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SMART SAND, INC.

(SND)
  Report
Delayed Nasdaq  -  04:00 2022-09-23 pm EDT
1.440 USD   -10.00%
09/01SMART SAND : September Investor Presentation
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08/25SMART SAND : Submission of Matters to a Vote of Security Holders - Form 8-K/A
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08/25SMART SAND, INC. Submission of Matters to a Vote of Security Holders (form 8-K/A)
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

08/09/2022 | 04:17pm EDT

(UNAUDITED)

ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations


The following discussion and analysis summarizes the significant factors
affecting the consolidated operating results, financial condition, liquidity and
cash flows of the Company as of and for the periods presented below. The
following discussion and analysis should be read in conjunction with our
unaudited condensed consolidated financial statements and related information
contained herein and our audited financial statements as of December 31, 2021
contained in our Annual Report on Form 10-K. We use contribution margin, EBITDA,
Adjusted EBITDA and free cash flow herein as non-GAAP measures of our financial
performance. For further discussion of contribution margin, EBITDA, Adjusted
EBITDA and free cash flow, see the section entitled "Non-GAAP Financial
Measures." We define various terms to simplify the presentation of information
in this Quarterly Report on Form 10-Q (this "Report"). All share amounts are
presented in thousands.


Forward-Looking Statements

This discussion contains forward-looking statements that are based on the
beliefs of our management, as well as assumptions made by, and information
currently available to our management. Actual results could differ materially
from those discussed in or implied by forward-looking statements as a result of
various factors, including those discussed herein and in the section entitled
"Risk Factors" in our Form 10-K for the year ended December 31, 2021. Our
estimates and forward-looking statements are primarily based on our current
expectations and estimates of future events and trends, which affect or may
affect our business and operations. Although we believe that these estimates and
forward-looking statements are based upon reasonable assumptions, they are
subject to several risks and uncertainties and are made in light of information
currently available to us. Important factors, in addition to the factors
described in this Report, may adversely affect our results as indicated in
forward-looking statements. You should read this Report and the documents that
we have filed as exhibits hereto completely and with the understanding that our
actual future results may be materially different from what we expect. The words
"may," "will," "should," "could," "expect," "plan," "anticipate," "believe,"
"estimate," "predict," "intend," "potential," "might," "would," "continue" or
the negative of these terms or other comparable terminology and similar words
are intended to identify estimates and forward-looking statements. Estimates and
forward-looking statements speak only as of the date they were made, and, except
to the extent required by law, we undertake no obligation to update, to revise
or to review any estimate and/or forward-looking statement because of new
information, future events or other factors. Estimates and forward-looking
statements involve risks and uncertainties and are not guarantees of future
performance. As a result of the risks and uncertainties described above, the
estimates and forward-looking statements discussed in this Report might not
occur and our future results, level of activity, performance or achievements may
differ materially from those expressed in these forward-looking statements due
to, including, but not limited to, the factors mentioned above, and the
differences may be material and adverse. Because of these uncertainties, you
should not place undue reliance on these forward-looking statements.


Overview


The Company

We are a fully integrated frac and industrial sand supply and services company.
The Company offers complete mine to wellsite proppant supply and logistics
solutions to our frac sand customers. We produce low-cost, high quality Northern
White sand, which is a premium sand used as proppant used to enhance hydrocarbon
recovery rates in the hydraulic fracturing of oil and natural gas wells and for
a variety of industrial applications. We also offer proppant logistics solutions
to our customers through our in-basin transloading terminals and our
SmartSystemsTM wellsite storage capabilities. In late 2021, we created our
Industrial Products Solutions ("IPS") business in order to diversify our
customer base and markets we serve by offering sand for industrial uses. We
market our products and services to oil and natural gas exploration and
production companies, oilfield service companies, and industrial manufacturers.
We sell our sand through long-term contracts or spot sales in the open market.
We provide wellsite proppant storage solutions services and equipment under
flexible contract terms custom tailored to meet the needs of our customers. 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

                                       19
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                                SMART SAND, INC.

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

storage silos and SmartPathTM transloader, access to all Class I rail lines, and the industry experience of our senior management team make us as a highly attractive provider of sand and logistics services.


We incorporated in Delaware in July 2011 and began operations at our Oakdale
facility with 1.1 million tons of annual processing capacity in July 2012. We
currently have 7.1 million tons of annual capacity at our Oakdale and Utica
facilities with the ability to expand annual processing capacity to
approximately 10.0 million tons of sand should we bring the Blair facility
online.

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. In January 2022, we began operations at
an additional unit train capable transloading terminal in Waynesburg,
Pennsylvania to service the Appalachian Basin, including the Marcellus and Utica
Formations. These terminals allow us to offer more efficient and sustainable
delivery options to our customers.

We also offer to our customers portable wellsite storage and management
solutions through our SmartSystems products and services. Our 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 SmartDepotXL™ silo
systems, SmartPath transloader, 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 self-contained SmartPath
transloader is a mobile sand transloading system designed to work with bottom
dump trailers and features a drive over conveyor, surge bin, and dust collection
system, and we believe the system has the ability to keep up with any hydraulic
fracturing 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 believe that our SmartSystems reduce tracking and related fuel
consumption for our customers, helping them meet their goals to reduce their
carbon footprint in their daily operations.

In the fourth quarter of 2021 we started our IPS business whereby we offer our
sand to customers for various industrial purposes, such as glass, foundry,
building products, filtration, geothermal, renewables, ceramics, turf &
landscape, retail, and recreation. While we are still in the early stages of
this business, we believe that as it grows, it will provide us with the ability
to diversify our sales into more stable, consumer-driven products to help
mitigate price volatility in the oil and gas industry.


Recent Acquisitions


On March 4, 2022, we entered into a Membership Interest Purchase Agreement (the
"Purchase Agreement") with Hi-Crush Inc., a Delaware corporation ("HCR"), and
Hi-Crush Blair LLC, a Delaware limited liability company and wholly-owned
subsidiary of HCR ("Blair") pursuant to which we acquired all of the issued and
outstanding limited liability company interest of Blair from HCR for aggregate
cash consideration of approximately $6.5 million, subject to customary working
capital adjustments.


Market Trends

Our historical results of operations and cash flows are not indicative of results of operations and cash flows to be expected in the future.


During most of 2020, demand for frac sand declined significantly as a result of
decreased demand for oil and natural gas as a result of the ongoing effects of
the coronavirus ("COVID-19") pandemic, which caused a global decrease in all
means of travel, the closure of borders between countries and a general slowing
of economic activity worldwide. Activity in the oil and gas industry began to
rebound in the fourth quarter of 2020 and through 2021 as the global
distribution of COVID-19 vaccines ramped up and travel restrictions lessened.
However, the prices of frac sand remained depressed during 2021 as supply
remained out of balance with demand even though market activity was improving.
Through the first six months of 2022, supply and demand fundamentals have
continued to improve and frac sand prices began recovering from previous
historic lows.

                                       20
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                                SMART SAND, INC.

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

Additionally, the ongoing conflict in the Ukraine has also contributed to
dramatic swings in oil and natural gas prices and significant volatility in the
oilfield service sector. However, we cannot predict if this trend will continue
or if sand prices will increase, decrease or stabilize.

Northern White sand, which is found predominantly in Wisconsin and limited
portions of Minnesota, Illinois, and Missouri, is considered a premium proppant
due to its favorable physical characteristics. While we anticipate that regional
sand will continue to affect the demand for Northern White sand in some of the
oil and natural gas producing basins in which we operate, we believe there will
continue to be demand for our high-quality Northern White sand. In particular,
we believe that Northern White sand has logistical advantages in the Appalachian
basin, Bakken basin, the western basins of Colorado, Wyoming, and in Canada. We
expect demand for our frac sand to continue to be supported by customers who are
focused on long-term well performance and ultimate recovery of reserves from the
oil and natural gas wells they are completing as well as those interested in the
efficiency of their logistics supply chain and delivery of sand to the wellsite.
Additionally, we believe market trends continue to support increased proppant
usage per well drilled due to operator focus on well efficiencies through
increasing lengths of drilling laterals, use of simul-fracking techniques and
other well enhancement strategies. As the amount of sand per well continues to
increase, we believe the delivery of sand to the operating basins by rail in
bulk shipments to terminals in close proximity to drilling activity provides
more sustainable and efficient delivery of sand to meet a customer's long term
proppant needs. Finally, we believe that the adoption of our SmartSystems in the
marketplace, which has a smaller footprint on customer sites than other sand
storage solutions, will allow us to sell more sand when packaged with our last
mile solutions. We believe the combination of our high quality Northern White
sand delivered in bulk to in basin terminals and ultimately delivered to the
wellsite through our SmartSystems wellsite proppant storage solutions provides
our customers efficient and sustainable sand supply to the wellsite that will
reduce trucking and related fuel consumption for our customers, helping them to
meet their goals to reduce their carbon footprint in their daily operations.

Demand in the IPS business is relatively stable as customers are spread over a
wide range of industries including glass, foundry, building products,
filtration, geothermal, renewables, ceramics, turf & landscape, retail,
recreation and more. The IPS business is primarily influenced by macroeconomic
drivers such as consumer demand and population growth. We began our
diversification into the IPS business in late 2021 and we expect to see
continued growth throughout North America.



                                       21
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                                SMART SAND, INC.

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


GAAP Results of Operations


Three Months Ended June 30, 2022 Compared to Three Months Ended June 30, 2021


The following table summarizes our revenue and expenses for the periods
indicated.
                                                  Three Months Ended June 30,                             Change
                                                   2022                  2021               Dollars               Percentage

Revenues:
Sand sales revenue                           $       67,111          $   28,801          $   38,310                         133  %

Logistics revenue                                     1,603                 838                 765                          91  %
Total revenue                                        68,714              29,639              39,075                         132  %
Cost of goods sold                                   59,743              31,999              27,744                          87  %
Gross profit                                          8,971              (2,360)             11,331                        (480) %
Operating expenses:
Salaries, benefits and payroll taxes                  3,225               2,285                 940                          41  %
Depreciation and amortization                           563                 577                 (14)                         (2) %
Selling, general and administrative                   3,795               3,855                 (60)                         (2) %
Bad debt expense                                          1              19,592             (19,591)                       (100) %
Total operating expenses                              7,584              26,309             (18,725)                        (71) %
Operating income (loss)                               1,387             (28,669)             30,056                        (105) %
Other income (expenses):

Interest expense, net                                  (406)               (513)                107                         (21) %
Other income                                             56               3,467              (3,411)                        (98) %
Total other income (expenses), net                     (350)              2,954              (3,304)                       (112) %
Income (loss) before income tax expense
(benefit)                                             1,037             (25,715)             26,752                        (104) %
Income tax expense (benefit)                          1,127               1,552                (425)                        (27) %
Net loss                                     $          (90)         $  (27,267)         $   27,177                        (100) %


Revenues

Revenues were $68.7 million for the three months ended June 30, 2022, during
which time we sold approximately 1,196,000 tons of sand. Revenues for the three
months ended June 30, 2021 were $29.6 million, during which time we sold
approximately 767,000 tons of sand. The key factors contributing to the increase
in revenues for the three months ended June 30, 2022 as compared to the three
months ended June 30, 2021 were as follows:

•Sand sales revenue increased from $28.8 million for the three months ended June
30, 2021 to $67.1 million or 133% for the three months ended June 30, 2022 as a
result of an increase in total volumes sold of approximately 56% and higher
average sale prices of our sand. Higher demand relative to supply for oil and
natural gas has led to increased prices in oil and natural gas which we believe
has led to increased demand for frac sand resulting in higher sand prices.

•Logistics revenue, which includes freight for certain mine gate sand sales,
railcar usage, logistics services, and SmartSystems rentals, was approximately
$1.6 million for the three months ended June 30, 2022 compared to $0.8 million
for the three months ended June 30, 2021. The increase in logistics revenue was
due to a higher utilization of our SmartSystems fleet.

                                       22
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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 $59.7 million and $32.0 million for the three months
ended June 30, 2022 and 2021, respectively. The increase was primarily due to
higher volumes sold in the current period and the related increase in production
costs and freight costs that accompany higher volumes. Additionally, higher
labor costs and utilities have also contributed to an increase in cost of goods
sold.

Gross Profit

Gross profit was $9.0 million for the three months ended June 30, 2022, compared
to $(2.4) million for the three months ended June 30, 2021. The increase in
profitability for the three months ended June 30, 2022 as compared to the three
months ended June 30, 2021 was primarily due to higher sales volumes and higher
average sale prices of our sand relative to the cost to produce and deliver
products to our customers.

Operating Expenses


Operating expenses were $7.6 million and $26.3 million for the three months
ended June 30, 2022 and 2021, respectively. For the three months ended June 30,
2021, we recorded non-cash bad debt expense of $19.6 million, which is the
difference between the $54.6 million accounts receivable balance that was
subject to litigation and the $35.0 million cash payment received under the
Settlement Agreement and Release, dated as of June 28, 2021 (the "Settlement
Agreement"), by and between the Company and U.S. Well Services, LLC ("U.S.
Well"). Salaries, benefits and payroll taxes increased to $3.2 million for the
three months ended June 30, 2022 as compared to $2.3 million for the three
months ended June 30, 2021, due primarily to accrued bonuses as management has
reinstated a formal employee bonus plan based on company performance for 2022
and increased staffing to support our IPS business segment. Depreciation and
amortization remained constant at $0.6 million for the three months ended June
30, 2022 and 2021. Selling, general and administrative expenses were $3.8
million for the three months ended June 30, 2022 compared to $3.9 million for
the three months ended June 30, 2021.

Other Income

In 2021 we qualified for federal government assistance through employee retention credit provisions of the Consolidated Appropriations Act of 2021. During the three months ended June 30, 2021, we recorded $3.4 million in employee retention credits, whereas for the three months ended June 30, 2022, we did not record any employee retention credits.

Interest Expense

We incurred $0.4 million and $0.5 million of net interest expense for the three months ended June 30, 2022 and 2021, respectively.

Income Tax Expense (Benefit)


For the three months ended June 30, 2022 and 2021, our effective tax rate was
approximately 108.7% and (6.0)%, respectively, based on the annual effective tax
rate net of discrete federal and state taxes. The computation of the effective
tax rate includes modifications from the statutory rate such as income tax
credits, tax depletion deduction, carrybacks, and state apportionment changes,
among other items.

As of June 30, 2022, we have recorded a liability for uncertain tax positions
included in deferred tax liabilities, long-term, net on our balance sheet,
related to our depletion deduction methodology. As of June 30, 2022, we
determined that it is more likely than not that we will not be able to fully
realize the benefits of certain existing deductible temporary differences and
have recorded a partial valuation allowance against the gross deferred tax
assets, which is included in liabilities, long-term, net on our balance sheet,
and a corresponding increase to the income tax expense on our condensed
consolidated statement of operations.

Net Loss


Net loss was $(0.1) million for the three months ended June 30, 2022 as compared
to net loss of $(27.3) million for the three months ended June 30, 2021. The
decrease in net loss is attributable to an increase in total volumes sold and
higher average sale prices of our sand. Additionally, the difference was also
due to non-cash bad debt expense recorded against the residual balance of
accounts receivable that were previously the subject of litigation for the three
months ended June 30, 2021.

                                       23
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                                SMART SAND, INC.

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

Six Months Ended June 30, 2022 Compared to Six Months Ended June 30, 2021


The following table summarizes our revenue and expenses for the periods
indicated.
                                                   Six Months Ended June 30,                              Change
                                                   2022                  2021               Dollars               Percentage
                                                        (in thousands)
Revenues:
Sand sales revenue                           $      105,400          $   51,948              53,452                         103  %
Shortfall revenue                                     1,915               1,741                 174                          10  %
Logistics revenue                                     3,004               3,400                (396)                        (12) %
Total revenue                                       110,319              57,089              53,230                          93  %
Cost of goods sold                                  103,329              64,426              38,903                          60  %
Gross profit                                          6,990              (7,337)             14,327                        (195) %
Operating expenses:
Salaries, benefits and payroll taxes                  6,617               4,660               1,957                          42  %
Depreciation and amortization                         1,090               1,138                 (48)                         (4) %
Selling, general and administrative                   7,843               7,009                 834                          12  %
Bad debt expense                                          1              19,592             (19,591)                       (100) %

Total operating expenses                             15,551              32,399             (16,848)                        (52) %
Operating income (loss)                              (8,561)            (39,736)             31,175                         (78) %
Other income (expenses):

Interest expense, net                                  (833)             (1,060)                227                         (21) %
Other income                                            268               3,665              (3,397)                        (93) %
Total other income (expenses), net                     (565)              2,605              (3,170)                       (122) %
Loss before income tax benefit                       (9,126)            (37,131)             28,005                         (75) %
Income tax benefit                                   (3,113)             (5,952)              2,839                         (48) %
Net loss                                     $       (6,013)         $  (31,179)         $   25,166                         (81) %


Revenues

Revenues were $110.3 million for the six months ended June 30, 2022, during
which time we sold approximately 2,048,000 tons of sand. Revenues for the six
months ended June 30, 2021 were $57.1 million, during which time we sold
approximately 1,527,000 tons of sand. The key factors contributing to the
increase in revenues for the six months ended June 30, 2022 as compared to the
six months ended June 30, 2021 were as follows:

•Sand sales revenue increased from $51.9 million for the six months ended June
30, 2021 to $105.4 million for the six months ended June 30, 2022 as a result of
an increase in total volumes sold of approximately 34%. In addition to an
increase in our volume, the 103% increase in our revenue is also attributable to
higher average sale prices of our sand. Sand prices have increased due to a
shift in supply and demand, which we believe is driven by increased prices in
oil and natural gas.

•We had $1.9 million contractual shortfall revenue for the six months ended June
30, 2022 compared to $1.7 million of contractual shortfall revenue for the six
months ended June 30, 2021. Our customer contracts dictate whether shortfall is
earned quarterly or at the end of their respective contract year. We recognize
revenue to the extent of the unfulfilled minimum contracted quantity at the
shortfall price per ton as stated in the contract.

•Logistics revenue, which includes freight for certain mine gate sand sales,
railcar usage, logistics services, and SmartSystems rentals, was approximately
$3.0 million for the six months ended June 30, 2022 compared to $3.4

                                       24
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                                SMART SAND, INC.

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

million for the six months ended June 30, 2021. The decrease in logistics revenue was due to the shift from mine gate sales to in-basin sales, which include transportation and any other handling services, partially offset by higher utilization of our SmartSystems fleet.

Cost of Goods Sold


Cost of goods sold was $103.3 million and $64.4 million for the six months ended
June 30, 2022 and June 30, 2021, respectively. The increase was primarily due to
higher volumes sold in the current period and the related increase in production
costs and freight costs that accompany higher volumes. Additionally higher labor
costs and utilities have also contributed to an increase in cost of goods sold.

Gross Profit


Gross profit was $7.0 million and $(7.3) million for the six months ended June
30, 2022 and June 30, 2021, respectively. The improvement in the gross profit
for the six months ended June 30, 2022 as compared to the six months ended June
30, 2021 was primarily due to higher sales volumes and higher average sale
prices of our sand relative to the cost to produce and deliver products to our
customers.

Operating expenses were $15.6 million and $32.4 million for the six months ended
June 30, 2022 and June 30, 2021, respectively. For the six months ended June 30,
2021, we recorded non-cash bad debt expense of $19.6 million, which is the
difference between the $54.6 million accounts receivable balance that was
subject to litigation and the $35.0 million cash payment received under the
Settlement Agreement. Salaries, benefits and payroll taxes increased to $6.6
million for the six months ended June 30, 2022 as compared to $4.7 million for
the six months ended June 30, 2021, due primarily to accrued bonuses as
management has reinstated a formal employee bonus plan based on company
performance for 2022 and increased staffing to support our IPS business segment.
Depreciation and amortization remained constant at $1.1 million for the six
months ended June 30, 2022 and June 30, 2021. Selling, general and
administrative expenses increased to $7.8 million for the six months ended June
30, 2022 compared to $7.0 million for the six months ended June 30, 2021,
primarily driven by higher travel costs post-COVID-19, increased royalty expense
due to higher total volumes sold and development costs related to our Waynesburg
terminal.

Interest Expense

We incurred $0.8 million and $1.1 million of net interest expense for the six
months ended June 30, 2022 and June 30, 2021, respectively. We continue to
reduce debt levels and decrease interest expense through scheduled amortizing
payments.

Income Tax Benefit

For the six months ended June 30, 2022 and June 30, 2021, our effective tax rate
was approximately 34.1% and 16.0%, respectively, based on the annual effective
tax rate net of discrete federal and state taxes. The computation of the
effective tax rate includes modifications from the statutory rate such as income
tax credits, tax depletion deduction, carrybacks, and state apportionment
changes, among other items.

As of June 30, 2022, we have recorded a liability for uncertain tax positions
included on our balance sheet, related to our depletion deduction methodology.
As of June 30, 2022, we determined that it is more likely than not that we will
not be able to fully realize the benefits of certain existing deductible
temporary differences and have recorded a partial valuation allowance against
the gross deferred tax assets, which is included in liabilities, long-term, net
on our balance sheet, and a corresponding increase to the income tax expense on
our condensed consolidated statement of operations.

Net Loss


Net loss was $(6.0) million for the six months ended June 30, 2022 as compared
to net loss of $(31.2) million for the six months ended June 30, 2021. The
decrease in net loss is attributable to an increase in total volumes sold and
higher average sale prices of our sand in addition to non-cash bad debt expense
recorded against the residual balance of accounts receivable that were
previously the subject of litigation in June 30, 2021.

                                       25
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                                SMART SAND, INC.

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


Non-GAAP Financial Measures

Contribution margin, EBITDA, Adjusted EBITDA and free cash flow 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. Gross profit is the GAAP measure most directly comparable to
contribution margin, net income is the GAAP measure most directly comparable to
EBITDA and Adjusted EBITDA and net cash provided by operating activities is the
GAAP measure most directly comparable to free cash flow. 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 contribution margin, EBITDA, Adjusted EBITDA or free cash
flow in isolation or as substitutes for an analysis of our results as reported
under GAAP. Because contribution margin, EBITDA, Adjusted EBITDA and free cash
flow 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.


Contribution Margin

We use contribution margin, which we define as total revenues less cost of goods
sold excluding depreciation, depletion and accretion of asset retirement
obligations, to measure our financial and operating performance. Contribution
margin excludes other operating expenses and income, including costs not
directly associated with the operations of our business such as accounting,
human resources, information technology, legal, sales and other administrative
activities.

We believe that reporting contribution margin and contribution margin per ton
sold provides useful performance metrics to management and external users of our
financial statements, such as investors and commercial banks, because these
metrics provide an operating and financial measure of our ability, as a combined
business, to generate margin in excess of our operating cost base.

Gross profit is the GAAP measure most directly comparable to contribution
margin. Contribution margin should not be considered an alternative to gross
profit presented in accordance with GAAP. Since 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.
                                                   Three Months Ended June 30,                  Six Months Ended June 30,
                                                    2022                  2021                  2022                  2021
                                                                   (in thousands, except per ton amounts)
Revenue                                       $       68,714          $   29,639          $      110,319          $   57,089
Cost of goods sold                                    59,743              31,999                 103,329              64,426
   Gross profit                                        8,971              (2,360)                  6,990              (7,337)
Depreciation, depletion, and accretion of
asset retirement obligations                           6,283               5,851                  12,514              11,864
   Contribution margin                        $       15,254          $    

3,491 $ 19,504 $ 4,527

   Contribution margin per ton                $        12.75          $     4.55          $         9.52          $     2.96
Total tons sold                                        1,196                 767                   2,048               1,527


Contribution margin was $15.3 million and $3.5 million, or $12.75 and $4.55 per
ton sold, for the three months ended June 30, 2022 and 2021, respectively. For
the six months ended contribution margin was $19.5 million and $4.5 million, or
$9.52 and $2.96 per ton sold, for the six months ended June 30, 2022 and 2021,
respectively. The increase in overall contribution margin and contribution
margin per ton was due primarily higher sales volumes and higher average sale
prices relative to the cost to produce and deliver products to our customers.

                                       26
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                                SMART SAND, INC.

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


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;

•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
loss for each of the periods indicated.
                                                Three Months Ended June 30,                 Six Months Ended June 30,
                                                  2022                 2021                  2022                 2021
                                                                            (in thousands)
Net loss                                    $         (90)         $ 

(27,267) $ (6,013) $ (31,179) Depreciation, depletion and amortization

            6,658               6,317                 13,225              12,777
Income tax expense (benefit)                        1,127               1,552                 (3,113)             (5,952)
Interest expense                                      417                 515                    851               1,070
Franchise taxes                                       131                  97                    191                 195
EBITDA                                      $       8,243          $  (18,786)         $       5,141          $  (23,089)
Gain on sale of fixed assets                          (16)                (60)                   (16)                (58)
Equity compensation                                   636                 581                  1,311               1,266

Acquisition and development costs                       -                  (5)                   337                  18

Accretion of asset retirement obligations             190                 111                    379                 225
Adjusted EBITDA                             $       9,159          $  (21,511)         $       7,258          $  (24,990)


Adjusted EBITDA was $9.2 million for the three months ended June 30, 2022
compared to $(21.5) million for the three months ended June 30, 2021. Adjusted
EBITDA was $7.3 million for the six months ended June 30, 2022 compared to
$(25.0) million for the six months ended June 30, 2021. The increase in Adjusted
EBITDA was primarily due to higher sales volumes, and higher average sale prices
of our sand relative to the cost to produce and deliver products to our
customers.

                                       27
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                                SMART SAND, INC.

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


Free Cash Flow

Free cash flow, which we define as net cash provided by operating activities
less purchases of property, plant and equipment, is used as a supplemental
financial measure by our management and by external users of our financial
statements, such as investors and commercial banks, to measure the liquidity of
our business.

Net cash provided by operating activities is the GAAP measure most directly
comparable to free cash flows. Free cash flows should not be considered an
alternative to net cash provided by operating activities presented in accordance
with GAAP. Because free cash flows may be defined differently by other companies
in our industry, our definition of free cash flows may not be comparable to
similarly titled measures of other companies, thereby diminishing its utility.
The following table presents a reconciliation of free cash flows to net cash
provided by operating activities.
                                               Three Months Ended June 30,                  Six Months Ended June 30,
                                                2022                  2021                  2022                  2021
                                                               (in thousands, except per ton amounts)
Net cash (used in) provided by operating
activities                                $       (2,287)         $   

32,566 $ (10,949) $ 36,480 Acquisition of Blair facility

                          -                   -                  (6,547)                  -
Purchases of property, plant and
equipment                                         (1,369)             (2,830)                 (5,137)             (5,043)
Free cash flow                            $       (3,656)         $   29,736          $      (22,633)         $   31,437

Free cash flow was $(3.7) million for the three months ended June 30, 2022 compared to $29.7 million for the three months ended June 30, 2021.


Free cash flow was $(22.6) million for the six months ended June 30, 2022
compared to $31.4 million for the six months ended June 30, 2021. The decrease
in free cash flow was primarily attributable to purchase of Blair for $6.5
million, increase in accounts receivable, repayment of tax refund IRS mistakenly
provided in prior period of $2.3 million, and increase in unbilled receivables
in the six months ended June 30, 2022 compared to the six months ended June 30,
2021. We expect that the investments made in the current period will be
cash-generating assets in the future.


Liquidity and Capital Resources


Our primary sources of liquidity are cash flow generated from operations and
availability under our ABL Credit Facility and other equipment financing
sources. As of June 30, 2022, cash on hand was $2.1 million and we had $16.0
million in undrawn availability on our ABL Credit Facility.

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.


Material Cash Requirements

Capital Requirements

We expect full year 2022 capital expenditures to be between $20.0 million and
$25.0 million, which we anticipate will primarily support efficiency projects at
Oakdale and Utica, capital related to the Waynesburg terminal. We expect to fund
these capital expenditures with cash from operations, equipment financing
options available to us or borrowings under the ABL Credit Facility or other
financing sources, such as equipment finance providers. For the six months ended
June 30, 2022, we spent approximately $5.1 million on capital expenditures.

                                       28
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                                SMART SAND, INC.

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

We have several debt facilities, including the Oakdale Equipment Financing,
various notes payable and our ABL Credit Facility. Our Oakdale Equipment
Financing is secured by substantially all of the assets at our Oakdale facility.
The balance on this facility as of June 30, 2022 was $13.6 million. Minimum cash
payments on this facility for the remainder of 2022 are anticipated to be $2.3
million. Our various notes payable are primarily secured by our manufactured
SmartSystems equipment. Total debt under these notes payable as of June 30, 2022
was $4.7 million. Minimum cash payments on these notes payable for the remainder
of 2022 are anticipated to be $1.6 million. There was $3.0 million outstanding
on our ABL Credit Facility as of June 30, 2022.

Operating Leases


We use leases primarily to procure certain office space, railcars and heavy
equipment as part of its operations. The majority of our lease payments are
fixed and determinable. Our operating lease liabilities as of June 30, 2022 were
$33.2 million. Minimum cash payments on operating leases for the remainder of
2022 are anticipated to be $5.9 million.

Mineral Rights Property


The Company is obligated under certain contracts for minimum payments for the
right to use land for extractive activities. The annual minimum payments under
these contracts are approximately $2.5 million per year in the aggregate for the
next 15 years.


Off-Balance Sheet Arrangements


We had outstanding performance bonds of $17.7 million and $8.6 million at June
30, 2022 and December 31, 2021, respectively. The increase in performance bonds
is due primarily to the acquisition of the Blair facility and the assumption of
performance bonds related to its potential future reclamation obligations.


Contractual Obligations

As of June 30, 2022, we had contractual obligations for the ABL Credit Facility, Oakdale Equipment Financing, notes payable, operating and finance leases, minimum payments for the rights to mine land, capital expenditures, asset retirement obligations, and other commitments to municipalities for maintenance.



Environmental Matters

We are subject to various federal, state and local laws and regulations governing, among other things, hazardous materials, air and water emissions, environmental contamination and reclamation and the protection of the environment and natural resources. We have made, and expect to make in the future, expenditures to comply with such laws and regulations, but cannot predict the full amount of such future expenditures.

Seasonality


Our business is affected to some extent by seasonal fluctuations in weather that
impact the production levels for a portion of our wet sand processing capacity.
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. We have indoor wet
processing facilities at each of our plant locations, which allow 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
                                       29
--------------------------------------------------------------------------------
                                SMART SAND, INC.

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

conditions may curtail drilling activities and, as a result, our sales volumes to those areas may be reduced during such severe weather periods.

Customer Concentration


For the six months ended June 30, 2022, revenue from EQT Production Corporation,
Halliburton Energy Services, and Encino Energy accounted for 28.3%, 18.7%, and
10.1%, respectively, of total revenue. For the six months ended June 30, 2021,
revenue from Rice Energy (a predecessor of EQT Production Corporation),
Halliburton Energy Services, and Enerplus accounted for 30.9%, 21.8%, and 13.0%,
respectively, of total revenue.


Critical Accounting Policies and Estimates

There have been no material changes in our critical accounting policies and procedures during the six months ended June 30, 2022.

Use of Estimates


The preparation of financial statements in accordance with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the consolidated financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Significant estimates used in the preparation of these financial statements
include, but are not limited to: impairment considerations of assets, including
intangible assets, fixed assets, and inventory; estimated cost of future asset
retirement obligations; fair values of acquired assets and assumed liabilities;
recoverability of deferred tax assets; inventory reserve; and the collectability
of receivables; and certain liabilities.

Actual results could differ from management's best estimates as additional
information or actual results become available in the future, and those
differences could be material. The decreases in demand related to COVID-19
pandemic in 2020 and 2021 and the ongoing conflict in Ukraine have caused
dramatic swings in oil and natural gas prices and significant volatility in the
oilfield service sector since. We continue to actively monitor the global impact
of current events, but we are currently unable to estimate the impact of these
events on our future financial position and results of operations or give any
assurances that these events will not have a material adverse effect on our
financial position or results of operations.

                                       30

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