Smart Sand, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Smart Sand supplies frac and industrial sand and related logistics and wellsite storage services. Unless noted otherwise, amounts are in millions of dollars.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $71.6 | $34.5 | $181.9 | $91.6 |
| Gross profit (loss) | $11.4 | $(2.0) | $18.4 | $(9.4) |
| Operating income (loss) | $3.8 | $(8.8) | $(4.8) | $(48.5) |
| Net income (loss) | $2.7 | $(7.3) | $(3.3) | $(38.4) |
| Operating cash flow | $10.8 | $1.1 | $(0.2) | $37.5 |
- Q3 revenue rose 108%; sand sales increased 113%, reflecting about 41% higher sand volume and higher average prices. Sand volume was 1.11 million tons versus 0.79 million. Nine-month volume was 3.16 million tons versus 2.32 million.
- Gross margin was approximately 16.0% in Q3 2022 versus negative 5.9% in Q3 2021; for nine months it was 10.1% versus negative 10.2%.
- Q3 Adjusted EBITDA, a non-GAAP measure, was $11.3 million versus negative $1.0 million; nine-month Adjusted EBITDA was $18.6 million versus negative $26.0 million. Nine-month contribution margin was $37.3 million, or $11.80 per ton, versus $8.6 million, or $3.72 per ton.
- At September 30, cash was $10.4 million, current assets $72.6 million and current liabilities $54.9 million. The resulting current ratio was approximately 1.32.
- Reported debt was $22.8 million, including $6.0 million outstanding on the ABL facility. The ABL had $13.0 million available to draw, after $1.0 million of letters of credit; the company reported covenant compliance. Operating lease liabilities were a separate $30.5 million.
- Nine-month capital spending was $9.5 million, plus $6.5 million to acquire Blair. Free cash flow, as defined by the company, was negative $16.3 million for the nine months; Q3 free cash flow was $6.4 million.
Material changes and unusual items
- The company returned to Q3 profitability as sand pricing, sales volumes and SmartSystems utilization improved. Logistics revenue increased to $2.2 million from $0.5 million in Q3.
- Nine-month results remained at a net loss despite the recovery in operations. The prior-year comparison included a $19.6 million noncash bad-debt charge related to the U.S. Well Services settlement and $5.0 million of employee retention credits recorded as other income. The company received $35 million in cash under the settlement in 2021.
- Cash decreased to $10.4 million from $25.6 million at year-end 2021, largely alongside working-capital investment, capital spending, the Blair acquisition and debt repayments. Accounts receivable rose to $32.9 million from $17.5 million.
- The March 2022 acquisition of the idle Blair mine and processing facility cost approximately $6.5 million. Bringing it online could expand annual processing capacity from 7.1 million to about 10.0 million tons; it was still idle at the reporting date.
- Asset retirement obligations increased to $25.0 million from $16.2 million, primarily due to $8.3 million of additions and revisions. Performance bonds increased to $17.7 million from $8.6 million, mainly due to Blair-related obligations.
Outlook, risks and contingencies
- Management expected 2022 capital expenditures, including Blair-related amounts, of $20–25 million, primarily for efficiency projects at Oakdale and Utica and the Waynesburg terminal. No specific revenue or earnings guidance was provided.
- Management said available cash, operating cash flows and ABL availability were sufficient to meet cash needs for the next 12 months. It expects to fund capital expenditures through operating cash, equipment financing, ABL borrowings or other financing.
- Management noted improving sand supply-and-demand conditions and recovering prices, but said it cannot predict whether prices will continue to rise, fall or stabilize. Inflation, recession risk, oil and gas price volatility, the Ukraine conflict and competition from regional sand could adversely affect results.
- Customer concentration is significant: four customers generated 65% of nine-month revenue, and three customers represented 67% of accounts receivable at September 30. Two suppliers accounted for 33% of nine-month cost of goods sold.
- Other exposures include seasonal weather impacts, environmental and reclamation requirements, potential silica-safety regulation, and minimum mineral-rights payments of about $2.5 million annually for the next 15 years. Routine litigation was not expected by management to have a material adverse effect. The filing reported no material change to previously disclosed risk factors.
Investor verification priorities
- Track whether stronger pricing and volumes persist and translate into sustained positive operating income and cash generation.
- Verify working-capital conversion, especially receivables and inventory, and reconcile reported free cash flow to operating and investing cash flows.
- Assess the funding and expected returns of the stated $20–25 million 2022 capital program and any decision to restart Blair.
- Monitor debt, ABL availability and covenant compliance, as well as lease obligations and the higher reclamation liability and performance bonds.
- Review customer and supplier concentration, tax valuation allowances and uncertain tax positions, and the effects of weather, regulation and commodity-market volatility.