Smart Sand, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. The company supplies Northern White frac sand and related logistics and wellsite storage services. Unless stated otherwise, financial amounts below are in millions of dollars.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $67.9 | $54.4 | $119.7 | $97.1 |
| Gross profit | $24.9 | $19.8 | $36.0 | $27.0 |
| Gross margin | 36.6% | 36.3% | 30.1% | 27.8% |
| Operating income | $19.2 | $12.9 | $25.2 | $14.3 |
| Net income | $14.3 | $10.0 | $18.3 | $11.0 |
| Diluted EPS | $0.36 | $0.25 | $0.46 | $0.27 |
| Adjusted EBITDA (non-GAAP) | $26.2 | $19.3 | $38.7 | $25.1 |
Revenue rose 25% in Q2 and 23% for the first half. Growth was driven chiefly by shortfall revenue under take-or-pay contracts—$16.3 million in Q2 and $22.0 million year to date—and higher logistics revenue. Sand sales revenue declined, and sand volumes sold fell to 741,000 tons from 839,000 in Q2 and to 1.389 million from 1.562 million in the first half. Management attributed stronger gross profit and Adjusted EBITDA principally to shortfall and logistics revenue; Adjusted EBITDA is a non-GAAP measure.
Q2 logistics revenue was $20.3 million, versus $13.3 million; sand sales revenue was $26.9 million, versus $34.6 million. For the first half, logistics revenue was $40.7 million, versus $27.0 million, while sand sales revenue was $48.0 million, versus $56.9 million. The company recorded a $0.6 million Q2 and $1.5 million first-half reduction in contingent consideration, lowering operating expenses. Net interest expense increased to $1.0 million in Q2 and $2.0 million for the first half.
Cash flow, balance sheet and debt
- First-half operating cash flow was $17.4 million, compared with $18.9 million. Investing cash outflow was $13.9 million, mainly for SmartDepot manufacturing, plant upgrades and maintenance. Financing cash outflow was $3.7 million. Cash ended the period at $1.3 million.
- Working capital was negative $6.8 million at June 30, compared with positive $25.4 million at year-end 2018. Current assets were $68.5 million and current liabilities $75.3 million. Management cited the current classification of the credit facility, adoption of lease accounting, lower inventory and higher receivables as key drivers.
- Credit-facility borrowings were $39.0 million, with $16.0 million undrawn under the $55.0 million capacity at June 30. Total debt on the balance sheet, including finance leases and notes payable and net of debt discount, was $46.6 million. The facility matures June 30, 2020; capacity is scheduled to decline to $50 million by December 31, 2019. The company reported compliance with covenants.
- Adoption of the lease accounting standard resulted in recognition of $35.9 million of operating right-of-use assets and $36.5 million of related liabilities at January 1, 2019. At June 30, operating lease liabilities were $33.0 million.
- Capital expenditures were approximately $13.9 million in the first half. The company estimated full-year 2019 capital expenditures of $25 million to $35 million, excluding acquisitions.
Outlook, risks and unusual items
- Management said demand began improving late in Q1 2019 as completions activity resumed. It noted that in-basin sand supply, drilling and completion activity, commodity prices, customer spending and contract price adjustments tied to WTI can affect demand and pricing. No specific revenue or earnings guidance was provided.
- Going-concern warning: Management stated that the June 2020 credit-facility maturity raises substantial doubt about the company’s ability to continue as a going concern absent refinancing or other capital. The company was pursuing refinancing, but gave no assurance it could be completed in time or on favorable terms.
- Customer litigation and receivables: The company is suing U.S. Well Services and Schlumberger over alleged nonpayment under take-or-pay contracts; both defendants have asserted counterclaims. Outcomes were described as uncertain. $34.6 million of accounts and unbilled receivables related to customers involved in pending litigation, and those receivables do not represent the full amounts sought in the lawsuits.
- Customer concentration is significant: three customers generated 60% of first-half revenue; four customers represented 89% of receivables at June 30. Revenue from U.S. Well Services was subject to litigation. The company also cited reliance on a primary third-party rail provider, seasonal operating effects, environmental and mine-safety regulation, and potential costs related to silica exposure rules.
- The company’s stated full-year capital-spending range is subject to funding availability, including operating cash flow, equipment financing and potential credit-facility borrowings. Substantially all assets secure the credit facility.
Investor verification priorities
- Track refinancing progress, facility capacity reductions, covenant compliance and liquidity ahead of the June 2020 maturity.
- Assess collectability and timing of the $34.6 million in litigation-related receivables, and monitor the two lawsuits and any counterclaims or settlements.
- Separate recurring sales and logistics economics from shortfall revenue, and monitor contract volumes, sand tonnage, pricing and customer activity.
- Compare cash generation and working-capital trends with reported earnings, particularly receivables, customer concentration and capital spending.
- Verify execution and funding of the $25 million–$35 million 2019 capital expenditure plan and the expected operating benefits.