Smart Sand, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Smart Sand supplies frac and industrial sand and related logistics and wellsite services. Financial figures below are in U.S. dollars; amounts are in millions unless stated otherwise.
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $82.4 | $41.6 | +98% |
| Gross profit (margin) | $11.6 (14.1%) | $(2.0) (-4.8%) | Improved |
| Operating income (loss) | $(1.6) | $(9.9) | Improved |
| Net income (loss) | $(3.6) | $(5.9) | Loss narrowed |
| Adjusted EBITDA (non-GAAP) | $8.4 | $(1.9) | Improved |
| Operating cash flow | $5.1 | $(8.7) | Improved |
| Capital expenditures | $4.0 | $3.8 | — |
| Free cash flow (non-GAAP) | $1.1 | $(19.0) | Improved |
Sand sales were $78.1 million, shortfall revenue $1.9 million, and logistics revenue $2.3 million. Sand volume sold rose about 40%, to 1.195 million tons from 852,000; management attributed the larger revenue increase to higher volume and average selling prices. Contribution margin, a non-GAAP measure, was $17.8 million, or $14.89 per ton, versus $4.3 million, or $4.99 per ton.
Balance sheet and liquidity
- Cash was $7.6 million at March 31, 2023, up from $5.5 million at year-end 2022. Working capital was $15.2 million.
- Total debt reported on the balance sheet was $25.9 million, including $7.0 million drawn on the ABL facility. A further $12.0 million was available under the facility, with $1.0 million in letters of credit; the company reported covenant compliance.
- Operating lease liabilities were $27.0 million. Asset retirement obligations were $19.1 million; performance bonds outstanding totaled $17.6 million.
- Management said available liquidity was sufficient to meet cash needs for the next 12 months.
Changes, outlook, and risks
- Management linked the improved results to stronger sand pricing and sales volumes, reflecting improved supply-demand conditions and increased oil and gas completion activity. Cost of goods sold rose 62%, less than revenue, but operating expenses increased 66% to $13.2 million.
- Operating expenses included a $1.9 million net loss on disposal of fixed assets related to wet-plant reconfiguration and mining-equipment upgrades. Income tax expense was $1.6 million despite a pretax loss, reflecting an effective tax rate of approximately negative 79.9% and deferred-tax valuation considerations.
- Management expects 2023 capital expenditures of $20–25 million, principally for efficiency projects at Oakdale and Utica and starting operations at Blair. Blair’s approximately 2.9-million-ton annual capacity facility was expected to begin operating in Q2 2023. No earnings or revenue guidance was provided.
- Contract customer performance obligations totaled $370.8 million; the company expected to recognize $227.1 million in the remainder of 2023, $71.4 million in 2024, and $72.3 million in 2025. These are contracted obligations, not a general revenue forecast.
- Customer concentration is significant: three customers generated 57% of Q1 revenue, including EQT at 32.5%. Three customers represented 61% of receivables at quarter-end. The filing also notes exposure to oil and gas market volatility, inflation and recession risk, weather seasonality, geographic concentration of mines, environmental and mine-safety regulation, and supplier concentration.
- The company repurchased 5.18 million shares from Clearlake, a related party, for $8.85 million: $4.43 million cash and an unsecured 10% promissory note due December 15, 2023. The transaction represented approximately 11.3% of pre-purchase shares outstanding.
- The company disclosed an immaterial 2022 expense-line reclassification of $1.46 million between salaries and SG&A, with no effect on previously reported net income. Management reported effective disclosure controls and no material change in internal control.
Important facts for investors to verify
- Reconcile the reported share counts: the balance sheet lists 37.94 million shares outstanding at March 31, while the cover page reports 41.33 million at May 2. The filing text does not explain this difference.
- Track whether sand pricing and volumes, gross margin, and operating cash generation remain improved, given management’s warning that pricing trends and industry activity may change.
- Assess liquidity and refinancing needs against 2023 cash requirements, including $20–25 million planned capex and the Clearlake note due in December 2023.
- Monitor execution and costs associated with starting Blair operations, customer concentration, environmental and reclamation obligations, and the $17.6 million of performance bonds.