SMART SAND : MANAGEMENT'S DISCUSSION AND ANALYSIS FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-K)

Forward-Looking Statements
The following discussion and analysis of our financial condition and results of
operations should be read together with Item 1, "Business," Item 6, "Selected
Financial Data," and the Consolidated Financial Statements and the related notes
in Item 8 of this Annual Report on Form 10-K.
This discussion contains forward-looking statements as a result of many factors,
including those set forth under Item 1, "Business-Forward-Looking Statements"
and Item 1A, "Risk Factors," and elsewhere in this report. These statements are
based on current expectations and assumptions that are subject to risks and
uncertainties. Actual results could differ materially from those discussed in or
implied by forward-looking statements. Factors that could cause or contribute to
these differences include those discussed below and elsewhere in this report,
particularly in Item 1A, "Risk Factors."
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." in Item 7 of this Annual Report on Form 10-K. We define
various terms to simplify the presentation of information in this Report. All
share amounts are presented in thousands.

Factors Impacting Comparability of Our Financial Results
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:
•Impairment loss. In 2019, we recorded impairment loss of $15.5 million, of
which $7.6 million relates to our finite-lived developed technology intangible
assets and $7.9 million relates to our Hixton, Wisconsin property. In 2018, we
recorded an impairment loss of $17.8 million, which related to our goodwill and
indefinite-lived trade name intangible asset. These amounts were recorded as an
operating expense on the consolidated income statement. See our discussion in
the section entitled "GAAP Results of Operations" for additional information
regarding these transactions.
•Expansion of our Oakdale facility. In May 2018, we completed an expansion
project to increase our nameplate processing capacity at our Oakdale facility
from approximately 3.3 million tons per year to approximately 5.5 million tons
per year.
•We have increased our sand sales delivered in-basin. In 2018 and 2019, a
greater portion of the frac sand that we sold was delivered directly to the
Bakken formation in the Williston Basin through our Van Hook terminal. This
resulted in higher average selling prices along with additional costs related to
such delivery.
•Shortfall Revenue. In 2019, we recorded shortfall revenue of $49.3 million
compared to $6.0 million and $1.2 million in 2018 and 2017, respectively.
Shortfall revenue of $24.8 million for year ended December 31, 2019 was from a
customer with which we have ongoing litigation.
•Market Trends. From early 2017 through the second quarter of 2018, improvements
in oil and natural gas prices created a more stable market environment. During
the second half of 2018, the demand for Northern White sand decreased, which we
believe was due primarily to insufficient takeaway capacity for the incremental
oil and natural gas production coming online in the Permian Basin, along with
increased availability of regional sand as a source of proppant in the Permian
basin. Additionally, oil and natural gas companies reduced their spending in the
latter portion of the year due to strong spending in the first half of 2018 and
lower oil prices, particularly in the fourth quarter of 2018. Demand briefly
recovered during the summer of 2019 before declining toward the end of 2019 as
oil and gas companies exhausted their budgets and managed their capital spending
to be in line with their expected operating cash flows.
We have found that increasingly over the last two years, customers are
disinclined to enter into long-term contracts for their frac sand supply and
have instead trended toward purchasing their frac sand supply in the spot market
at
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SMART SAND, INC.

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
                                  (UNAUDITED)

market prices. Should our customer base continue to limit their exposure to longer term contracts, we intend to increase focus on shorter term contracts to increase sales in the spot market.

Overview

We are a fully integrated frac sand supply and services company, offering
complete mine to wellsite proppant supply and logistics solutions to our
customers. We produce low-cost, high quality Northern White frac sand, which is
a premium proppant used to enhance hydrocarbon recovery rates in the hydraulic
fracturing of oil and natural gas wells. We also offer proppant logistics
solutions to our customers through our in-basin transloading terminal and our
SmartSytemsTM wellsite proppant storage capabilities. 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 long-term take-or-pay contracts and spot sales in the open
market, and provide wellsite proppant storage 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 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. We operate this terminal
under a long-term agreement with Canadian Pacific Railway to service the Van
Hook terminal directly along with the other key oil and natural gas exploration
and production basins of North America.  The Van Hook terminal became
operational in April 2018. Since operations commenced, we have been providing
Northern White sand in-basin at this terminal to our contracted and spot sales
customers. This terminal allows us to offer more efficient delivery options to
customers operating in the Bakken Formation in the Williston Basin.
We also offer to our customers portable wellsite proppant storage through our
SmartSystems storage solutions. The SmartSystems provide our customers with the
capability to unload, store and deliver proppant at the wellsite, as well as the
ability to rapidly set up, takedown and transport the entire system. This
capability creates efficiencies, flexibility, enhanced safety and reliability
for customers. Through our SmartSystems wellsite proppant storage solutions, we
offer the SmartDepot and 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 Tracker, 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.

Assets and Operations
Oakdale
Our sand reserves include a balanced concentration of coarse sand, (19% 20/40
and coarser), finer sand (41% of 40/70 mesh) and fine sand (40% 60/140
gradation, which we refer to in this annual report as "100 mesh"). Our 30/50
gradation is a derivative of the 20/40 and 40/70 blends. We believe that this
mix of coarse and fine sand reserves, combined with contractual demand for our
products across a range of mesh sizes, provides us with relatively higher mining
yields and lower processing costs than frac sand mines with predominantly coarse
sand reserves. In addition, our approximate 316 million tons of proven
recoverable reserves implies a reserve life of approximately 57 years based on
our current annual nameplate processing capacity of 5.5 million tons. This long
reserve life enables us to better serve demand for different types of frac sand
as compared to mines with shorter reserve lives.
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SMART SAND, INC.

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
                                  (UNAUDITED)

Our Oakdale facility is purpose-built to exploit the reserve profile in place
and produce high-quality frac sand. Unlike some of our competitors, our primary
processing and rail loading facilities are located in close proximity to the
mine site, which limits the need for us to truck sand on public roads between
the mine and the production facility or between wet and dry processing
facilities. Our on-site transportation assets include approximately nine miles
of rail track in a triple-loop configuration and four railcar loading facilities
that are connected to a Class I rail line owned by Canadian Pacific. This
enables us to simultaneously accommodate multiple unit trains and significantly
increases our efficiency in meeting our customers' frac sand transportation
needs. Our unit train capable transload facility approximately three miles from
the Oakdale facility in Byron Township, Wisconsin, provides us with the ability
to ship sand to our customers on the Union Pacific rail network. We believe that
we are the only sand facility in Wisconsin that has dual served rail
capabilities, which should create competition among our rail carriers and allow
us to provide more competitive logistics options for our customers.
Due to sustained freezing temperatures in our area of operation during winter
months, we have historically halted the operation of our wet plant for
approximately three to five months. As a result, we have excavated and washed
sand in excess of current delivery requirements during the months when the wet
plant was operational. This excess sand is placed in stockpiles that feed the
dry plants and enable us to fill customer orders throughout the year without
interruption. Our second wet plant facility, brought online in the fourth
quarter of 2017, is enclosed, which allows us to operate at its full capacity
during the winter months.
Logistics
Through our transloading terminal in Van Hook, North Dakota, we provide one of
the most efficient and lowest-cost sources of Northern White sand in-basin to
customers operating in the Bakken Formation in the Williston Basin.
Through our SmartSystems offering, we have the technology, production capacity
and management team to compete further in the frac sand supply chain for our
customers by offering logistics services from the mine all the way to the
wellsite. Our SmartSystems consist of our SmartDepot proppant storage silos,
transload technology, and rapid deployment trailer system.
We believe our patented SmartDepot silos will outperform our competitors in that
they can be set up or taken down rapidly, they include industry-leading passive
and active dust suppression technology, they have the capability of gravity-fed
operation and they can be filled by both pneumatic and gravity dump trailers.
Our trailers detach, which reduces their footprint on the wellsite. We are
currently developing a new transload technology to complement our existing
solutions.
Through the expansion of our SmartSystems fleet and other logistics options, we
continue evaluating ways to reduce the landed cost of our products in-basin and
to the wellsite for our customers while increasing our customized service
offerings to provide additional delivery and pricing alternatives, including
selling product on an "as-delivered" basis to the wellsite.
We intend to continue expanding our footprint in-basin through the expansion of
our SmartSystems wellsite storage solutions fleets and potentially through the
addition of one or more terminals in other oil and natural gas operating basins.
Benefits of our long-term growth strategy for in-basin delivery of sand include
new contracted customers by marketing through our own terminal, more opportunity
for spot sales by forward deploying sand and the opportunity to capture
incremental margin on the sale of sand farther down the supply chain by managing
the cost of rail and terminal operations. Additionally, having a presence
in-basin gives us an opportunity to have a base of operations from which to
market our SmartSystems wellsite proppant storage solutions. We have also
developed a proprietary software program, the SmartSystem Tracker, which allows
our SmartSystems customers to monitor silo-specific information, including
location, proppant type, and proppant inventory.
How We Generate Revenue
We generate revenue by excavating and processing frac sand, which we sell to our
customers under long-term price agreements or as spot sales at prevailing market
rates. In some instances, revenues also include a charge for transportation
services provided to customers. Our transportation revenue fluctuates based on a
number of factors, including the volume of product transported and the distance
between the plant and our customers. Our contracts contain a minimum volume
purchase requirement and provide for delivery of frac sand FCA at our Oakdale
facility, our Van Hook transloading terminal in the Bakken, or another location
specified by our customers. Revenue is generally recognized as products are
delivered in accordance with the contract.
We generate revenue on our SmartSystems by renting equipment to our customers
under contract terms tailored to meet the short-term or long-term needs with any
number of SmartDepot silos they require. We recognize rental revenue when the
equipment is made available for the customer to use or other obligations in the
contract are met. Our first SmartDepot silos
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                                SMART SAND, INC.

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
                                  (UNAUDITED)

became available in the third quarter of 2018 and the first set was contracted
in January 2019. As of December 31, 2019, we had four SmartSystems fleets with
customers.
Costs of Conducting Our Business
The principal direct costs involved in operating our business are freight
charges, which consist of transportation, railcar rental and storage, labor,
maintenance, utility costs, equipment, excavation and depreciation of our
property, plant and equipment. We incur labor costs associated with employees at
our processing facility represent the most significant cost of converting frac
sand to finished product. Our Oakdale facility undergoes maintenance to minimize
unscheduled downtime and ensure the ongoing quality of our frac sand. We incur
utility costs in connection with the operation of our processing facility,
primarily electricity and natural gas, which are both susceptible to market
fluctuations. We lease equipment in many areas of our operations including our
mining and hauling equipment and logistics services. Excavation costs relate to
the blasting and excavation of sand and other materials from which we ultimately
do not derive revenue. However, the ratio of rejected materials to total amounts
excavated has been, and we believe will continue to be, in line with our
expectations, given the extensive core sampling and other testing we undertook
at the Oakdale facility. In addition, other costs include processing costs,
overhead allocation, depreciation and depletion are capitalized as a component
of inventory and are reflected in cost of goods sold when inventory is sold.

Overall Trends and Outlook
Demand Trends
According to Spears, the North American proppant market, including frac sand,
ceramic and resin-coated proppant, was approximately 111 million tons in 2019,
which is a 5% increase over the 105 million tons Spears reported for 2018.
Spears estimates that 2020 demand will be flat with 111 million tons of proppant
demand.
                     [[Image Removed: snd-20191231_g4.jpg]]
                                              2014             2015            2016             2017             2018             2019            2020E
New U.S. Horizontal Wells                  20,906           14,500           8,638           13,166           15,686           14,615           12,607
Proppant Demand (Mil Tons)                   69               55               44              80               105              111              111


Although the horizontal rig count is expected to decrease in 2020, frac sand
demand is projected to be consistent with 2019 levels due to longer laterals, an
increase in the number of frac stages per well and an increase in the amount of
proppant used in each stage. Demand growth for frac sand and other proppants is
primarily driven by advancements in oil and natural gas
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SMART SAND, INC.

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
                                  (UNAUDITED)

drilling and well completion technology and techniques, such as horizontal
drilling and hydraulic fracturing. These advancements have made the extraction
of oil and natural gas increasingly cost-effective in formations that
historically would have been uneconomic to develop. More proppant is being used
per well, which is supporting proppant demand despite horizontal drilling
activity stabilizing. Spears estimates that proppant demand in 2020 will be
consistent with 2019 as new wells will decrease while the average proppant used
per well is expected to increase from 6,600 tons per well in 2019 to
approximately 7,600 tons per well by the end of 2020.
Supply Trends
There has been consolidation activity including mergers, acquisitions, closures
of mines and bankruptcy filings among our peers. Additional consolidation
activity is expected in 2020 in the mining, transloading and logistics
businesses. Many large oil and natural gas exploration and production companies
have continued to integrate vertically by sourcing their own proppant and some
own their own sand mines. Spears identifies a growing trend in this direction
and estimates 50% of the North American proppant demand is currently
direct-sourced. In-basin demand in the Permian basin more than tripled from 2017
through 2019. Sand supply is expected to peak in late 2019 or early 2020 with
few additional suppliers entering the field.
Supplies of high-quality Northern White frac sand are limited to select areas,
predominantly in western Wisconsin and limited areas of Minnesota and Illinois.
We believe the ability to obtain large contiguous reserves in these areas is a
key constraint and can be an important supply consideration when assessing the
economic viability of a potential frac sand facility. Further constraining the
supply and throughput of Northern White frac sand is that not all of the large
reserve mines have on-site excavation, processing or logistics capabilities.
Historically, much of the capital investment in Northern White frac sand mines
was used for the development of coarser deposits in western Wisconsin, which is
inconsistent with the increasing demand for finer mesh frac sand in recent
years. As such, we've seen competitors in the Northern White frac sand market
reduce their capacity by shuttering or idling operations as the shift to finer
sands in hydraulic fracturing of oil and natural gas wells erodes the ongoing
economic viability of producing coarser grades of sand.
Management's Outlook
We expect the demand for frac sand in 2020 to be consistent with the demand
during 2019. Demand for both frac sand and our SmartSystems is influenced by the
volume of oil and natural gas well drilling and completion activity, as well as
the types of wells that are completed. The industry is trending towards drilling
and completing wells with longer laterals and more frac stages per lateral foot
drilled. This trend is leading to higher volumes of sand per well and the need
for oil and natural gas exploration companies to manage larger volumes of sand
at the wellsite. We believe these trends support continued demand for frac sand
and increased demand for SmartSystems as customers look to create synergies in
the time and cost of managing their sand needs at the wellsite.
We generally expect the price of raw frac sand to correlate with the level of
drilling activity for oil and natural gas, although the increasing supply of
sand could keep the price depressed. The willingness of exploration and
production companies to engage in new drilling 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 generally tend to correlate with drilling activity.


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SMART SAND, INC.

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
                                  (UNAUDITED)

GAAP Results of Operations

Year Ended December 31, 2019 compared to the Year Ended December 31, 2018:

                                                            Year Ended December 31,                                            Change
                                                            2019                 2018             Dollars                 Percentage
                                                                             (in thousands, except percentage change)
Revenues                                               $    233,073          $ 212,470          $ 20,603                               10  %
Cost of goods sold                                          152,021            144,903             7,118                                5  %
Gross profit                                                 81,052             67,567            13,485                               20  %
Operating expenses:
Salaries, benefits and payroll taxes                         11,560             11,043               517                                5  %
Depreciation and amortization                                 2,411              1,843               568                               31  %
Selling, general and administrative                          11,328             12,825            (1,497)                             (12) %
Change in estimated fair value of contingent
consideration                                                (3,272)            (1,858)           (1,414)                              76  %
Impairment loss                                              15,542             17,835            (2,293)                             (13) %
Total operating expenses                                     37,569             41,688            (4,119)                             (10) %
Operating income                                             43,483             25,879            17,604                               68  %
Other income (expenses):
Interest expense, net                                        (3,621)            (2,266)           (1,355)                              60  %
Loss on extinguishment of debt                                 (561)                 -              (561)                  Not meaningful
Other income                                                    131                197               (66)                             (34) %
Total other income (expenses), net                           (4,051)            (2,069)           (1,982)                              96  %
Income before income tax expense                             39,432             23,810            15,622                               66  %
Income tax expense                                            7,809              5,122             2,687                               52  %
Net income                                             $     31,623          $  18,688          $ 12,935                               69  %



Revenue
Revenue was $233.1 million for the year ended December 31, 2019, during which we
sold approximately 2,462,000 tons of sand. Revenue for the year ended December
31, 2018 was $212.5 million, during which we sold approximately 2,995,000 tons
of sand. The key factors contributing to the increase in revenues for the year
ended December 31, 2019 as compared to the year ended December 31, 2018 were as
follows:
•We had $49.3 million in contractual shortfall revenue for the year ended
December 31, 2019 and $6.0 million for the year ended December 31, 2018,
respectively. Our contracts with customers 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. In 2019, shortfall revenue of $24.8
million was from a customer with which we have pending litigation.
•Logistics revenue, which includes freight for certain mine gate sand sales,
railcar usage, logistics services and SmartSystems rentals, was $74.2 million
for the year ended December 31, 2019, an increase of $11.3 million when compared
to logistics revenue of $62.9 million for the year ended December 31, 2018. The
increase in logistics revenue was due to higher in-basin sales and rentals of
our SmartSystems equipment. At December 31, 2019, we had four fleets of
SmartSystems in the field.
•Sand sales revenue decreased to $109.6 million for the year ended December 31,
2019 compared to $143.1 million for the year ended December 31, 2018, primarily
due to decreased sales volumes.
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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 $152.0 million and $144.9 million, for the years ended
December 31, 2019 and December 31, 2018, respectively. Cost of goods sold
increased in December 31, 2019 compared to December 31, 2018 primarily due to
higher transportation costs as a result of increased in-basin sales volumes and
increased depreciation and amortization due to our Oakdale expansion project
being operational for the full year, partially offset by decreases in labor and
equipment costs on lower total volumes sold.
Gross Profit
Gross profit was $81.1 million and $67.6 million for the years ended December
31, 2019 and December 31, 2018, respectively. The increase in gross profit for
the year ended December 31, 2019 was primarily due to higher shortfall and
logistics revenue, partially offset by increased transportation costs as a
result of increased in-basin sales volumes and lower total sales volumes.
Operating Expenses
Operating expenses were $37.6 million and $41.7 million for the years ended
December 31, 2019 and December 31, 2018, respectively. Operating expenses are
primarily comprised of wages and benefits, professional services fees and other
administrative expenses, all of which were relatively consistent year over year.
Salaries, benefits and payroll taxes were $11.6 million and $11.0 million for
the years ended December 31, 2019 and December 31, 2018, respectively. Selling,
general and administrative expenses decreased from $12.8 million for the year
ended December 31, 2018 to $11.3 million for the year ended December 31, 2019,
primarily as a result of wellsite storage solution acquisition-related costs in
the prior year. We recorded a decrease in the estimated fair value of contingent
consideration related to our acquisition of Quickthree, which resulted in an
offset to operating expenses in the amount of $3.3 million for the year ended
December 31, 2019 and $1.9 million for the year ended December 31, 2018. In
2019, we recorded an impairment charge of $15.5 million of which $7.6 million
related to our finite-lived developed technology intangible assets in intangible
assets, net on the balance sheet and $7.9 million related to our Hixton,
Wisconsin property in property, plant and equipment, net on the balance sheet.
The impairment of the finite-lived intangible assets is from our developed
technology allocated to the Quickload acquired in connection with the
acquisition of Quickthree in 2018. We are developing and testing a new transload
technology and no longer plan to actively market the Quickload and as such, all
developed technology intangible assets related to the Quickload were fully
impaired during the third quarter of 2019. In the fourth quarter of 2019, we
determined that the carrying amount of the Hixton, Wisconsin property may not be
fully recoverable as we have no current plans to further develop the site. In
the fourth quarter of 2018, we recorded an impairment charge of $17.8 million
related to goodwill and an other indefinite-lived intangible asset. The
impairment charge was primarily due to the decline in our stock price in 2018
and the relationship between the resulting market capitalization and the equity
recorded on our balance sheet.
Other Income (Expense)
We incurred $3.6 million and $2.3 million of net interest expense for the years
ended December 31, 2019 and 2018, respectively. The increase in net interest
expense for the year ended December 31, 2019 was primarily due to higher average
borrowings under the Former Credit Facility to fund acquisition activities in
2018. In 2019, we also recognized $0.6 million of costs due to the
extinguishment of the Former Credit Facility. Our borrowings and total debt were
reduced late in 2019 as a result of the payment in full and termination of the
Former Credit Facility and our entry into the ABL Credit Facility.
Income Tax Expense (Benefit)
Income tax expense was $7.8 million for the year ended December 31, 2019
compared to income tax expense of $5.1 million for the year ended December 31,
2018. For the years ended December 31, 2019 and 2018, our effective tax rate was
approximately 19.8% and 21.5%, respectively, based on the statutory federal rate
net of discrete federal and state taxes. The computation of the effective tax
rate for the years ended December 31, 2019 and December 31, 2018 included
modifications for income tax credits, among other items.
For the year ended December 31, 2018, we recorded a net operating loss for tax
purposes due to the significant amount of capital expenditures we incurred,
which were eligible for 100% expensing available under the Tax Reform Act. There
are additional provisions in the Tax Reform Act that could impact us that will
continue to be monitored as additional guidance is released and any necessary
adjustments will be recorded in the period that the guidance is released.
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SMART SAND, INC.

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
                                  (UNAUDITED)

Net Income
Net income was $31.6 million for year ended December 31, 2019 compared to $18.7
million for the year ended December 31, 2018. The increase in net income was
primarily due to higher shortfall revenue from customers that did not take their
contractual minimum volumes of sand, higher logistics revenue from increased
volumes shipped through our Van Hook terminal and rented SmartSystems equipment
and lower impairment charges in 2019 compared to 2018.

Year Ended December 31, 2018 Compared to the Year Ended December 31, 2017:

                                                     Year Ended December 31,                                             Change
                                                     2018                 2017             Dollars                  Percentage
                                                                       (in thousands, except percentage change)
Revenues                                        $    212,470          $ 137,212          $ 75,258                                 55  %
Cost of goods sold                                   144,903            100,304            44,599                                 44  %
Gross profit                                          67,567             36,908            30,659                                 83  %
Operating expenses:
Salaries, benefits and payroll taxes                  11,043              8,219             2,824                                 34  %
Depreciation and amortization                          1,843                525             1,318                                251  %
Selling, general and administrative                   12,825              9,459             3,366                                 36  %
Change in estimated fair value of contingent
consideration                                         (1,858)                 -            (1,858)                       Not meaningful
Impairment loss                                       17,835                  -            17,835                     Not meaningful
Total operating expenses                              41,688             18,203            23,485                                129  %
Operating income                                      25,879             18,705             7,174                                 38  %
Other income (expenses):

Interest expense, net                                 (2,266)              (450)           (1,816)                               404  %

Other income                                             197                462              (265)                               (57) %
Total other income (expenses), net                    (2,069)                12            (2,081)                       Not meaningful
Income before income tax (benefit) expense            23,810             18,717             5,093                                 27  %
Income tax (benefit) expense                           5,122             (2,809)            7,931                               (282) %
Net income                                      $     18,688          $  21,526          $ (2,838)                               (13) %



Revenue
Revenue was $212.5 million for the year ended December 31, 2018, during which we
sold approximately 2,995,000 tons of sand. Revenue for the year ended December
31, 2017 was $137.2 million, during which we sold approximately 2,449,000 tons
of sand. Revenues increased for the year ended December 31, 2018 as compared to
the year ended December 31, 2017 as a result of higher sales volumes and higher
average selling prices.
The key factors contributing to the increase in revenues for the year ended
December 31, 2018 as compared to the year ended December 31, 2017 were as
follows:
•Sand sales revenue increased to $143.1 million for the year ended December 31,
2018 compared to $80.2 million for the year ended December 31, 2017 due to
increased sales volumes and higher average selling prices. Tons sold increased
by 22.3% as exploration and production activity in the oil and natural gas
industry improved in 2018 compared to 2017.
•Average selling price per ton increased to $47.76 for the year ended December
31, 2018 from $32.74 for the year ended December 31, 2017 due to increased
volumes and higher average selling prices related to increased in-basin sand
sales volumes, which are sold at a higher price than sand sold at the mine gate
and favorable price adjustments under certain of our take-or-pay contracts based
upon the Average Cushing Oklahoma WTI Spot Prices.
                                       49
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SMART SAND, INC.

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
                                  (UNAUDITED)

•We had $6.0 million in contractual shortfall revenue for the year ended
December 31, 2018 and $1.2 million for the year ended December 31, 2017,
respectively. Our contracts with customers 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.
•Transportation revenue, which includes freight for certain mine gate sand sales
and railcar usage, increased approximately $7.1 million for the year ended
December 31, 2018 when compared to the year ended December 31, 2017, increasing
from $55.8 million to $62.9 million. The increase in transportation revenue was
due to the increased sales volumes in 2018 compared to 2017 as a result of
increased exploration and production activity in the oil and natural gas
industry as well as our increased in-basin sales activity generated from our Van
Hook terminal which began operations in April 2018.
Cost of Goods Sold
Cost of goods sold was $144.9 million and $100.3 million, or $48.38 and $40.96
per ton sold, for the years ended December 31, 2018 and December 31, 2017,
respectively. Cost of goods sold and per ton cost of goods sold increased in
2018 compared to 2017 due to higher sales volumes, which led to increased
staffing, utilities and equipment expenses, and increased freight charges.
Freight charges, which consist of transportation costs and railcar rental and
storage expense, were higher primarily due to increased volumes sold and
increased in-basin activities. Additionally, we incurred an increase in
operating labor costs for the year ended December 31, 2018 due to additional
staffing to support the expansion of the Oakdale facility.
Gross Profit
Gross profit was $67.6 million and $36.9 million for the years ended December
31, 2018 and 2017, respectively. The increase in gross profit for the year ended
December 31, 2018 was primarily due to higher sales volumes, including in-basin
and spot sales, and higher average selling prices, partially offset by increased
staffing, utilities and equipment expenses, along with increased transportation
charges.
Operating Expenses
Operating expenses were $41.7 million and $18.2 million for the years ended
December 31, 2018 and 2017, respectively. Operating expenses are primarily
comprised of wages and benefits, professional services fees and other
administrative expenses. An impairment charge of $17.8 million related to
goodwill and an other indefinite-lived intangible asset was recorded in the
fourth quarter of 2018. The impairment charge relates primarily to the decline
in our stock price in 2018 and the relationship between the resulting market
capitalization and the equity recorded on our balance sheet. Additionally,
salaries, benefits and payroll taxes were $11.0 million and $8.2 million for the
years ended December 31, 2018 and 2017, respectively. The approximate $2.8
million increase was primarily due to additional headcount in 2018 as compared
to 2017. Selling, general and administrative expenses increased from $9.5
million for the year ended December 31, 2017 to $12.8 million for the year ended
December 31, 2018, primarily as a result of well-site storage solution
acquisition-related costs and royalty payments relating to our Texas land
leases. We recorded a decrease in the estimated fair value of contingent
consideration, which resulted in an offset to operating expenses in the amount
of $1.9 million for the year ended December 31, 2018, for our acquisition of
Quickthree.
Other Income (Expense)
We incurred $2.3 million and $0.5 million of net interest expense for the years
ended December 31, 2018 and 2017, respectively. The increase in interest expense
for the year ended December 31, 2018 was primarily due to borrowings under the
Former Credit Facility to fund acquisition activity. Interest expense in 2017
was derived primarily from deferred finance fees and unused line fees for the
Former Credit Facility.
Income Tax (Benefit) Expense
Income tax expense was $5.1 million for the year ended December 31, 2018
compared to a benefit of $2.8 million for the year ended December 31, 2017. We
recorded a tax benefit of approximately $8.5 million due to a re-measurement of
deferred tax assets and liabilities in the fourth quarter of 2017, as a result
of the Tax Reform Act that was enacted on December 22, 2017. For the years ended
December 31, 2018 and 2017, our effective tax rate was approximately 21.5% and
(15.0)%, respectively, based on the statutory federal rate net of discrete
federal and state taxes. Our effective tax rate for the year ended December 31,
2018 benefited from the decrease in the U.S. statutory tax rate from 35.0% in
2017 to 21.0% in 2018. The
                                       50
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SMART SAND, INC.

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
                                  (UNAUDITED)

computation of the effective tax rate for the year ended December 31, 2018
included modifications for income tax credits, among other items. The
computation for the year ended December 31, 2017 also included a benefit related
to share-based compensation and the domestic production activities deduction
("DPAD"). The DPAD was repealed for tax years beginning after January 1, 2018
under the Tax Reform Act. The computation for 2017 also included the impact of
depletion method change for tax purposes on our prior year returns.
The Tax Reform Act significantly revised the U.S. corporate income tax regime
by, among other things, lowering the U.S. corporate tax rate from 35% to 21%
effective January 1, 2018, repealing the deduction for domestic production
activities and implementing 100% direct expensing of certain non-residential
property. U.S. GAAP requires that the impact of tax legislation be recognized in
the period in which the law was enacted.
For the year of 2018, we recorded a net operating loss for tax purposes due to
the significant amount of capital expenditures, which are eligible for 100%
expensing available under the Tax Reform Act. There are additional provisions in
the Tax Reform Act that could impact us that will continue to be monitored as
additional guidance is released and any necessary adjustments will be recorded
in the period that the guidance is released.
Net Income
Net income was $18.7 million for year ended December 31, 2018 compared to $21.5
million for the year ended December 31, 2017. The decrease in net income was
primarily due to an impairment charge of $17.8 million related to goodwill and
an other indefinite-lived intangible asset was recorded in the fourth quarter of
2018. The impairment charge relates primarily to the decline in our stock price
in 2018 and the relationship between the resulting market capitalization and the
equity recorded on our balance sheet. Increased sales volumes during 2018 and
favorable pricing trends in the first half of the year led to higher gross
profit which partially offset the impairment charge.

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 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, plus: (i) depreciation, depletion and
amortization expense; (ii) income tax expense (benefit); (iii) interest expense;
and (iv) franchise taxes. We define Adjusted EBITDA as EBITDA, plus: (i) gain or
loss on sale of fixed assets or discontinued operations; (ii) integration and
transition costs associated with specified transactions; (iii) equity
compensation; (iv) acquisition and development costs; (v) non-recurring cash
charges related to restructuring, retention and other similar actions; (vi)
earn-out, contingent consideration obligations and other acquisition and
development costs; and (vii) non-cash charges and unusual or non-recurring
charges. Adjusted EBITDA is used as a supplemental financial measure by
management and by external users of our financial statements, such as investors
and commercial banks, to assess:
•the financial performance of our assets without regard to the impact of
financing methods, capital structure or historical cost basis of our assets;
•the viability of capital expenditure projects and the overall rates of return
on alternative investment opportunities?
•our ability to incur and service debt and fund capital expenditures?
                                       51
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                                SMART SAND, INC.

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
                                  (UNAUDITED)

•our operating performance as compared to those of other companies in our
industry without regard to the impact of financing methods or capital structure;
and
•our debt covenant compliance, as Adjusted EBITDA is a key component of critical
covenants to the ABL Credit Facility.
We believe that our presentation of EBITDA and Adjusted EBITDA will provide
useful information to investors in assessing our financial condition and results
of operations. Net income is the GAAP measure most directly comparable to EBITDA
and Adjusted EBITDA. EBITDA and Adjusted EBITDA should not be considered
alternatives to net income presented in accordance with GAAP. Because EBITDA and
Adjusted EBITDA may be defined differently by other companies in our industry,
our definitions of EBITDA and Adjusted EBITDA may not be comparable to similarly
titled measures of other companies, thereby diminishing their utility. The
following table presents a reconciliation of EBITDA and Adjusted EBITDA to net
income for each of the periods indicated.
                                                                           Year Ended December 31,
                                                                  2019               2018               2017
                                                                                (in thousands)
Net income                                                    $  31,623          $  18,688          $  21,526
Depreciation, depletion and amortization                         27,135             18,165              7,300
Income tax (benefit) expense                                      7,809              5,122             (2,809)
Interest expense                                                  3,626              2,320                700
Franchise taxes                                                     285                442                339
EBITDA                                                        $  70,478          $  44,737          $  27,056
(Gain) loss on sale of fixed assets                                 (42)               321                253
Integration and transition costs                                      -                  -                 16
Equity compensation (1)                                           2,755              2,670              1,652
Acquisition and development costs (2)                            (3,047)              (218)               845
Non-cash impairment loss                                         15,542             17,835                  -
Cash charges related to retention and employee relocation           137                674                279
Accretion of asset retirement obligations                           687                (26)               514
Loss on extinguishment of debt                                      561                  -                  -
Adjusted EBITDA                                               $  87,071          $  65,993          $  30,615


(1) Represents the non-cash expenses for stock-based awards issued to our
employees and employee stock purchase plan compensation expense.
(2) Represents costs incurred related to the business combinations and current
development project activities. The year ended December 31, 2019 includes $3,272
decrease in the estimated fair value of our contingent consideration related to
the acquisition of Quickthree and $225 of development project activities. The
year ended December 31, 2018 includes $1,858 decrease in the estimated fair
value of our contingent consideration related to the acquisition of Quickthree,
partially offset by $1,146 of costs related to the acquisition of Quickthree and
$494 related to development project activities. The year ended December 31, 2017
includes costs related to development project activities.
_________________________

Adjusted EBITDA was $87.1 million for the year ended December 31, 2019 compared
to $66.0 million for the year ended December 31, 2018. The increase in Adjusted
EBITDA for the year ended December 31, 2019, as compared to the prior year, was
primarily due to higher shortfall and logistics revenue, partially offset by
increased transportation charges and lower overall volumes of sand sold.
Adjusted EBITDA was $66.0 million for the year ended December 31, 2018 compared
to $30.6 million for the year ended December 31, 2017. The increase in Adjusted
EBITDA for the year ended December 31, 2018, as compared to the prior year, was
primarily due to higher sales volumes, including in-basin sales, and higher
average selling prices, partially offset by increased staffing, utilities and
equipment expenses, along with increased transportation charges.

                                       52
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                                SMART SAND, INC.

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
                                  (UNAUDITED)

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.
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.
                                                                            Year Ended December 31,
                                                                   2019               2018               2017
                                                                                 (in thousands)
Revenue                                                        $ 233,073          $ 212,470          $ 137,212
Cost of goods sold                                               152,021            144,903            100,304
   Gross profit                                                   81,052             67,567             36,908

Depreciation, depletion, and accretion of asset retirement obligations included in cost of goods sold

                        25,412             16,297              7,289
   Contribution margin                                         $ 106,464          $  83,864          $  44,197
   Contribution margin per ton                                 $   43.24          $   28.00          $   18.05
Total tons sold                                                    2,462              2,995              2,449



Contribution margin was $106.5 million, or $43.24 per ton sold, for the year
ended December 31, 2019 compared to $83.9 million, or $28.00 per ton sold, for
the year ended December 31, 2018. The increase in contribution margin and
contribution margin per ton sold for the year ended December 31, 2019, as
compared to the prior year, was primarily due to higher in-basin sales volumes
through our Van Hook terminal and higher shortfall revenue.
Contribution margin was $83.9 million, or $28.00 per ton sold, for the year
ended December 31, 2018 compared to $44.2 million, or $18.05 per ton sold, for
the year ended December 31, 2017. The increase in contribution margin and
contribution margin per ton sold for the year ended December 31, 2018, as
compared to the prior year, was primarily due to the increased sales volumes
overall as well as increased in-basin sales volumes through our Van Hook
terminal, which began operations in April 2018, coupled with favorable pricing
trends in the first half of 2018.

Liquidity and Capital Resources
Currently, our primary sources of liquidity are cash flow generated from
operations and availability under our ABL Credit Facility and other equipment
financing sources. Based on our balance sheet, cash flows, current market
conditions and information available to us at this time, we believe that we have
sufficient liquidity and other available capital resources, to meet our cash
needs for the next twelve months, including continued investment in our
SmartSystems wellsite proppant storage solutions and other capital projects.

                                       53
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                                SMART SAND, INC.

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
                                  (UNAUDITED)

Working Capital
Working capital is a measure of our ability to pay our liabilities as they
become due. The following table presents the components of our working capital
as of December 31, 2019 compared to December 31, 2018.
                                  Year Ended December 31,
                                 2019                  2018
                                      (in thousands)
Total current assets        $    90,377             $ 50,096
Total current liabilities        40,018               24,652
Working capital             $    50,359             $ 25,444



Our working capital was $50.4 million at December 31, 2019 compared to working
capital of $25.4 million at December 31, 2018. The increase in working capital
was primarily due to a net increase in accounts and unbilled receivables of
$38.0 million, partially offset by $13.1 million new short-term operating lease
liabilities as a result of adopting the new lease accounting standard on January
1, 2019 and a $5.3 million increase in the current portion of our amortizing
long-term debt under the Oakdale Equipment Financing and notes payable. As of
December 31, 2019 and 2018, $37.4 million and $3.2 million of accounts and
unbilled receivables is attributable to a customer with which we have pending
litigation.

Summary Cash Flows The following table sets forth a summary of our cash flows for the periods indicated:

Year Ended December 31,

                                                              2019               2018                2017
                                                                            (in thousands)
Net cash provided by operating activities                 $  44,633          $   50,909          $  15,628
Net cash used in investing activities                     $ (25,425)         $ (125,989)         $ (51,148)
Net cash (used in) provided by financing activities       $ (18,035)

$ 41,319 $ 23,213

Net Cash Provided by Operating Activities
Net cash provided by operating activities was $44.6 million for the year ended
December 31, 2019, which included income of $31.6 million, non-cash expenses of
$47.8 million, partially offset by $34.8 million in changes in operating assets
and liabilities.
Net cash provided by operating activities was $50.9 million for the year ended
December 31, 2018, which included net income of $18.7 million and net non-cash
expenses of $39.5 million, partially offset by $7.3 million in changes in
operating assets and liabilities.
Net cash provided by operating activities was $15.6 million for the year ended
December 31, 2017, which included net income of $21.5 million and net non-cash
expenses of $8.8 million, partially offset by $14.7 million in changes in
operating assets and liabilities.
Net Cash Used In Investing Activities
Net cash used in investing activities was $25.4 million for the year ended
December 31, 2019, of which $12.8 million was used to expand our SmartSystems
operations and $12.7 million was used to expand our Van Hook terminal and
capital improvements at our Oakdale facility.
                                       54
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SMART SAND, INC.

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
                                  (UNAUDITED)

Net cash used in investing activities was $126.0 million for the year ended
December 31, 2018, of which approximately $45.5 million was used for our
acquisitions of the Van Hook terminal and Quickthree, and the remainder of which
was used for the completion of the Oakdale expansion project which began in
2017.
Net cash used in investing activities was $51.1 million for the year ended
December 31, 2017, which was primarily used in connection with the Oakdale
expansion project.
Net Cash (Used in) Provided by Financing Activities
Net cash used by financing activities was $18.0 million for the year ended
December 31, 2019. In 2019, we repaid a net $42.0 million on our revolving
credit facilities, paid $2.3 million of deferred financing and debt issuance
costs and paid $2.0 million of contingent consideration, partially offset by
receipt of $23.0 million in proceeds from the Oakdale Equipment Financing and
$5.4 million of net proceeds from other notes payable.
Net cash provided by financing activities was $41.3 million for the year ended
December 31, 2018, which was primarily related to net draws on our Former Credit
Facility of $44.5 million, partially offset by repurchases of our common shares
of $2.2 million and repayments of notes payable of $0.6 million.
Net cash provided by financing activities was $23.2 million for the year ended
December 31, 2017, which included net proceeds from equity issuance of $24.2
million.

Indebtedness
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 is based upon our eligible accounts
receivable and inventory. The ABL Credit Facility contains various reporting
requirements, negative covenants and restrictive provisions and requires
maintenance of specified financial covenants under certain conditions, including
a fixed charge coverage ratio, as defined in the ABL Credit Agreement. As of
December 31, 2019, the Company was in compliance with all covenants under the
ABL Credit Facility. As of December 31, 2019, the outstanding balance on the ABL
Credit Facility was $2.5 million and the amount of undrawn availability was
$17.5 million.
Oakdale Equipment Financing
On December 13, 2019, we entered into an equipment financing arrangement with
Nexseer, secured by substantially all of the assets at our Oakdale facility. We
received $23.0 million of net proceeds, of which we used $19.3 million to repay
in full and terminate our Former Credit Facility, $3.0 million for general
working capital purposes and $0.7 million to pay transaction fees associated
with the debt refinancing. The Oakdale Equipment Financing amortizes over 5
years, maturing on December 13, 2024, and bears interest at 5.79%. The balance
of the Oakdale Equipment Financing as of December 31, 2019 was $22.4 million.
Former Credit Facility
On December 8, 2016, the Company entered into a three-year senior secured
revolving credit facility under a revolving credit agreement with Jefferies
Finance LLC, as administrative and collateral agent. The Former Credit Facility
was paid in full and terminated with proceeds from the Oakdale Equipment
Financing.
Notes Payable
We have entered into various financing arrangements to support the manufacturing
of our wellsite proppant storage solutions equipment with interest rates between
6.48% and 7.49%. Title to the equipment is held by the financial institutions as
collateral, though the equipment is included in the Company's property plant and
equipment. Total notes payable outstanding at December 31, 2019 was $9.8
million.

                                       55
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                                SMART SAND, INC.

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
                                  (UNAUDITED)

Capital Requirements
We expect full year 2020 capital expenditures to be between $20 million and $30
million, which are anticipated to primarily support incremental growth in our
SmartSystems. These expenditures exclude any potential acquisitions. We expect
to fund these capital expenditures with cash from operations, equipment
financing options available to us or borrowings under the ABL Credit Facility.

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,
we announced that our board of directors authorized the 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, our board of directors reauthorized the existing share repurchase program
for one year. At December 31, 2019, the maximum number of shares that we may
repurchase under the repurchase authority was 1,411,800 shares. There were no
share repurchases during the year ended December 31, 2019.
The program allows us to repurchase shares at our 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 us 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 $7.9 million and $8.6 million of outstanding performance bonds as of each
of the years ended December 31, 2019 and 2018, respectively. These performance
bonds assure our performance under our reclamation plan, maintenance and
restoration of public roadways and an agreement with a pipeline common carrier.

Contractual Obligations
The following table presents our contractual obligations as of December 31,
2019:
                                                Less than         1-3            3-5         More than
                                  Total          1 year          years          years         5 years
                                                            (in thousands)
Debt service                   $  40,417       $  7,959       $ 15,636       $ 16,822       $      -
Operating leases                  30,613         14,292         14,039          2,282              -
Asset retirement obligations       6,142            477            144              -          5,521
Land rights obligations           40,950          2,275          4,550          4,550         29,575
Total                          $ 118,122       $ 25,003       $ 34,369       $ 23,654       $ 35,096




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.

                                       56
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SMART SAND, INC.

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
                                  (UNAUDITED)

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 were capitalized into inventory and expensed when these tons are
sold, which can lead to us having higher overall cost of production in the first
and fourth quarters of each calendar year as we expense inventory costs that
were previously capitalized. 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 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 year ended December 31, 2019, Liberty, Rice Energy (a subsidiary of EQT
Corporation), Hess Corporation, and U.S. Well Services accounted for 23.8%,
19.0%, 15.5%, and 14.7%, respectively, of total revenue. For the year ended
December 31, 2018, Liberty, EQT, WPX Energy, and Hess accounted for 22.8%,
21.4%, 11.6%, and 10.6%, respectively, of total revenue. For the year ended
December 31, 2017, Rice Energy, Liberty, Weatherford, and U.S. Well Services
accounted for 27.1%, 20.6%, 13.7%, and 10.2%, respectively, of total revenue.

Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations
is based on our consolidated financial statements, which have been prepared in
accordance with GAAP. The preparation of these financial statements requires us
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the dates
of the financial statements and the reported revenues and expenses during the
reporting periods. We evaluate these estimates and assumptions on an ongoing
basis and base our estimates on historical experience, current conditions and
various other assumptions that we believe to be reasonable under the
circumstances. The results of these estimates form the basis for making
judgments about the carrying values of assets and liabilities as well as
identifying and assessing the accounting treatment with respect to commitments
and contingencies. Our actual results may materially differ from these
estimates.
Listed below are the accounting policies we believe are critical to our
financial statements due to the degree of uncertainty regarding the estimates or
assumptions involved, and that we believe are critical to the understanding of
our operations.
Revenue Recognition
On January 1, 2018, we adopted ASC 606, "Revenue from Contracts with Customers"
and all the related amendments thereto, using the modified retrospective method.
There was no adjustment made to the opening balance of retained earnings as a
result of applying ASC 606. Results for reporting periods beginning January 1,
2018 are presented under ASC 606, while the comparative information is not
restated and will continue to be reported under the accounting standards in
effect for those periods. Under ASC 606, revenues are recognized when control of
the promised goods or services is transferred to our customers, the amount of
which reflects the consideration the Company expects to be entitled to in
exchange for those goods or services. Prior to January 1, 2018, we recognized
revenue when persuasive evidence of an arrangement exists, delivery of products
has occurred, the sales price charged is fixed or determinable, collectability
is reasonably assured, and the risk of loss is transferred to the customer.
Under current and former revenue standards, this generally means that sales are
FCA, payment made at the origination point at our facility, and title passes as
the product is loaded into railcars hired by the customer or provided by us.
Deliveries of
                                       57
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SMART SAND, INC.

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
                                  (UNAUDITED)

in-basin sand have shipping terms of FCA, DAT or DAP; and we recognize this
revenue when the sand is received at the destination.
We derive our revenue by mining and processing sand that our customers purchase
for various uses. Our revenues are primarily a function of the price per ton
realized and the volumes sold. In some instances, our revenues also include
transportation costs we charge to our customers, a monthly charge to reserve
sand capacity and shortfall payments due from customers for minimum volume
commitments. Our transportation revenue fluctuates based on a number of factors,
including the volume of product we transport and the distance between our plant
and our customers. Our reservation and shortfall revenue fluctuates based on
negotiated contract terms.
We sell sand through short-term price agreements, at prevailing market rates,
and long-term take-or-pay contracts. The expiration dates of these contracts
range from 2020 through 2023. These agreements define, among other commitments,
the volume of product that our customers must purchase, the volume of product
that we must provide and the price that we will charge and that our customers
will pay for each ton of contracted product.
SmartSystems revenues consist primarily of the rental of our patented
SmartSystems equipment to customers, which is typically earned under fixed
monthly fees, services related to delivery, proppant management and maintenance
on the equipment. Revenues are recognized as the performance obligations are
satisfied under the terms of the customer contract.
Accounts and Unbilled Receivables
Accounts receivable represents customer transactions that have been invoiced as
of the balance sheet date; unbilled receivables represent customer transactions
that have not yet been invoiced as of the balance sheet date. Accounts
receivable are due within 30 days, or in accordance with terms agreed upon with
customers, and are stated at amounts due from customers net of any allowance for
doubtful accounts. We consider accounts outstanding longer than the payment
terms past due. We determine the allowance by considering a number of factors,
including the length of time trade accounts receivable are past due, previous
loss history, the customer's current ability to pay its obligation, and the
condition of the general economy and the industry as a whole. Accounts
receivable are written off when they are deemed uncollectible, and payments
subsequently received on such receivables are credited to bad debt expense. We
have not had material allowances or bad debt expense
Asset Retirement Obligation
We estimate the future cost of dismantling, restoring and reclaiming operating
excavation sites and related facilities in accordance with federal, state and
local regulatory requirements and recognize reclamation obligations when
extraction occurs and record them as liabilities at estimated fair value. In
addition, a corresponding increase in the carrying amount of the related asset
is recorded and depreciated over such asset's useful life or the estimated
number of years of extraction. The reclamation liability is accreted to expense
over the estimated productive life of the related asset and is subject to
adjustments to reflect changes in value resulting from the passage of time and
revisions to the estimates of either the timing or amount of the reclamation
costs. Changes in estimates at inactive mines or mining areas are reflected in
earnings in the period an estimate is revised. If the asset retirement
obligation is settled for more or less than the carrying amount of the
liability, a loss or gain will be recognized, respectively.
At December 31, 2019, we updated our reclamation plan for certain of our asset
retirement obligations which resulted in a reduction to the asset retirement
obligation by $9.8 million. There was no effect on the income statement in the
current period for this change in estimate but there will be a reduction to the
amount of depreciation and accretion expense recorded in future periods as a
result of this change in estimate.
Inventory Valuation
Sand inventory is stated at the lower of cost or net realizable value using the
average cost method. Costs applied to inventory include direct excavation costs,
processing costs, overhead allocation, depreciation and depletion. Stockpile
tonnages are calculated by measuring the number of tons added and removed from
the stockpile. Tonnages are verified periodically by a surveyor. Costs are
calculated on a per ton basis and are applied to the stockpiles based on the
number of tons in the stockpile.
Spare parts inventory includes critical spare parts. We account for spare parts
on a first-in first-out basis, and value the inventory at the lower of cost or
net realizable value.
                                       58
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SMART SAND, INC.

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
                                  (UNAUDITED)

Leases
On January 1, 2019 we adopted ASU 2016-02, Leases (Topic 842), and related
amendments, which replaced the existing guidance in ASC 840, Leases. ASU 2016-02
requires lessees to recognize most leases on their balance sheets as lease
liabilities with corresponding right-of-use assets. The new lease standard does
not substantially change lessor accounting. We adopted ASU 2016-02 and its
related updates using the transition practical expedients, which allows us to
use the existing lease population, classification and determination of initial
direct costs when calculating the lease liability and right-of-use asset
balances. We also used the optional transition method, which allows us to
initially apply the new standard at the adoption date and recognize a
cumulative-effect adjustment to the opening balance of retained earnings. There
was no adjustment made to the opening balance of retained earnings. We have
implemented new accounting policies and software to facilitate the recording and
reporting of lease transactions and balances. We recorded initial operating
right-of-use assets of $35.9 million and related lease liabilities of $36.5
million on our consolidated balance sheet on January 1, 2019. Operating leases
were not recorded on the balance sheet as of December 31, 2018.
Leases - Lessee

We use leases primarily to procure certain office space, railcars and heavy
equipment as part of our operations. The majority of our lease payments are
fixed and determinable with certain lease payments containing immaterial
variable payments based on the number of hours the equipment is used. Certain of
our leases have options that allow for renewal at market rates, purchase at fair
market value or termination of the lease. We must determine that it is
reasonably certain that a lease option will be exercised for such an option to
be included in the right-of-use asset or lease liability. We are not reasonably
certain that any of our lease options will be exercised and, as such, have not
included those options in our right-of-use assets or lease liabilities. Certain
of our equipment leases contain residual value guarantees which guarantee
various parts of heavy equipment will have a remaining life when the equipment
is returned to the lessor. It is possible that we could owe additional amounts
to the lessor upon return of equipment. There are no restrictions or covenants
imposed by any of our leases.
We evaluate contracts during the negotiation process and when they are executed
to determine the existence of leases. A contract contains a lease when it
conveys the right to use property, plant or equipment for a stated period of
time in exchange for consideration. Leases with an initial term of twelve months
or less are not recorded on the balance sheet. We recognize lease expense on a
straight-line basis over the term of the lease. We evaluate the classification
of our leases at the commencement date and include both lease and non-lease
components in our calculation of consideration in the contract for all classes
of operating leases.
We apply a single discount rate to all operating leases. We determined our
incremental borrowing rate based on an average of collateralized borrowing rates
offered by various lenders. We considered the nature of the assets and the life
of the leases and determined that there is no significant difference in the
incremental borrowing rate.
We are 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. See "Contractual Obligations" above for additional information.
Leases - Lessor
We manufacture and offer for lease our SmartSystems wellsite proppant storage
solutions. We negotiate the terms of our lease agreements on a case-by-case
basis. There are no significant options that are reasonably certain to be
exercised, residual value guarantees or restrictions or covenants in our lease
contracts and, therefore, no such terms have been included in our accounting for
the leases. All of our SmartSystems are leased under operating leases.
Depletion
We amortize the cost to acquire land and mineral rights using a
units-of-production method, based on the total estimated reserves and tonnage
extracted each period.
Impairment of Indefinite-Lived and Long-Lived Assets
In applying the acquisition method of accounting for business combinations,
amounts assigned to identifiable assets and liabilities acquired were based on
estimated fair values as of the date of acquisition, with the remainder recorded
as goodwill. Intangible assets are initially valued at fair value using
generally accepted valuation methods appropriate for the type of intangible
asset. Intangible assets with definite lives are amortized over their estimated
useful lives and are reviewed for
                                       59
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SMART SAND, INC.

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
                                  (UNAUDITED)

impairment if indicators of impairment arise. Intangible assets with indefinite
lives are tested for impairment annually as of December 31, and whenever
indicators of impairment arise. The fair value of the intangible assets is
compared with their carrying value and an impairment loss would be recognized
for the amount by which the carrying amount exceeds the fair value. Goodwill is
tested for impairment annually as of December 31, and whenever indicators of
impairment arise.
We periodically evaluate whether current events or circumstances indicate that
the carrying value of our long-lived assets may not be recoverable. If
circumstances indicate that the carrying value may not be recoverable, we
estimate future undiscounted net cash (without interest charges), estimated
future sales prices (considering historical and current prices, price trends and
related factors) and anticipated operating costs and capital expenditures. If
the carrying value of our long-lived assets is less than the undiscounted cash
flows, the assets are measured at fair value and an impairment is recorded if
that fair value is less than the carrying value.
During the year ended December 31, 2019, we recorded impairment loss of $15.5
million, of which $7.6 million relates to our finite-lived developed technology
intangible assets and $7.9 million relates to our Hixton, Wisconsin property.
The impairment of the finite-lived intangible assets is from our developed
technology allocated to the Quickload acquired in connection with the
acquisition of Quickthree in 2018. We are developing and testing a new transload
technology and no longer plan to actively market the Quickload and as such, all
developed technology intangible assets related to the Quickload were fully
impaired during the third quarter of 2019. In the fourth quarter of 2019, we
determined that the full amount recorded on the balance sheet related to the
Hixton, Wisconsin property may not be recoverable as we have no current plans to
further develop the site.
For the year ended December 31, 2018, we performed both a qualitative and
quantitative analysis of its goodwill and the estimated fair value of the
Company was in excess of its carrying value. To perform the test, we used
valuation techniques to estimate the fair value of the Company as a single
reporting unit under the income and market approaches. Under the discounted cash
flow method, an income approach, the business enterprise value is determined by
discounting to present value the terminal value which is calculated using
debt-free after-tax cash flows for a finite period of years. Key estimates in
this approach were internal financial projection estimates prepared by
management, business risk, and expected rates of return on capital. The
guideline company method, a market approach, develops valuation multiples by
comparing our reporting units to similar publicly traded companies. Key
estimates and selection of valuation multiples rely on the selection of similar
companies, obtaining estimates of forecast revenues and EBITDA estimates for the
similar companies and selection of valuation multiples as they apply to the
reporting unit characteristics. Under the similar transactions method, a market
approach, actual transaction prices and operating data from companies deemed
reasonably similar to the reporting units is used to develop valuation multiples
as an indication of how much a knowledgeable investor in the marketplace would
be willing to pay for the Company. Following the fair value determination using
the methods above, we conducted an evaluation of our stock price at or near the
measurement date and the relationship between the resulting market
capitalization and the fair value of the Company.
Our estimates of prices, recoverable proven reserves and operating and capital
costs are subject to certain risks and uncertainties which may affect the
recoverability of our long-lived assets. Although we have made our best estimate
of these factors based on current conditions, it is reasonably possible that
changes could occur, which could adversely affect our estimate of the net cash
flows expected to be generated from our operating property. We recorded an
impairment charge of $17.8 million related to goodwill and an other
indefinite-lived intangible asset for the year ended December 31, 2018. The
impairment charge relates primarily to the decline in our stock price in 2018
and the relationship between the resulting market capitalization and the equity
recorded on our balance sheet.
There were no impairment losses in 2017.
Income Taxes
Under the balance sheet approach to provide for income taxes, we recognize
deferred tax assets and liabilities for the expected future tax consequences of
net operating loss carryforwards and temporary differences between the carrying
amounts and the tax bases of assets and liabilities. In assessing the
realizability of deferred tax assets, we consider 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. If we determine it is more likely than not that we will not
be able to realize the benefits of the deductible temporary differences, we
would record a valuation allowance against the net deferred tax asset.
                                       60
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                                SMART SAND, INC.

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
                                  (UNAUDITED)

We recognize the impact of uncertain tax positions at the largest amount that,
in our judgment, is more-likely-than-not to be required to be recognized upon
examination by a taxing authority.
Stock-Based Compensation
Stock-based compensation expense is recorded based upon the fair value of the
award at grant date. Such costs are recognized as expense over the corresponding
requisite service period. The fair value of the awards granted was calculated
based on a weighted analysis of (i) publicly-traded companies in a similar line
of business to us (market comparable method) and (ii) our discounted cash flows.
The application of this valuation model involves inputs and assumptions that are
judgmental and highly sensitive in the valuation of incentive awards, which
affects compensation expense related to these awards. These inputs and
assumptions include the value of a share of our common stock.
Prior to our initial public offering, we used a combination of the guideline
company approach and a discounted cash flow analysis to determine the fair value
of our stock. The key assumptions in this estimate included our projections of
future cash flows, company-specific cost of capital used as a discount rate,
lack of marketability discount, and qualitative factors to compare us to
comparable guideline companies. During 2016, factors that contributed to changes
in the underlying value of our stock included the continued market challenges
and corresponding decline in oil and natural gas drilling activity, changes to
future cash flows projected from the expansion of capacity, product mix,
including mix of finer grade versus coarser grade sand, and other factors. As
our operations are highly dependent on sales to the oil and natural gas
industry, the market conditions for this industry had a high degree of impact on
the company's value.
Once our shares became publicly traded, we began using the actual market price
of our 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 as the
grant date fair value for restricted stock awards.
The following is a summary of the restricted stock awards granted and the
related grant date fair value in the years ended December 31, 2019, 2018 and
2017.
                                          Number of         Weighted Average
                                        Shares Granted         Grant Date
                                        (in thousands)         Fair Value
For the year ended December 31, 2019           1,884       $         2.58
For the year ended December 31, 2018             746       $         6.61
For the year ended December 31, 2017             352       $        14.77


Emerging Growth Company
We qualify as an "emerging growth company" pursuant to the provisions of the
JOBS Act, enacted on April 5, 2012. Section 102 of the JOBS Act provides that an
"emerging growth company" can take advantage of the extended transition period
provided in Section 7(a)(2)(B) of the Securities Act for complying with new or
revised accounting standards. However, we are choosing to "opt out" of such
extended transition period, and as a result, we will comply with new or revised
accounting standards on the relevant dates on which adoption of such standards
is required for non-emerging growth companies. Our election to "opt-out" of the
extended transition period is irrevocable.
Recent Accounting Pronouncements
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820),
which modifies disclosure requirements for fair value measurements by removing
the disclosure of the valuation process for Level 3 fair value measurements,
among other disclosure modifications. The guidance is effective for the
financial statements periods beginning after December 15, 2019, although early
adoption is permitted. We early adopted ASU 2018-13 on December 31, 2019 and
fair value disclosures in these financial statements have been updated
accordingly. The changes in disclosures are immaterial.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), and related
amendments, which replaced the existing guidance in ASC 840, Leases. ASU 2016-02
requires lessees to recognize most leases on their balance sheets as lease
liabilities with corresponding right-of-use assets. We adopted ASU 2016 and its
related amendments on January 1, 2019. See our discussion of leases above for
additional information.

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