SMART SAND, INC. (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 ofDecember 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 endedDecember 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 --------------------------------------------------------------------------------
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 inDelaware inJuly 2011 and began operations at ourOakdale facility with 1.1 million tons of annual processing capacity inJuly 2012 . We currently have 7.1 million tons of annual capacity at ourOakdale andUtica facilities with the ability to expand annual processing capacity to approximately 10.0 million tons of sand should we bring theBlair facility online. We operate a unit train capable transloading terminal in Van Hook,North Dakota to service the Bakken Formation in theWilliston 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 ofNorth America . InJanuary 2022 , we began operations at an additional unit train capable transloading terminal inWaynesburg, Pennsylvania to service theAppalachian Basin , including the Marcellus andUtica 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
OnMarch 4, 2022 , we entered into a Membership Interest Purchase Agreement (the "Purchase Agreement") withHi-Crush Inc. , aDelaware corporation ("HCR"), andHi-Crush Blair LLC , aDelaware 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 ofBlair 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
--------------------------------------------------------------------------------SMART SAND, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (UNAUDITED) Additionally, the ongoing conflict in theUkraine 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 inWisconsin and limited portions ofMinnesota ,Illinois , andMissouri , 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 ofColorado ,Wyoming , and inCanada . 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 throughoutNorth America . 21 --------------------------------------------------------------------------------
SMART SAND, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (UNAUDITED) GAAP Results of Operations
Three Months Ended
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.
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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 endedJune 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$9.0 million for the three months endedJune 30, 2022 , compared to$(2.4) million for the three months endedJune 30, 2021 . The increase in profitability for the three months endedJune 30, 2022 as compared to the three months endedJune 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 endedJune 30, 2022 and 2021, respectively. For the three months endedJune 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 ofJune 28, 2021 (the "Settlement Agreement"), by and between the Company andU.S. Well Services, LLC ("U.S. Well"). Salaries, benefits and payroll taxes increased to$3.2 million for the three months endedJune 30, 2022 as compared to$2.3 million for the three months endedJune 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 endedJune 30, 2022 and 2021. Selling, general and administrative expenses were$3.8 million for the three months endedJune 30, 2022 compared to$3.9 million for the three months endedJune 30, 2021 .
Other Income
In 2021 we qualified for federal government assistance through employee
retention credit provisions of the Consolidated Appropriations Act of 2021.
During the three months ended
Interest Expense
We incurred
Income Tax Expense (Benefit)
For the three months endedJune 30, 2022 and 2021, our effective tax rate was approximately 108.7% and (6.0)%, respectively, based on the annual effective tax rate net of discrete federal and state taxes. The computation of the effective tax rate includes modifications from the statutory rate such as income tax credits, tax depletion deduction, carrybacks, and state apportionment changes, among other items. As ofJune 30, 2022 , we have recorded a liability for uncertain tax positions included in deferred tax liabilities, long-term, net on our balance sheet, related to our depletion deduction methodology. As ofJune 30, 2022 , we determined that it is more likely than not that we will not be able to fully realize the benefits of certain existing deductible temporary differences and have recorded a partial valuation allowance against the gross deferred tax assets, which is included in liabilities, long-term, net on our balance sheet, and a corresponding increase to the income tax expense on our condensed consolidated statement of operations.
Net Loss
Net loss was$(0.1) million for the three months endedJune 30, 2022 as compared to net loss of$(27.3) million for the three months endedJune 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 endedJune 30, 2021 . 23 --------------------------------------------------------------------------------
SMART SAND, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (UNAUDITED)
Six Months Ended
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
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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
Cost of Goods Sold
Cost of goods sold was$103.3 million and$64.4 million for the six months endedJune 30, 2022 andJune 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 endedJune 30, 2022 andJune 30, 2021 , respectively. The improvement in the gross profit for the six months endedJune 30, 2022 as compared to the six months endedJune 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 endedJune 30, 2022 andJune 30, 2021 , respectively. For the six months endedJune 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 endedJune 30, 2022 as compared to$4.7 million for the six months endedJune 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 endedJune 30, 2022 andJune 30, 2021 . Selling, general and administrative expenses increased to$7.8 million for the six months endedJune 30, 2022 compared to$7.0 million for the six months endedJune 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 ourWaynesburg terminal. Interest Expense We incurred$0.8 million and$1.1 million of net interest expense for the six months endedJune 30, 2022 andJune 30, 2021 , respectively. We continue to reduce debt levels and decrease interest expense through scheduled amortizing payments. Income Tax Benefit For the six months endedJune 30, 2022 andJune 30, 2021 , our effective tax rate was approximately 34.1% and 16.0%, respectively, based on the annual effective tax rate net of discrete federal and state taxes. The computation of the effective tax rate includes modifications from the statutory rate such as income tax credits, tax depletion deduction, carrybacks, and state apportionment changes, among other items. As ofJune 30, 2022 , we have recorded a liability for uncertain tax positions included on our balance sheet, related to our depletion deduction methodology. As ofJune 30, 2022 , we determined that it is more likely than not that we will not be able to fully realize the benefits of certain existing deductible temporary differences and have recorded a partial valuation allowance against the gross deferred tax assets, which is included in liabilities, long-term, net on our balance sheet, and a corresponding increase to the income tax expense on our condensed consolidated statement of operations.
Net Loss
Net loss was$(6.0) million for the six months endedJune 30, 2022 as compared to net loss of$(31.2) million for the six months endedJune 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 inJune 30, 2021 . 25 --------------------------------------------------------------------------------
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
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 endedJune 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 endedJune 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 --------------------------------------------------------------------------------
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)
6,658 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
--------------------------------------------------------------------------------
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
- - (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
Free cash flow was$(22.6) million for the six months endedJune 30, 2022 compared to$31.4 million for the six months endedJune 30, 2021 . The decrease in free cash flow was primarily attributable to purchase ofBlair for$6.5 million , increase in accounts receivable, repayment of tax refundIRS mistakenly provided in prior period of$2.3 million , and increase in unbilled receivables in the six months endedJune 30, 2022 compared to the six months endedJune 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 ofJune 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 atOakdale andUtica , capital related to theWaynesburg 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 endedJune 30, 2022 , we spent approximately$5.1 million on capital expenditures. 28 --------------------------------------------------------------------------------
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 ourOakdale facility. The balance on this facility as ofJune 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 ofJune 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 ofJune 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 ofJune 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 atJune 30, 2022 andDecember 31, 2021 , respectively. The increase in performance bonds is due primarily to the acquisition of theBlair facility and the assumption of performance bonds related to its potential future reclamation obligations.
Contractual Obligations
As of
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
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--------------------------------------------------------------------------------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 endedJune 30, 2022 , revenue fromEQT 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 endedJune 30, 2021 , revenue from Rice Energy (a predecessor ofEQT 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
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 inUkraine 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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