Smart Sand, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparisons are with Q1 2020. Amounts are in U.S. dollars; financial figures below are in millions unless stated otherwise.
Business context
Smart Sand supplies frac sand and mine-to-wellsite logistics and storage solutions to the oil and gas industry. It reported approximately 7.1 million tons of annual processing capacity, including its Utica, Illinois facility acquired in September 2020. Sand sales volume was approximately 760,000 tons, versus 757,000 tons a year earlier.
Financial performance
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Total revenue | $27.5 | $47.5 |
| Gross profit (loss) | $(5.0) | $6.4 |
| Operating income (loss) | $(11.1) | $0.5 |
| Net income (loss) | $(3.9) | $(0.1) |
| Net loss per share, basic and diluted | $(0.09) | — |
| Operating cash flow | $3.9 | $12.1 |
| Capital expenditures | $2.2 | $4.2 |
| Free cash flow (non-GAAP) | $1.7 | $7.9 |
| Adjusted EBITDA (non-GAAP) | $(3.5) | $6.4 |
Gross margin was approximately negative 18% versus positive 13% in Q1 2020. Contribution margin, a company-defined non-GAAP measure, fell to $1.0 million, or $1.36 per ton, from $11.5 million, or $15.20 per ton. The 2021 income tax benefit was $7.5 million; the filing reports a 65.7% effective tax rate, reflecting items including tax credits, depletion deductions and state tax effects.
Material changes and liquidity
- Revenue declined 42%. Sand sales revenue fell 23%, primarily because of lower average selling prices despite similar tonnage. Logistics revenue fell 84%, as sales shifted toward in-basin shipments, which generally include less separately reported logistics revenue.
- Cost of goods sold declined 21%, including lower freight expense and railcar rental costs, but not enough to offset lower prices and logistics revenue. Gross profit therefore moved from $6.4 million to a $5.0 million loss.
- Cash and cash equivalents were $11.4 million at quarter-end. Working capital was $69.5 million, down from $74.8 million at December 31, 2020.
- Debt carrying value was approximately $27.7 million: $7.1 million current and $20.7 million long-term. No ABL borrowings were outstanding; $10.3 million was available to draw after letters of credit. A separate acquisition liquidity facility had $5.0 million undrawn. The company reported compliance with ABL covenants.
- Operating cash flow and free cash flow were positive but substantially below the prior-year quarter. Cash decreased by $0.3 million during the quarter. Cash generation included working-capital changes and noncash items.
Outlook, risks and contingencies
- Management expected 2021 capital expenditures of $10–$15 million, mainly for SmartSystems growth, maintenance and efficiency projects; $2.2 million had been spent in Q1. Management said available liquidity was sufficient for cash needs over the next 12 months, including planned investment.
- Management described industry activity as rebounding in late 2020 and Q1 2021 but cautioned that COVID-19 effects, oil and gas prices, and market conditions remained uncertain. It gave no specific revenue or earnings guidance.
- Frac sand pricing faces pressure from increased supply, including in-basin sand, and customers’ preference for spot-market purchases. Weather can affect mining and demand; operations are concentrated in Wisconsin and Illinois.
- Customer and receivable concentration is significant: three customers generated 74% of Q1 revenue. At March 31, 82% of accounts receivable was subject to litigation. The U.S. Well Services dispute remained pending after trial; $54.6 million of receivables was attributable to U.S. Well, and the company could not assess the likely outcome.
- Other exposures include $15.9 million in asset retirement obligations, $38.6 million of future minimum land-use commitments, and $9.5 million of performance bonds. The filing reports no material change in risk factors or market-risk exposure from the 2020 Form 10-K.
Important facts for investors to verify
- Whether the U.S. Well Services litigation produces a recovery, and the collectability and accounting treatment of the related $54.6 million receivable.
- Whether sand prices, logistics revenue and contribution margin improve, particularly given continuing in-basin competition and spot-market purchasing.
- Whether operating cash flow can support planned $10–$15 million capital spending while meeting scheduled debt and other obligations.
- Whether customer concentration, COVID-19-related industry uncertainty, and reclamation and environmental obligations change materially.