litigation risk Q2 2020 vs Q2 2019 Performance (in thousands) | Metric | Q2 2020 | Q2 2019 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Revenues | $26,106 | $67,941 | $(41,835) | (62)% | | Tons Sold (thousands) | 208 | 741 | (533) | (72)% | | Gross Profit | $14,200 | $24,873 | $(10,673) | (43)% | | Net Income | $4,640 | $14,276 | $(9,636) | (67)% | - The company has reduced its full-year 2020 capital expenditure budget to less than $10.0 million, a reduction of up to $20 million, primarily by cutting SmartSystems manufacturing plans193 Non-GAAP Reconciliation: Adjusted EBITDA (in thousands) | Metric | Q2 2020 | Q2 2019 | Six Months 2020 | Six Months 2019 | | :--- | :--- | :--- | :--- | :--- | | Net income | $4,640 | $14,276 | $4,556 | $18,309 | | EBITDA | $14,273 | $25,929 | $20,377 | $38,304 | | Adjusted EBITDA | $15,610 | $26,243 | $21,975 | $38,665 | - As of June 30, 2020, the company had $16.6 million in cash and $8.0 million in undrawn availability on its ABL Credit Facility. Management believes this provides sufficient liquidity for the next twelve months171174 Quantitative and Qualitative Disclosures about Market Risk There have been no material changes to the company's market risk exposure since the prior annual report - There have been no material changes in the company's exposure to market risks during the six months ended June 30, 2020209 Controls and Procedures Management concluded disclosure controls were effective, despite identifying and correcting a significant deficiency related to a prior-period accounting error - An accounting error related to a vendor rebate from fiscal year 2018 was identified. While not material to prior periods, it was corrected via revisions to prior financial statements211212 - Management determined the omission constituted a 'significant deficiency' in internal control over financial reporting and has added new review controls to ensure contracts are accounted for completely213 Part II Legal Proceedings The company is engaged in significant litigation with a key customer, U.S. Well Services, LLC, over an alleged breach of a take-or-pay contract - Smart Sand is suing U.S. Well Services, LLC for breach of a take-or-pay Master Product Purchase Agreement, seeking unspecified monetary damages112 - As of June 30, 2020, accounts and unbilled receivables from U.S. Well Services totaled $54.6 million113227 Risk Factors Key risks include dependence on the volatile oil and gas industry, reliance on a single production facility, and significant customer concentration with ongoing litigation - The business is highly dependent on oil and natural gas industry activity, which has been depressed by the COVID-19 pandemic and an oil price war, leading to a material adverse impact on the company's financial position and cash flows218219221 - All sand sales are generated from a single facility in Oakdale, Wisconsin, creating a significant operational risk. Any disruption at this facility could materially harm the business226 - A substantial portion of accounts receivable ($54.6 million) as of June 30, 2020 is due from one customer, and collection is subject to the uncertain outcome of ongoing litigation227 Unregistered Sales of Equity Securities and Use of Proceeds The company has an authorized share repurchase program, but no shares were repurchased during Q2 2020, with 633,500 shares remaining available - No shares were repurchased during the three months ended June 30, 2020194230 - As of June 30, 2020, the company had authority to repurchase a maximum of 633,500 additional shares under its existing program194230 Defaults upon Senior Securities No defaults upon senior securities occurred during the reporting period - None231 Mine Safety Disclosures The company's mining operations are subject to MSHA and OSHA regulations, with a commitment to safety and adherence to industry standards - Operations are subject to the Federal Mine Safety and Health Act, with MSHA performing at least two unannounced inspections annually232 - The company monitors workplace exposure to respirable silica and notes that MSHA may adopt stricter rules, which could require capital expenditures233 Other Information No additional information is reported for this item - None235 Exhibits This section lists all exhibits filed with the Form 10-Q, including corporate governance documents, material contracts, and certifications - Key exhibits filed include a letter agreement to a Master Product Purchase Agreement, the Amended and Restated 2016 Omnibus Incentive Plan, CEO/CFO certifications, and Mine Safety Disclosures237