Smart Sand, Inc. — Q3 2021 Form 10-Q
Business context and reporting period. The filing covers the quarter and nine months ended September 30, 2021. Smart Sand supplies frac sand and related logistics and wellsite storage services to the oil and gas industry. Its mines in Wisconsin and Illinois have approximately 7.1 million tons of annual processing capacity. In September 2021, the company acquired rights to build and operate a transload terminal in Waynesburg, Pennsylvania, which it expected to open in Q4 2021. Financial figures below are in U.S. dollars; amounts are rounded to millions unless stated otherwise.
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $34.5m | $23.4m | $91.6m | $97.0m |
| Gross profit (loss) | $(2.0)m | $5.2m | $(9.4)m | $25.8m |
| Operating income (loss) | $(8.8)m | $(1.2)m | $(48.5)m | $7.9m |
| Net income (loss) | $(7.3)m | $36.3m | $(38.4)m | $40.8m |
| Adjusted EBITDA, non-GAAP | $(1.0)m | $6.1m | $(26.0)m | $28.1m |
| Sand sold | 790,000 tons | 309,000 tons | 2.317m tons | 1.273m tons |
- Q3 revenue rose 47%, led by higher sand volumes: sand sales revenue increased to $31.3m from $12.4m. Shortfall revenue fell to $2.7m from $6.8m, and logistics revenue fell to $0.5m from $4.1m.
- Nine-month revenue declined 6% despite higher sand volumes. Sand sales revenue increased to $83.3m, but shortfall revenue dropped to $4.4m from $22.1m and logistics revenue to $3.9m from $24.0m.
- Gross margin was approximately negative 5.9% in Q3 2021, compared with 22.1% in Q3 2020; for the nine-month periods it was negative 10.2% versus 26.6%. Management attributed weaker profitability principally to low selling prices relative to production and delivery costs, reduced shortfall revenue, and higher freight costs associated with more in-basin deliveries.
- Nine-month operating expenses included $19.6m of non-cash bad-debt expense related to the U.S. Well Services settlement. Prior-year results included a $39.9m bargain-purchase gain from the Eagle Proppants acquisition, making the year-over-year net-income comparison unusually significant.
- Other income included employee retention credits of $1.7m in Q3 and $5.0m for the nine months. The nine-month tax benefit was $6.1m; the company also recorded a $2.2m uncertain-tax-position liability and a $1.3m valuation allowance.
Cash flow, liquidity and debt
- Nine-month operating cash flow was $37.5m, investing cash outflow $6.9m, and financing cash outflow $5.7m. Capital expenditures were $7.0m. Management said operating cash flow included the $35.0m U.S. Well Services settlement payment; it should not be viewed as wholly recurring operating cash generation.
- Q3 free cash flow, a company-defined non-GAAP measure, was negative $0.9m; nine-month free cash flow was $30.6m, compared with $14.8m a year earlier.
- At September 30, cash was approximately $36.7m and working capital $42.7m, down from $74.8m at December 31, 2020. Long-term debt, net of current portion, was $17.0m and current debt $7.3m. The company had no ABL borrowings, $1.2m of letters of credit, and $16.5m available to draw; it reported covenant compliance. Cash exceeded reported debt by approximately $12.4m, excluding lease liabilities.
- Management believed available liquidity was sufficient for the next 12 months, including planned SmartSystems investment, the Waynesburg terminal, and other capital projects. Full-year 2021 capital expenditure guidance was $14m–$16m; $7.0m had been spent through September.
Material changes, outlook and risks
- The U.S. Well Services litigation was settled in June 2021: the company received $35.0m cash after a court judgment of $50.9m, and recorded $19.6m of non-cash bad-debt expense against the receivable. The parties also agreed to a two-year right of first refusal for certain sand purchases beginning January 2022.
- Management described frac sand prices as depressed amid industry overcapacity, despite a recovery in oilfield activity and sales volumes. The company said it could not predict when prices would improve or stabilize. COVID-19-related market volatility remained a risk.
- The filing gives differing statements about Q4 employee retention credits: the Q3 discussion says the company did not expect to qualify in Q4 following a legislative change, while the nine-month discussion says it expected approximately $1.7m absent a further change in legislation. Verify the final eligibility and amount.
- Customer concentration remains notable: four customers represented 68% of nine-month revenue, and two customers represented 55% of receivables at September 30. Sand operations are concentrated in Wisconsin and Illinois; risks include weather seasonality, environmental and mine-safety requirements, reclamation obligations, and dependence on transport routes and oil-and-gas basins.
- After quarter-end, on November 9, 2021, the company entered an at-the-market sale agreement allowing it to sell up to $25m of its own shares; a selling stockholder may separately sell up to 10,920,445 shares. The company would receive no proceeds from the stockholder’s sales. These offerings may affect share supply and dilution.
Investor verification priorities
- Track realized sand prices, freight and production costs, contribution margin per ton, and whether increased volumes translate into sustainable positive operating margins.
- Separate recurring cash generation from the one-time $35.0m litigation settlement and monitor working capital and receivable collections.
- Confirm Waynesburg terminal opening, utilization, and capital spending against the $14m–$16m full-year plan.
- Review the Q4 employee retention credit eligibility and reconcile management’s differing statements in the filing.
- Monitor the ATM program and selling-stockholder sales, customer concentration, debt maturities, and environmental, reclamation, and tax exposures.