Smart Sand(SND) - 2024 Q1 - Quarterly Report

PART I FINANCIAL INFORMATION ITEM 1. Financial Statements This section presents Smart Sand, Inc.'s unaudited condensed consolidated financial statements, including balance sheets, statements of operations, comprehensive income (loss), changes in stockholders' equity, and cash flows, with detailed notes on business, accounting policies, debt, leases, revenue, income taxes, and concentrations for the period ended March 31, 2024 Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheet Highlights (in thousands) | Item | March 31, 2024 | December 31, 2023 | Change | % Change | | :--------------------------------- | :------------- | :---------------- | :----- | :------- | | Cash and cash equivalents | $4,598 | $6,072 | $(1,474) | -24.3% | | Accounts receivable | $37,698 | $23,231 | $14,467 | 62.3% | | Total current assets | $71,169 | $61,904 | $9,265 | 15.0% | | Total assets | $349,261 | $346,300 | $2,961 | 0.9% | | Accounts payable | $9,935 | $16,041 | $(6,106) | -38.1% | | Accrued expenses and other liabilities | $15,402 | $11,024 | $4,378 | 39.7% | | Current portion of long-term debt | $22,045 | $15,711 | $6,334 | 40.3% | | Total current liabilities | $59,311 | $54,466 | $4,845 | 8.9% | | Total liabilities | $106,733 | $104,033 | $2,700 | 2.6% | | Total stockholders' equity | $242,528 | $242,267 | $261 | 0.1% | Condensed Consolidated Statements of Operations Condensed Consolidated Statements of Operations Highlights (in thousands, except per share amounts) | Item | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | Change | % Change | | :--------------------------------- | :-------------------------------- | :-------------------------------- | :----- | :------- | | Sand revenue | $79,719 | $80,019 | $(300) | -0.4% | | SmartSystems revenue | $3,333 | $2,331 | $1,002 | 43.0% | | Total revenue | $83,052 | $82,350 | $702 | 0.9% | | Total cost of goods sold | $71,241 | $70,713 | $528 | 0.7% | | Gross profit | $11,811 | $11,637 | $174 | 1.5% | | Total operating expenses | $11,027 | $13,245 | $(2,218) | -16.7% | | Operating income (loss) | $784 | $(1,608) | $2,392 | 148.8% | | Net loss | $(216) | $(3,599) | $3,383 | 94.0% | | Basic net loss per common share | $(0.01) | $(0.09) | $0.08 | 88.9% | | Diluted net loss per common share | $(0.01) | $(0.09) | $0.08 | 88.9% | Condensed Consolidated Statements of Comprehensive Income (Loss) Condensed Consolidated Statements of Comprehensive Income (Loss) (in thousands) | Item | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :--------------------------------- | :-------------------------------- | :-------------------------------- | | Net loss | $(216) | $(3,599) | | Foreign currency translation adjustment | $(26) | $(66) | | Comprehensive loss | $(242) | $(3,665) | Condensed Consolidated Statements of Changes in Stockholders' Equity Changes in Stockholders' Equity (in thousands) | Item | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :--------------------------------- | :-------------------------------- | :-------------------------------- | | Balance at December 31 | $242,267 | $243,471 | | Stock-based compensation | $642 | $779 | | Employee stock purchase plan issuance | $25 | $33 | | Restricted stock buy back | $(170) | $(3) | | Net loss | $(216) | $(3,599) | | Balance at March 31 | $242,528 | $231,772 | Condensed Consolidated Statements of Cash Flows Condensed Consolidated Statements of Cash Flows Highlights (in thousands) | Cash Flow Activity | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :--------------------------------- | :-------------------------------- | :-------------------------------- | | Net cash (used in) provided by operating activities | $(3,863) | $5,105 | | Net cash used in investing activities | $(1,645) | $(4,017) | | Net cash provided by financing activities | $4,034 | $1,006 | | Net (decrease) increase in cash and cash equivalents | $(1,474) | $2,094 | | Cash and cash equivalents at end of period | $4,598 | $7,604 | Notes to the Condensed Consolidated Financial Statements These notes provide detailed disclosures on the company's organization, accounting policies, inventory, property, debt, leases, asset retirement obligations, revenue, income taxes, concentrations, and contingencies, offering essential context to the unaudited financial statements NOTE 1 — Organization and Nature of Business - Smart Sand, Inc. operates as a fully integrated frac and industrial sand supply and services company, offering mine-to-wellsite proppant solutions and industrial sand[30] - The company's operating facilities (Oakdale, Utica, Blair) have a total annual processing capacity of approximately 10.0 million tons, with the Blair facility commencing operations in April 2023[31][32][33][91] - Smart Sand provides proppant logistics solutions through a network of in-basin transloading terminals, including new terminals in Minerva, Ohio, and Dennison, Ohio, expected to commence operations in Q2 2024[34][92] - The company offers proprietary SmartSystems™ for wellsite proppant storage and management, including SmartDepot silos, SmartPath transloaders, and SmartBelt conveyors, designed for efficiency, safety, and dust suppression[35][93] - Smart Sand has expanded its Industrial Product Solutions (IPS) to diversify its customer base and markets, with blending and cooling assets installed at its Utica facility in 2023[30][94] NOTE 2 — Summary of Significant Accounting Policies - The company reclassified prior year revenue line items: 'Sand revenue' now includes sand sales, shortfall, railcar rental, and transportation, while 'SmartSystems revenue' covers equipment rental and related services, with no change in revenue recognition methods[39] - Management relies on significant estimates for financial reporting, including asset impairment, asset retirement obligations, fair value of acquired assets, deferred tax assets, inventory reserves, and collectability of receivables[41] - Global events (Ukraine, Middle East conflicts) and policy changes (LNG permits) may affect oil and natural gas prices, leading to volatility in the oilfield service sector, with an uncertain material adverse effect on the company's financial position or results[42] - Recent FASB ASUs on Segment Reporting (ASU 2023-07, effective 2024/2025) and Income Taxes (ASU 2023-09, effective 2025/2026) are expected to primarily affect note disclosures upon adoption[44][47][48] NOTE 3 — Inventory Inventory Breakdown (in thousands) | Inventory Type | March 31, 2024 | December 31, 2023 | | :--------------- | :------------- | :---------------- | | Raw material | $1,509 | $467 | | Work in progress | $6,076 | $9,391 | | Finished goods | $9,237 | $8,244 | | Spare parts | $8,762 | $8,721 | | Total inventory | $25,584 | $26,823 | NOTE 4 — Property, Plant and Equipment, net Property, Plant and Equipment, net (in thousands) | Item | March 31, 2024 | December 31, 2023 | | :--------------------------------- | :------------- | :---------------- | | Machinery, equipment and tooling | $41,748 | $40,632 | | SmartSystems | $31,127 | $30,651 | | Plant and building | $215,098 | $213,756 | | Total gross PP&E | $417,436 | $414,230 | | Less: accumulated depreciation and depletion | $166,052 | $159,138 | | Total property, plant and equipment, net | $251,384 | $255,092 | - Depreciation expense for the three months ended March 31, 2024, was $6,981 thousand, up from $6,342 thousand in the prior year period[50] NOTE 5 — Accrued and Other Expenses Accrued and Other Expenses (in thousands) | Item | March 31, 2024 | December 31, 2023 | | :--------------------------------- | :------------- | :---------------- | | Employee related expenses | $2,128 | $1,767 | | Accrued freight and delivery charges | $3,226 | $2,066 | | Accrued real estate tax | $1,703 | $1,044 | | Accrued utilities | $1,217 | $604 | | Other accrued liabilities | $2,040 | $58 | | Total accrued liabilities | $15,402 | $11,024 | NOTE 6 — Debt Debt Breakdown (in thousands) | Item | March 31, 2024 | December 31, 2023 | | :--------------------------------- | :------------- | :---------------- | | Current portion of long-term debt: | | | | ABL Credit Facility | $14,000 | $8,000 | | Oakdale Equipment Financing | $6,854 | $6,462 | | Notes payable | $983 | $1,011 | | Finance leases | $208 | $238 | | Total current portion of long-term debt | $22,045 | $15,711 | | Long-term debt, net of current portion: | | | | Oakdale Equipment Financing | $0 | $1,388 | | Notes payable | $1,972 | $1,519 | | Finance leases | $473 | $542 | | Total long-term debt | $2,445 | $3,449 | - The ABL Credit Facility had $14.0 million outstanding and $6.0 million available as of March 31, 2024, with a weighted average interest rate of 8.25% for Q1 2024. The company is in the process of refinancing this facility[57][134] - The Oakdale Equipment Financing bears a fixed interest rate of 5.79%, with an outstanding balance of $6.9 million as of March 31, 2024[58][134] - Notes payable, primarily for heavy equipment and SmartSystems, bear interest rates between 3.99% and 7.49%, totaling $3.0 million as of March 31, 2024[59][134] NOTE 7 — Leases Lease Liabilities and Right-of-Use Assets (in thousands) | Item | March 31, 2024 | December 31, 2023 | | :--------------------------------- | :------------- | :---------------- | | Total right-of-use assets | $21,145 | $24,173 | | Total lease liabilities | $22,305 | $25,372 | | Operating lease cost (Q1 2024) | $3,387 | $3,195 | | Finance lease cost (Q1 2024) | $75 | $110 | - The weighted average remaining lease term for operating leases was 2.7 years (March 31, 2024) with a weighted average discount rate of 6.53%[65] NOTE 8 — Asset Retirement Obligations Asset Retirement Obligations (in thousands) | Item | Amount | | :--------------------------------- | :----- | | Balance at December 31, 2023 | $19,923 | | Accretion expense | $249 | | Balance at March 31, 2024 | $20,172 | NOTE 9 — Revenue Revenue Disaggregation (in thousands) | Revenue Type | Q1 2024 Revenue | % of Total | Q1 2023 Revenue | % of Total | | :------------- | :-------------- | :--------- | :-------------- | :--------- | | Sand revenue | $79,719 | 96% | $80,019 | 97% | | SmartSystems revenue | $3,333 | 4% | $2,331 | 3% | | Total revenue | $83,052 | 100% | $82,350 | 100% | - Unsatisfied performance obligations as of March 31, 2024, totaled $184.180 million, with $98.950 million expected in the remainder of 2024 and $85.230 million in 2025[72] NOTE 10 — Income Taxes - The effective tax rate for Q1 2024 was approximately 155.2%, compared to (79.9)% in Q1 2023, based on the annual effective tax rate net of discrete federal and state taxes[74] - The company recorded a liability for uncertain tax positions of $2.240 million and a partial valuation allowance against gross deferred tax assets of $874 thousand as of December 31, 2023, with no material change in Q1 2024[75][76] NOTE 11 — Concentrations - Four customers accounted for 63% of total accounts receivable as of March 31, 2024 (down from 70% at Dec 31, 2023)[78] - Three customers accounted for 60% of total revenues for Q1 2024 (up from 57% in Q1 2023). Specific customers for Q1 2024 were Equitable Gas Corporation (37.4%), Halliburton Energy Services (11.4%), and Encino Energy (11.2%)[78][141] - Two vendors accounted for 29% of accounts payable as of March 31, 2024, and two vendors accounted for 35% of cost of goods sold for Q1 2024[81] - The company faces geographic risk due to its primary product (Northern White sand) and mining operations being limited to Wisconsin and Illinois[82] NOTE 12 — Commitments and Contingencies - The company is involved in litigation regarding negligence and nuisance claims at its Blair facility, with HCR agreeing to indemnify for pre-acquisition actions; the outcome is uncertain[84] - Total aggregate principal amount of performance bonds outstanding was $19.727 million as of March 31, 2024[85] ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial performance for the three months ended March 31, 2024, covering business overview, market trends, GAAP results, non-GAAP measures, liquidity, and critical accounting policies, highlighting increased SmartSystems revenue and reduced net loss amid market volatility and inflation Overview - Smart Sand, Inc. is a fully integrated frac and industrial sand supply and services company, offering low-cost, high-quality Northern White sand and comprehensive logistics solutions[89] - The company operates mining and processing facilities in Oakdale, Utica, and Blair, with a combined annual processing capacity of approximately 10.0 million tons, and access to all Class I rail lines[91] - Smart Sand controls five in-basin transloading facilities and offers SmartSystems™ wellsite proppant storage and management solutions, including SmartDepot silos, SmartPath transloaders, and SmartBelt conveyors, to enhance efficiency and safety[92][93] - The company is expanding its Industrial Product Solutions (IPS) to diversify its customer base and markets, with blending and cooling assets installed at its Utica facility in 2023[94] Market Trends - During Q1 2024, the Northern White Sand market experienced a relative balance of supply and demand, with increased volumes (approximately 12%) but lower average sand prices compared to Q1 2023[96][105] - Sand pricing moderated in the second half of 2023 and stabilized in Q1 2024, while high levels of inflation continued to increase operating expenses[96] - Geopolitical events (Ukraine, Middle East) and policy changes (LNG permits) could impact oil and natural gas prices, leading to demand and pricing volatility, and customer reluctance for long-term contracts, favoring spot market purchases[96][99] - The IPS business offers relative stability due to diverse macroeconomic drivers and is expected to help diversify sales and mitigate price volatility from the oil and gas industry[101] GAAP Results of Operations GAAP Results of Operations (in thousands, except per share amounts) | Item | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | Change | % Change | | :--------------------------------- | :-------------------------------- | :-------------------------------- | :----- | :------- | | Total revenue | $83,052 | $82,350 | $702 | 0.9% | | Sand revenue | $79,719 | $80,019 | $(300) | -0.4% | | SmartSystems revenue | $3,333 | $2,331 | $1,002 | 43.0% | | Total cost of goods sold | $71,241 | $70,713 | $528 | 0.7% | | Gross profit | $11,811 | $11,637 | $174 | 1.5% | | Total operating expenses | $11,027 | $13,245 | $(2,218) | -16.7% | | Operating income (loss) | $784 | $(1,608) | $2,392 | 148.8% | | Net loss | $(216) | $(3,599) | $3,383 | 94.0% | | Basic net loss per common share | $(0.01) | $(0.09) | $0.08 | 88.9% | - Total volumes sold increased by approximately 12% (1,336,000 tons in Q1 2024 vs. 1,195,000 tons in Q1 2023), but average sand prices were lower, while SmartSystems revenue grew due to higher utilization and expanded SmartBelt technology[105] - Operating expenses decreased significantly due to cost reduction measures and a non-recurring $1.9 million net loss on disposal of fixed assets in Q1 2023[109][113] - The effective tax rate was 155.2% in Q1 2024, compared to (79.9)% in Q1 2023, influenced by income tax credits, tax depletion deduction, and state apportionment changes[111] Non-GAAP Financial Measures The company uses non-GAAP financial measures like Contribution Margin, EBITDA, Adjusted EBITDA, and Free Cash Flow to offer supplemental insights into operational performance, liquidity, and debt servicing ability, complementing GAAP financial statements Contribution Margin Contribution Margin (in thousands, except per ton amounts) | Item | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :--------------------------------- | :-------------------------------- | :-------------------------------- | | Gross profit | $11,811 | $11,637 | | Depreciation, depletion, and accretion of ARO | $6,697 | $6,159 | | Contribution margin | $18,508 | $17,796 | | Contribution margin per ton | $13.85 | $14.89 | | Total tons sold | 1,336 | 1,195 | - Overall contribution margin increased due to higher tons sold and increased SmartSystems utilization, while contribution margin per ton decreased due to lower average sand sales prices[121] EBITDA and Adjusted EBITDA EBITDA and Adjusted EBITDA Reconciliation (in thousands) | Item | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :--------------------------------- | :-------------------------------- | :-------------------------------- | | Net loss | $(216) | $(3,599) | | Depreciation, depletion and amortization | $7,200 | $6,551 | | Income tax expense and other taxes | $607 | $1,845 | | Interest expense | $496 | $442 | | EBITDA | $8,087 | $5,239 | | Net loss on disposal of fixed assets | $3 | $1,889 | | Equity compensation | $581 | $736 | | Acquisition and development costs | $308 | $271 | | Cash charges related to restructuring and retention of employees | $107 | $0 | | Accretion of asset retirement obligations | $249 | $200 | | Adjusted EBITDA | $9,335 | $8,335 | - Adjusted EBITDA increased primarily due to higher sales volumes, increased IPS sales, and higher utilization of the SmartSystems fleet[126] Free Cash Flow Free Cash Flow Reconciliation (in thousands) | Item | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :--------------------------------- | :-------------------------------- | :-------------------------------- | | Net cash (used in) provided by operating activities | $(3,863) | $5,105 | | Purchases of property, plant and equipment | $(1,646) | $(4,018) | | Free cash flow | $(5,509) | $1,087 | - The decrease in free cash flow was primarily due to a decrease in net cash provided by operating activities, attributed to an increase in working capital to support higher sales volumes[130] Liquidity and Capital Resources - As of March 31, 2024, the company had $4.6 million in cash and cash equivalents and $6.0 million in undrawn availability on its ABL Credit Facility, which is currently being refinanced[131] - Expected capital expenditures for full year 2024 are between $15.0 million and $20.0 million, primarily for process improvement, equipment upgrades, and the build-out of new Ohio terminals[133] - Debt facilities include the Oakdale Equipment Financing ($6.9 million outstanding) and various notes payable ($3.0 million outstanding) as of March 31, 2024[134] - Operating lease liabilities totaled $21.6 million as of March 31, 2024, with anticipated minimum cash payments of $8.3 million for the remainder of 2024[135] - The company has $19.7 million in outstanding performance bonds as of March 31, 2024, and annual minimum payments of approximately $2.5 million for mineral rights contracts over the next 13 years[136][137] - The business is affected by seasonality, with wet sand processing capacity historically limited during winter months, leading to lower cash operating costs in Q1/Q4 and higher in Q2/Q3 due to inventory build-up[140] - For Q1 2024, Equitable Gas Corporation, Halliburton Energy Services, and Encino Energy accounted for 37.4%, 11.4%, and 11.2% of total revenue, respectively[141] Critical Accounting Policies and Estimates - There have been no material changes in the company's critical accounting policies and procedures during the three months ended March 31, 2024[143] - Management continues to rely on significant estimates for financial reporting, acknowledging that actual results could differ materially due to additional information or future economic uncertainties[144][145] ITEM 3. Quantitative and Qualitative Disclosures about Market Risk This section discusses the company's market risk exposure, primarily interest rate risk from its ABL Credit Facility, which management deems non-material, confirming no other significant changes since the prior annual report - The company's primary market risk is interest rate risk, mainly from its ABL Credit Facility, which had $14.0 million outstanding at March 31, 2024, bearing a variable interest rate. This is not considered a material interest rate risk[146] - There have been no additional material changes to the company's exposure to market risks from those described in its Annual Report on Form 10-K for the year ended December 31, 2023[147] ITEM 4. Controls and Procedures Management, including the CEO and CFO, concluded the company's disclosure controls and procedures were effective as of March 31, 2024, with no material changes in internal control over financial reporting during the quarter - The company's disclosure controls and procedures were evaluated and deemed effective as of March 31, 2024[148] - There have been no changes in internal control over financial reporting for the quarter ended March 31, 2024, that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting[149] PART II OTHER INFORMATION ITEM 1. Legal Proceedings This section incorporates by reference the disclosure regarding legal proceedings from Note 12 – Commitments and Contingencies – Litigation, within Part I, Item 1 of this Form 10-Q - Disclosure regarding legal proceedings is incorporated by reference from Note 12 of the condensed consolidated financial statements[151] ITEM 1A. Risk Factors The company states there have been no material changes to the risk factors previously outlined in its Annual Report on Form 10-K for the year ended December 31, 2023 - There have been no material changes to the risk factors described in Part I, Item 1A of the Annual Report on Form 10-K for the year ended December 31, 2023[152] ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds During the three months ended March 31, 2024, the company did not engage in any unregistered sales of equity securities - No shares were sold by the company without registration under the Securities Act of 1933, as amended, during the three months ended March 31, 2024[153] ITEM 3. Defaults upon Senior Securities The company reported no defaults upon senior securities during the period covered by this report - There were no defaults upon senior securities[154] ITEM 4. Mine Safety Disclosures The company maintains a strong commitment to mine safety, operating under stringent MSHA and OSHA regulations, including those for respirable silica exposure, with compliance detailed in Exhibit 95.1 - The company's mining operations are subject to safety regulations by the U.S. Mining Safety and Health Administration (MSHA) and the U.S. Occupational Safety and Health Administration (OSHA)[155][156] - Workplace exposure to respirable silica is closely monitored, and potential future stricter exposure limits could necessitate capital expenditures for equipment[156] - The company complies with the Federal Mine Safety and Health Act of 1977, and information concerning mine safety violations is included in Exhibit 95.1[157] ITEM 5. Other Information This section indicates no other information to report for the period - No other information is reported in this section[158] ITEM 6. Exhibits This section lists all exhibits filed as part of the Form 10-Q, including various certifications, the Mine Safety Disclosure Exhibit, and XBRL interactive data files - The report includes certifications pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934 and 18 U.S.C. 906 of the Sarbanes-Oxley Act of 2002[159] - Mine Safety Disclosure Exhibit 95.1 is filed with the report[159] - XBRL Instance Document and Taxonomy Extensions (Schema, Calculation, Definition, Label, Presentation Linkbases) are included as exhibits[159] SIGNATURES Signatures The report was officially signed on May 13, 2024, by Lee E. Beckelman, Chief Financial Officer, and Christopher M. Green, Vice President of Accounting, confirming its submission - The report was signed on May 13, 2024, by Lee E. Beckelman, Chief Financial Officer, and Christopher M. Green, Vice President of Accounting[164]