Smart Sand, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; unaudited. Smart Sand produces and sells Northern White frac sand, primarily under long-term take-or-pay contracts. Financial amounts below are in millions unless stated otherwise.
Financial and operating results
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Revenue | $25.1 | $10.4 |
| Gross profit | $5.4 | $5.0 |
| Gross margin | 21.5% | 48.5% |
| Operating income | $1.6 | $2.8 |
| Net income | $1.0 | $0.4 |
| Operating cash flow | $3.8 | $2.8 |
| Capital expenditures | $1.6 | $0.6 |
| Adjusted EBITDA (non-GAAP) | $3.7 | $4.7 |
- Sand sales were approximately 558,500 tons versus 129,300 tons. Revenue rose 142%, but average selling price including reservation charges fell to $29.98 per ton from $44.92.
- Gross margin contracted as sales mix and pass-through transportation costs increased. Production costs, a non-GAAP measure, were $15.84 per ton versus $18.52.
- Reservation revenue was $7.5 million, up from $2.8 million; no shortfall revenue was recognized versus $3.0 million in Q1 2016. Transportation revenue was approximately $8.3 million, and railcar revenue was $1.7 million.
- Net income improved despite lower operating income, mainly because preferred-stock and other interest expense fell to about $0.2 million from $2.3 million. The Series A preferred stock and former revolving facility had been redeemed or repaid in November 2016.
Liquidity, debt and capital
- At March 31, cash was $72.7 million, restricted cash $1.0 million, and working capital $79.5 million, up from $51.3 million at December 31, 2016.
- Operating cash flow was $3.8 million; financing provided $23.9 million, primarily from the February equity offering, which generated approximately $24.2 million of net proceeds. Cash and restricted cash totaled $73.6 million at quarter-end.
- No borrowings were outstanding under the $45 million revolving credit facility; the company reported compliance with its covenants. It had approximately $1.1 million of equipment-financing obligations and $0.6 million of notes payable.
- Management expected approximately $85 million of 2017 expansion and replacement capital expenditures and reported $1.7 million of project commitments at quarter-end. Planned expansion would increase annual processing capacity from 3.3 million to approximately 4.4 million tons, particularly for fine mesh sand.
Outlook, risks and notable items
- Management said drilling and completion activity improved in the second half of 2016 and Q1 2017, and expected activity to remain at current levels or improve through the rest of 2017 if oil and gas prices held or strengthened. This is conditional commentary, not formal financial guidance.
- Four customers generated 81% of Q1 revenue; three named customers accounted for 71.2%. Customer concentration exposes results and cash flows to customer credit, contract renewal and industry downturn risks. Four customers represented 84% of receivables at quarter-end.
- The company primarily relies on one third-party rail provider. Operations and inventory are concentrated in Wisconsin, and wet-plant activity is subject to seasonal weather effects.
- Operating lease commitments, primarily for railcars, totaled approximately $25.3 million for 2018–2022 and thereafter. Performance bonds outstanding were $8.6 million. Management said pending litigation was not expected to materially affect financial position; no probable environmental matters were reported.
- Management cited expected public-company costs of approximately $1.4 million annually, plus $1.0 million in nonrecurring transition costs. The filing reported no material changes to previously disclosed risk factors and no material subsequent events.
Important facts for investors to verify
- Whether the planned $85 million capital program is completed on schedule and funded without material additional borrowing.
- Whether higher volumes can be sustained while protecting realized prices, gross margins and Adjusted EBITDA.
- Customer concentration, take-or-pay terms, reservation-charge mechanics and counterparties’ ability to pay.
- Rail availability and costs, expansion execution, seasonal production effects, and compliance with revolving-credit covenants.
- Reconcile transportation revenue presentations: the notes report $6.6 million while MD&A reports approximately $8.3 million for Q1 2017; the filing text does not provide a clear reconciliation.