Smart Sand(SND) - 2020 Q4 - Annual Report

Part I Business Smart Sand is an integrated Northern White frac sand supplier, operating mines with 9.0 million tons annual capacity and proprietary logistics solutions - Smart Sand is a fully integrated frac sand supply and services company producing high-quality Northern White frac sand, a premium proppant used in hydraulic fracturing[20] - The company owns and operates a frac sand mine and processing facility in Oakdale, Wisconsin, with approximately 315 million tons of proven recoverable sand reserves and an annual processing capacity of 5.5 million tons[20] - In September 2020, the company acquired Eagle Proppants Holdings, adding two frac sand mines in Illinois and Wisconsin with a combined annual processing capacity of 3.5 million tons, and gaining access to the BNSF Class I rail line[21] - The company offers wellsite proppant storage and management solutions through its SmartSystems, which include portable silos (SmartDepot) and a mobile transloader (SmartPath)[23] Financial Performance (2018-2020, $ millions) | Metric | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Net Income | $38.0 | $31.6 | $20.1 | | Adjusted EBITDA | $20.5 | $87.1 | $67.8 | - The acquisition of Eagle Proppants Holdings resulted in a bargain purchase gain of $39.6 million, as the estimated fair value of net assets acquired ($41.7 million) exceeded the total consideration[29] - For the year ended December 31, 2020, three customers, Rice Energy (EQT), Liberty, and U.S. Well Services, accounted for 28.1%, 21.7%, and 14.0% of total revenue, respectively[50] Risk Factors The company faces risks from oil and gas volatility, customer concentration, market competition, and environmental regulations - The business is highly dependent on the volatile oil and natural gas industry, where declining activity would reduce proppant demand[100][102] - A substantial majority of revenues are generated from a limited number of customers under long-term take-or-pay contracts, posing counterparty risk[103] - The company faces significant competition from large national and smaller regional producers, with increased supply of regional sand impacting Northern White Sand sales and pricing[105][106] - A substantial portion of accounts receivable ($54.6 million as of Dec 31, 2020) is from one customer currently subject to litigation over nonpayment[121] - Legislative and regulatory initiatives related to hydraulic fracturing could increase costs and operating restrictions for customers, potentially reducing frac sand demand[159][162] - The company is subject to stringent health and safety regulations from MSHA and OSHA, including rules regarding workplace exposure to crystalline silica, which could lead to increased costs[167][169] - Ownership is concentrated, with Clearlake Capital and the CEO beneficially owning approximately 25.1% and 15.2% of outstanding common stock, respectively, limiting other stockholders' influence[180] Unresolved Staff Comments The company reports that it has no unresolved staff comments from the Securities and Exchange Commission - None[199] Properties The company's primary operating facilities include frac sand mines in Oakdale, Wisconsin, and Utica, Illinois, with significant reserves and processing capacities Oakdale, Wisconsin Facility Characteristics | Facility Characteristic | Description | | :--- | :--- | | Proven recoverable reserves | 315 million tons | | Annual processing capacity | 5.5 million tons | | Logistics capabilities | Dual served by Canadian Pacific and Union Pacific rail lines | Utica, Illinois Facility Characteristics | Facility Characteristic | Description | | :--- | :--- | | Proven and probable reserves | 130 million tons | | Annual processing capacity | 1.6 million tons | | Logistics capabilities | Access to BNSF, CSX, NS rail lines and Illinois River barge terminal | - The company owns an idled mine in New Auburn, WI, a fully permitted site in Hixton, WI with 100 million tons of proven reserves, and holds leases in the Permian Basin, though it has no immediate plans to develop these sites[201][202][203] - A 56,000 square foot facility in Saskatoon, Saskatchewan, Canada is leased for the manufacturing of SmartSystems wellsite proppant storage solutions[204] Legal Proceedings The company is involved in litigation with U.S. Well Services, LLC, over alleged breach of contract for nonpayment, with a decision pending - The company filed a lawsuit against U.S. Well Services, LLC for breach of contract related to a long-term take-or-pay agreement, with a decision pending after trial completion in December 2020[535][537] - As of December 31, 2020, accounts and unbilled receivables from U.S. Well Services totaled $54.6 million[538] Mine Safety Disclosures The company's mining operations are subject to stringent health and safety standards enforced by MSHA and OSHA, including regulations on silica exposure - Operations are regulated by the U.S. Mining Safety and Health Administration (MSHA) under the Federal Mine Safety and Health Act of 1977, which imposes stringent health and safety standards[213][215] - The company is also subject to OSHA regulations for workplace exposure to respirable silica, a known health hazard, with MSHA expected to adopt similar rules that could require capital expenditures for exposure reduction[214] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on NASDAQ under "SND," with 43.4 million shares outstanding, and no dividends are anticipated due to debt restrictions - The company's common stock has been publicly traded on the NASDAQ under the symbol "SND" since November 4, 2016[216] - As of February 24, 2021, there were 43,410,521 shares of common stock outstanding[217] - The company has not paid any dividends and does not expect to in the foreseeable future, with its ability to do so restricted by its ABL Credit Facility[218] Selected Financial Data From 2018 to 2020, revenues decreased, but net income increased due to a bargain purchase gain, while Adjusted EBITDA and tons sold declined Selected Financial Data (2018-2020, in thousands) | Metric | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Revenues | $122,340 | $233,073 | $212,470 | | Gross Profit | $18,119 | $81,052 | $69,367 | | Net Income | $37,954 | $31,623 | $20,101 | | Adjusted EBITDA | $20,456 | $87,071 | $67,793 | | Total Assets | $427,677 | $363,403 | $320,292 | | Long-term debt, net | $22,445 | $28,240 | $47,893 | | Tons Sold | 1,886 | 2,462 | 2,995 | Management's Discussion and Analysis of Financial Condition and Results of Operations In 2020, revenue fell 48% to $122.3 million due to lower volumes and logistics revenue, while net income rose to $38.0 million primarily from a bargain purchase gain and tax benefit - Key factors impacting 2020 results include the acquisition of Eagle Proppants Holdings (resulting in a $39.6 million bargain purchase gain), reduced demand from the COVID-19 pandemic and OPEC actions, and a $5.1 million impairment loss on Permian basin assets[231] Year-over-Year Results of Operations (2020 vs. 2019, in thousands) | Metric | 2020 | 2019 | Change % | | :--- | :--- | :--- | :--- | | Total Revenue | $122,340 | $233,073 | (48)% | | Gross Profit | $18,119 | $81,052 | (78)% | | Operating (Loss) Income | $(13,017) | $43,483 | (130)% | | Net Income | $37,954 | $31,623 | 20% | - The decrease in 2020 revenue was driven by lower sand sales volume, a 53% decrease in shortfall revenue to $23.3 million, and a 62% decrease in logistics revenue to $28.2 million[262][263] - The increase in 2020 net income was primarily due to the $39.6 million gain on bargain purchase and a $13.0 million income tax benefit, which offset the decline in operating income[268][271][272] Non-GAAP Financial Measures (2018-2020, in thousands) | Metric | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Adjusted EBITDA | $20,456 | $87,071 | $67,793 | | Contribution Margin | $39,141 | $106,464 | $85,664 | | Free Cash Flow | $16,921 | $19,107 | $(45,181) | - As of December 31, 2020, the company had $11.7 million in cash, $9.5 million available under its ABL Credit Facility, and $5.0 million available under its Acquisition Liquidity Support Facility[305] - Working capital increased to $74.8 million at year-end 2020 from $52.2 million at year-end 2019, primarily due to cash collections and reduced spending[309] Quantitative and Qualitative Disclosures About Market Risk The company faces indirect commodity price risk from oil and gas fluctuations, limited interest rate risk, and significant credit risk due to customer concentration - The company is indirectly exposed to commodity price risk, as fluctuations in oil and natural gas prices impact drilling and completion activity, affecting demand for its products[371] - Interest rate risk is limited because the majority of debt is at fixed rates, and the variable-rate ABL Credit Facility had a zero balance as of December 31, 2020[372] - Significant credit risk exists due to customer concentration in the oil and gas industry, with receivables from a single customer involved in pending litigation amounting to $54.6 million as of December 31, 2020[373][374] Financial Statements and Supplementary Data The 2020 consolidated financial statements show total assets of $427.7 million, net income of $38.0 million (boosted by a bargain purchase gain), and an unqualified audit opinion from Grant Thornton LLP Consolidated Balance Sheet Highlights (as of Dec 31, in thousands) | Account | 2020 | 2019 | | :--- | :--- | :--- | | Total Current Assets | $112,086 | $92,177 | | Total Assets | $427,677 | $363,403 | | Total Current Liabilities | $37,263 | $40,018 | | Total Liabilities | $138,870 | $117,847 | | Total Stockholders' Equity | $288,807 | $245,556 | Consolidated Income Statement Highlights (Year Ended Dec 31, in thousands) | Account | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Total Revenue | $122,340 | $233,073 | $212,470 | | Gross Profit | $18,119 | $81,052 | $69,367 | | Operating (Loss) Income | $(13,017) | $43,483 | $27,679 | | Net Income | $37,954 | $31,623 | $20,101 | - The independent registered public accounting firm, Grant Thornton LLP, issued an opinion that the financial statements present fairly, in all material respects, the financial position and results of operations in conformity with U.S. GAAP[379] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on any accounting or financial disclosure matters - None[545] Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2020 - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by the report[546] - Based on an assessment using the COSO 2013 framework, management determined that the company maintained effective internal control over financial reporting as of December 31, 2020[549] Other Information The company reports no other information for this item - None[552] Part III Directors, Executive Officers and Corporate Governance Information regarding directors, executive officers, and corporate governance is incorporated by reference from the company's 2021 Proxy Statement - Information required by this item is incorporated by reference from the registrant's proxy statement for the 2021 Annual Meeting of Stockholders[554][556] Executive Compensation Information regarding executive compensation is incorporated by reference from the company's 2021 Proxy Statement - Information required by this item is incorporated by reference from the registrant's proxy statement for the 2021 Annual Meeting of Stockholders[557] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership of certain beneficial owners and management, as well as equity compensation plans, is incorporated by reference from the company's 2021 Proxy Statement - Information required by this item is incorporated by reference from the registrant's proxy statement for the 2021 Annual Meeting of Stockholders[558][559] Certain Relationships and Related Transactions, and Director Independence Information regarding certain relationships, related party transactions, and director independence is incorporated by reference from the company's 2021 Proxy Statement - Information required by this item is incorporated by reference from the registrant's proxy statement for the 2021 Annual Meeting of Stockholders[560] Principal Accounting Fees and Services Information regarding principal accounting fees and services is incorporated by reference from the company's 2021 Proxy Statement - Information required by this item is incorporated by reference from the registrant's proxy statement for the 2021 Annual Meeting of Stockholders[561] Part IV Exhibits, Financial Statement Schedules This section lists all exhibits filed with the Form 10-K, including key agreements and Sarbanes-Oxley Act certifications - Lists key agreements filed as exhibits, including the Equity Purchase and Sale Agreement with Eagle Materials, Inc., the ABL Credit Agreement, and various Master Product Purchase Agreements with major customers[563][564] - Includes required certifications from the CEO and CFO pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002[565] Form 10-K Summary The company reports no summary for this item - None[567]