Smart Sand, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Smart Sand supplies frac sand and related logistics and wellsite storage services. Financial amounts below are in millions unless otherwise stated.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $65.7 | $63.1 | $185.4 | $160.2 |
| Gross profit / margin | $27.1 / 41.3% | $22.6 / 35.7% | $63.2 / 34.1% | $49.5 / 30.9% |
| Operating income | $14.4 | $17.4 | $39.6 | $31.7 |
| Net income | $10.9 | $12.1 | $29.2 | $23.1 |
| Diluted EPS | $0.27 | $0.30 | $0.73 | $0.57 |
| Adjusted EBITDA (non-GAAP) | $28.8 | $22.1 | $67.4 | $47.2 |
Q3 sand sales were approximately 611,000 tons, versus 823,000 tons a year earlier; nine-month sales were approximately 2.0 million tons, versus 2.384 million. Q3 revenue rose 4% and nine-month revenue rose 16%, despite lower volumes. Revenue included shortfall payments of $15.6 million in Q3 and $37.7 million year to date; logistics revenue was $20.4 million and $61.1 million, respectively. Sand sales revenue fell in both comparisons.
Net income declined 10% in Q3, despite higher gross profit, primarily reflecting a $7.6 million impairment of Quickload-related technology and higher interest expense. Nine-month net income rose 26%. Adjusted EBITDA increased in both comparisons, largely due to higher shortfall revenue. This non-GAAP measure is not a substitute for GAAP results.
Cash, debt and liquidity
- Nine-month operating cash flow was $40.3 million; investing cash outflow was $19.5 million, mainly for SmartDepot manufacturing and plant upgrades; financing cash outflow was $20.2 million, mainly net revolving-credit repayments.
- Cash was $2.1 million at September 30. Working capital was $17.5 million, down from $25.4 million at year-end, partly due to classifying the credit facility as current and recording lease liabilities.
- The company had $22.5 million outstanding on its revolving facility, with $30.0 million undrawn under $52.5 million of borrowing capacity. The facility matures June 30, 2020; its balance is classified as current. The company was in covenant compliance at September 30.
- Management said the facility maturity raises substantial doubt about the company’s ability to continue as a going concern absent refinancing or other capital. It is pursuing refinancing, but gives no assurance it can complete it in time or on favorable terms.
- Management estimated 2019 capital expenditures of approximately $25–$30 million, excluding acquisitions, to be funded through operations, equipment financing or facility borrowings.
Changes, outlook and notable risks
- Management said demand improved late in the first half of 2019 and leveled off in Q3. Q3 volumes were affected by weather-related Bakken shipping delays and slower spot sales amid lower well-completion activity. Management expected no contract-price change tied to average WTI for Q4 2019; the filing provides no earnings or revenue guidance.
- Shortfall revenue materially supported results. Of Q3 shortfall revenue, $14.0 million was from U.S. Well Services, with which Smart Sand is litigating over unpaid take-or-pay obligations. The company reported $35.0 million of accounts and unbilled receivables from that customer at September 30 and cannot predict the litigation outcome or collection timing.
- Smart Sand settled its Schlumberger Technology Corporation lawsuit in September. The settlement included an upfront cash payment, a new four-year take-or-pay contract, and removal of specified receivables and deferred revenue from the balance sheet.
- Customer and supplier concentration is significant: four customers generated 82% of Q3 revenue; two customers represented 80% of receivables. The company also relies primarily on one third-party rail carrier and has operations and inventory concentrated in Wisconsin.
- The company impaired $7.6 million of Quickload-related developed technology because it no longer plans to actively market the system while developing and testing new transload technology. The filing also notes environmental and mine-safety regulation, seasonality, and potential exposure to additional lease residual-value payments.
Key facts for investors to verify
- Progress, terms and timing of refinancing the credit facility before its June 30, 2020 maturity, and implications for the going-concern warning.
- U.S. Well Services litigation status, collectability of its $35.0 million receivable, and further shortfall amounts expected to accrue in 2020.
- How much revenue and cash generation can be sustained as shortfall payments, sales volumes and market demand change.
- Customer and supplier concentration, rail-service dependence, and the expected returns on planned capital expenditures.
- Whether the Quickload impairment or other operating and market conditions lead to additional asset impairments or costs.