Smart Sand, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; filed May 6, 2020. Smart Sand supplies frac sand and related logistics and wellsite storage solutions to the oil and natural gas industry. Financial amounts below are in U.S. dollars; millions are used unless stated otherwise.
Financial performance and position
- Revenue: $47.5 million, down 8% from $51.8 million. Sand sales revenue rose to $30.0 million from $25.6 million as volumes increased to approximately 757,000 tons from 648,000. Logistics revenue declined to $16.2 million from $20.4 million; contractual shortfall revenue fell to $1.3 million from $5.8 million.
- Profit and margins: Gross profit was $6.4 million versus $11.2 million; gross margin was approximately 13.5% versus 21.6%. Operating income fell to $0.5 million from $6.0 million. Net loss was $0.1 million, compared with net income of $4.0 million. Adjusted EBITDA, a non-GAAP measure, was $6.4 million versus $12.4 million; contribution margin was $11.5 million, or $15.20 per ton, versus $17.1 million, or $26.35 per ton.
- Cash flow: Operating cash flow was $12.1 million, up from $6.3 million. Investing cash outflow was $4.2 million, compared with $8.5 million, primarily reflecting SmartSystems manufacturing expenditures. Financing cash flow was positive $1.0 million. Cash increased to $11.5 million from $2.6 million.
- Liquidity: Working capital was $53.7 million, compared with $50.4 million at year-end; current assets were $92.8 million and current liabilities $39.1 million. The company reported $14.0 million undrawn under its $20.0 million asset-based credit facility.
- Debt: Total reported debt was approximately $37.7 million, including $6.0 million drawn on the ABL facility; debt was $34.4 million at December 31, 2019. The Oakdale equipment financing carries a fixed 5.79% rate. The company reported compliance with credit covenants.
Changes versus prior year and quarter-end
- Year-over-year revenue declined despite higher sand volumes, chiefly because shortfall revenue was substantially lower and logistics revenue decreased. Management said Q1 volumes were strong and occurred primarily before the oil-market downturn.
- Gross profit, operating income, net income and Adjusted EBITDA all weakened materially year over year. Management attributed the profit decline principally to lower shortfall revenue; higher volumes partly offset it.
- Interest expense declined to $0.5 million from $1.0 million, primarily due to lower average debt outstanding. Selling, general and administrative expense increased by $0.7 million, primarily from professional fees and development costs.
- From December 31, 2019, cash increased by $8.9 million, while inventory declined to $17.8 million from $21.4 million and total liabilities declined to $115.5 million from $117.5 million.
Outlook, risks and notable items
- Market outlook: COVID-19-related demand declines and increased global oil supply drove severe oil-price volatility. Management could not estimate the future financial impact and cautioned that conditions could materially adversely affect results, cash flows and liquidity. The April 2020 Russia/OPEC production cuts might not stabilize the market.
- Actions and capital spending: The company reduced its 2020 capital expenditure budget by up to $20 million and estimated full-year spending of approximately $5–$10 million; Q1 spending was $4.2 million. It also reported headcount and salary reductions and suspension of variable cash compensation. Management stated it expected sufficient liquidity for the next 12 months, based on information then available. No specific revenue or earnings guidance was provided.
- Customer and collection risk: One customer represented 69% of accounts receivable at March 31. A customer involved in ongoing take-or-pay contract litigation accounted for $39.8 million of accounts and unbilled receivables, up from $37.4 million at year-end; management could not predict the litigation outcome or assure timely collection. Four customers generated 79% of Q1 revenue.
- Other items: The company repurchased 778,300 shares for approximately $1.0 million, at an average $1.26 per share. The CARES Act resulted in a recorded discrete tax benefit of $0.8 million, although Q1 income tax expense was $0.2 million. A $1.0 million noncash reduction in contingent consideration fair value was recorded in operating expenses. The company had $8.6 million of outstanding performance bonds and $40.3 million of future minimum land-use commitments.
Important facts for investors to verify
- Whether the disputed $39.8 million customer receivable is collectible, and how the take-or-pay litigation and related contract perform.
- How the post-quarter oil-market downturn, COVID-19 effects and customer activity affect volumes, pricing, logistics revenue and cash generation.
- Whether the stated $5–$10 million 2020 capital expenditure outlook and liquidity assessment remain achievable, including ABL borrowing availability and covenant compliance.
- How customer and supplier concentration, operating reliance on the Oakdale facility and rail service, and potential asset impairment or credit-loss allowances evolve.