Smart Sand, Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017; compared with the same 2016 periods. Smart Sand produces Northern White frac sand for the oil and gas industry. Figures below are in U.S. dollars; financial statement amounts are converted from thousands to millions unless otherwise indicated.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $39.3m | $10.9m | $94.2m | $29.8m |
| Gross profit | $13.0m | $5.0m | $26.8m | $12.0m |
| Gross margin | 33.1% | 45.7% | 28.5% | 40.2% |
| Operating income | $8.8m | $2.5m | $14.1m | $5.1m |
| Net income (loss) | $7.0m | $(0.1)m | $10.6m | $(2.1)m |
| Diluted EPS | $0.17 | $(0.00) | $0.26 | $(0.09) |
| Adjusted EBITDA, non-GAAP | $11.6m | $4.5m | $21.7m | $11.0m |
Q3 sand volume sold rose approximately 184% to 653,400 tons; nine-month volume rose approximately 216% to 1.74 million tons. Average selling price, including reservation revenue, declined to $34.02 per ton from $40.66 in Q3 and to $32.02 from $39.87 for the nine-month period, as reservation revenue was spread across higher volumes. Transportation revenue and its related costs rose substantially with shipments; management says these amounts are primarily pass-through and do not materially affect gross profit. Production cost per ton (a company-defined non-GAAP measure) improved to $10.79 from $11.43 in Q3 and to $13.13 from $14.81 year to date.
Nine-month operating cash flow was $8.6m, versus $8.1m. Capital spending drove investing cash outflow of $27.6m, versus $2.0m. Financing provided $23.3m, including approximately $24.2m net proceeds from the February 2017 share offering. Cash and cash equivalents were $51.3m at September 30, plus $0.5m restricted cash. Working capital was $59.3m, up from $51.3m at December 31, 2016.
Total liabilities were $44.7m. The $45m senior secured revolving facility was undrawn, and the company reported covenant compliance. Equipment financing obligations were $0.6m, notes payable were $0.3m current, and no long-term notes payable remained. The facility is secured by substantially all company assets and expires in December 2019.
Material changes and management outlook
- Higher sales volumes and increased reservation revenue supported the return to profitability. Lower interest expense also helped: the Series A preferred stock was redeemed and the former revolver repaid in November 2016.
- Revenue growth was partly offset by lower average selling price and increased operating expenses, including headcount, stock compensation, and public-company costs. Management estimated approximately $1.4m in additional annual public-company expenses.
- The company was expanding Oakdale, Wisconsin processing capacity from 3.3 million to approximately 5.5 million tons annually. Completion was expected by the end of Q1 2018. Management expected approximately $50m of expansion and replacement capital expenditures during 2017; $18.1m of project commitments remained at September 30. Funding was expected from operating cash flow, equity proceeds, and potentially revolver borrowings.
- Management said drilling and completion activity improved through Q3 2017 and expected activity to continue at current levels or better for the rest of 2017 if oil and gas prices remained at or above then-current levels. The filing provides no numerical revenue or earnings guidance.
- Management disclosed railcar availability and completion of a third rail loop as sources of operating inefficiency during the first nine months, plus approximately $0.5m of unplanned maintenance costs. The company also described seasonality from winter constraints on excavation and wet processing.
Risks, contingencies, and unusual items
- Customer and industry concentration remain significant: four customers generated 74% of nine-month revenue; three generated 64% in Q3. Five customers account for most revenue under take-or-pay agreements. The company also primarily relies on one third-party rail carrier.
- Commodity-price changes can affect customer drilling activity and demand. Long-term contracts provide some protection from short-term fluctuations, but the company does not hedge this indirect exposure.
- Operating lease commitments, primarily for railcars, totaled approximately $35.6m for 2018–2022 and thereafter. Outstanding performance bonds were $8.6m; $0.5m of cash was restricted as collateral for a pipeline-carrier bond.
- The company reported no pending litigation it believed would materially affect its financial position, results, or cash flows, and no probable environmental matters. It reported no material changes to previously disclosed risk factors.
- The company planned to adopt the new revenue-recognition standard on January 1, 2018, using the modified retrospective method, subject to completion of its impact assessment.
Investor verification priorities
- Confirm whether the Oakdale expansion was completed on schedule and within the stated capital budget, and whether added capacity translated into sales and improved unit economics.
- Track realized price per ton, sales mix, reservation and shortfall revenue, and the contribution and pass-through treatment of freight revenue and costs.
- Assess receivables and working-capital conversion: accounts receivable increased to $20.5m from $5.3m at year-end, while nine-month operating cash flow was $8.6m.
- Monitor customer concentration, take-or-pay contract terms and expirations, customer credit quality, and reliance on the principal rail carrier and key suppliers.
- Review remaining capital commitments, lease and bond obligations, and any future use of the secured revolving facility; distinguish non-GAAP Adjusted EBITDA and production costs from GAAP results.