Smart Sand, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Smart Sand supplies frac sand and related logistics and wellsite services; it reported one operating segment. Amounts below are in U.S. dollars unless stated otherwise.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $29.6 million | $26.1 million | $57.1 million | $73.6 million |
| Gross profit (loss) | $(2.4) million | $14.2 million | $(7.3) million | $20.6 million |
| Operating income (loss) | $(28.7) million | $8.7 million | $(39.7) million | $9.2 million |
| Net income (loss) | $(27.3) million | $4.6 million | $(31.2) million | $4.6 million |
| Adjusted EBITDA (non-GAAP) | $(21.5) million | $15.6 million | $(25.0) million | $22.0 million |
Q2 gross margin was approximately negative 8%; the prior-year quarter was approximately 54%. Six-month gross margin was approximately negative 13%, versus 28% in 2020. Q2 sand sales were $28.8 million, while shortfall revenue was zero; six-month shortfall revenue was $1.7 million. Sand volumes rose to 767,000 tons in Q2 from 208,000, and to 1.527 million tons for the first half from 964,000.
- Cash flow: Six-month operating cash flow was $36.5 million; capital expenditures were $5.0 million, yielding company-defined free cash flow of $31.4 million. The $35.0 million litigation settlement cash receipt materially contributed to cash generation.
- Liquidity: Cash was $39.3 million at June 30, 2021. Working capital was $47.1 million, down from $74.8 million at December 31, 2020. Current assets were $81.7 million and current liabilities $34.6 million.
- Debt and availability: Balance-sheet debt, net of fees, totaled about $26.0 million ($7.2 million current and $18.8 million long term). No ABL borrowings were outstanding; $12.9 million was available under the facility after letters of credit. A separate $5.0 million acquisition liquidity facility had not been drawn and was available through September 18, 2021. The company reported covenant compliance.
Material changes and unusual items
- Revenue rose 14% in Q2, principally from higher sand volumes, but fell 22% for the first half. Higher volumes were offset by lower sand prices, sharply reduced shortfall revenue, and lower logistics revenue.
- Cost of goods sold rose with sales volumes and greater freight costs from more in-basin deliveries. Management attributed the gross-profit decline mainly to lower average selling prices and reduced shortfall revenue.
- The U.S. Well Services dispute was settled for $35.0 million cash after a court judgment of $50.9 million. Smart Sand recorded a $19.6 million non-cash bad-debt expense for the difference between the $54.6 million receivable and settlement cash. The settlement also includes a two-year right of first refusal covering specified Northern White sand purchases beginning in 2022.
- Other income included $3.4 million of employee retention credits. Management expected to qualify for approximately $1.7 million in each remaining quarter of 2021.
- The company recorded a $2.7 million liability and corresponding tax expense for uncertain tax positions related to its depletion deduction methodology. Six-month income tax benefit was $6.0 million.
Outlook, risks, and contingencies
Management forecast 2021 capital expenditures of $10 million to $12 million, mainly for SmartSystems growth and mine maintenance and efficiency projects; $5.0 million had been spent through June. Management stated liquidity was sufficient for the next twelve months. The filing gives no specific revenue or earnings guidance.
- Management said frac sand prices remained depressed amid oversupply and that it could not predict when prices would improve or stabilize. It also could not estimate the future financial impact of COVID-19-related market volatility.
- Customer concentration is significant: three customers represented 65.7% of first-half revenue; four customers represented 84% of receivables at June 30. Two suppliers accounted for 51% of first-half cost of goods sold.
- Operations are concentrated in Wisconsin and Illinois and are exposed to regional environmental, legal, economic, weather, and mine-safety risks. The company reported $16.1 million in asset retirement obligations, $38.7 million of future minimum land-use commitments, and $9.1 million of performance bonds outstanding.
- The filing reported no material changes to risk factors or market-risk exposure from the 2020 Form 10-K. Disclosure controls were assessed as effective.
Key facts for investors to verify
- Whether sand pricing and contribution margin recover despite higher volumes; first-half contribution margin was $4.5 million, or $2.96 per ton, versus $30.8 million, or $31.92 per ton, in 2020.
- The sustainability of operating cash flow and liquidity after excluding the one-time $35.0 million settlement receipt, and the repayment needs under debt and lease obligations.
- Collection and customer-credit exposure, including concentration in receivables and the outcome of any remaining settlement-related or tax matters.
- Execution and funding of the $10 million to $12 million capital plan and the expected contribution from the Utica, Illinois operations and SmartSystems.
- Non-GAAP measures are company-defined; assess them alongside GAAP results, particularly the large bad-debt charge and negative Adjusted EBITDA.