Smart Sand, Inc. — Q3 2020 Form 10-Q
Business context and period: Quarterly results for the three and nine months ended September 30, 2020, compared with the corresponding 2019 periods. Smart Sand supplies frac sand and mine-to-wellsite logistics and storage services. The quarter included the September 18 acquisition of Eagle’s proppants business.
Financial performance and liquidity
- Q3 revenue: $23.4 million, down 64% year over year; sand sales were $12.4 million, contractual shortfall revenue $6.8 million, and logistics revenue $4.1 million. Sand volume sold fell to 309,000 tons from 611,000.
- Q3 profitability: Gross profit was $5.2 million, down from $27.1 million; gross margin was approximately 22% versus 41%. Operating loss was $1.2 million. Net income of $36.3 million included a $39.9 million bargain-purchase gain from the Eagle acquisition. Adjusted EBITDA, a non-GAAP measure, was $6.1 million versus $28.8 million.
- Nine-month results: Revenue was $97.0 million, down 48%; gross profit was $25.8 million versus $63.2 million. Net income was $40.8 million versus $29.2 million, again reflecting the acquisition gain. Adjusted EBITDA was $28.1 million versus $67.4 million.
- Cash flow: Nine-month operating cash flow was $22.2 million, compared with $40.3 million. Investing used $7.4 million and financing used $6.5 million. Cash rose to $11.0 million at quarter-end from $2.6 million at year-end 2019.
- Liquidity and debt: Working capital was $70.4 million. Total reported debt was approximately $30.3 million, including current maturities; no ABL borrowings were outstanding. ABL availability was $9.6 million, and the Eagle acquisition facility provided up to $5.0 million of additional borrowing, with none drawn at quarter-end. Management said liquidity and available capital should meet needs for the next 12 months.
- Other balance-sheet items: Total assets were $436.6 million and stockholders’ equity $290.7 million. Asset retirement obligations increased to $14.8 million, including $8.4 million assumed in the acquisition.
Material changes and significant events
- Revenue, sand volumes, gross profit and Adjusted EBITDA declined sharply amid depressed oil prices, industry oversupply, reduced demand and the COVID-19 disruption. Lower volumes and shortfall revenue drove much of the decline.
- On September 18, Smart Sand acquired Eagle’s proppants business for approximately $2.1 million in stock. The acquired Illinois and Wisconsin mines have about 3.5 million tons of combined annual processing capacity. The preliminary fair value of net assets was $41.9 million, producing the $39.9 million bargain-purchase gain; valuation and working-capital adjustments remained subject to change.
- The company reduced headcount and compensation, cut its capital spending budget, and negotiated deferred payments on certain leases, debt and minimum royalties. Nine-month capital expenditures were $7.4 million.
- The company disclosed a significant deficiency in internal control over financial reporting related to accounting for a vendor rebate. It revised prior-period statements for an immaterial error and added review controls. Management nevertheless concluded disclosure controls were effective at September 30, 2020.
Outlook, risks and contingencies
- Smart Sand estimated 2020 capital expenditures would be less than $10 million, following reductions of up to $20 million from its prior budget, particularly in SmartSystems manufacturing. The filing provides no revenue or earnings guidance.
- Management said oil and gas market conditions remained uncertain and it could not estimate the pandemic’s future financial impact. Prolonged low prices, oversupply or weaker activity could further pressure demand, cash flow, asset values and borrowing availability.
- Customer and collection risk is significant: two customers represented 95% of accounts receivable. Approximately $54.6 million of accounts and unbilled receivables related to U.S. Well Services, with which Smart Sand is litigating over take-or-pay contract payments. The company could not predict the litigation outcome or collection timing.
- Other risks include acquisition integration and assumed liabilities, reliance on a primary rail provider and Oakdale facility, supplier concentration, environmental and mine-safety requirements, and seasonal operating impacts. Outstanding performance bonds were $10.4 million.
Investor verification priorities
- Separate recurring operating performance from the $39.9 million noncash bargain-purchase gain; review Adjusted EBITDA alongside GAAP results.
- Assess collectability and timing of the $54.6 million U.S. Well receivable balance and the potential effects of the litigation.
- Confirm the Eagle acquisition’s final purchase-price allocation, integration progress, operating contribution and any subsequent working-capital adjustments.
- Track liquidity, eligible-asset borrowing availability, debt maturities and whether further cost or capital spending reductions are needed.
- Review the remediation of the vendor-rebate accounting control deficiency and future revisions of comparative financial statements.