Business Context and Reporting Period
Smart Sand, Inc. filed this Form 10-K for the year ended December 31, 2020. It supplies Northern White frac sand and related logistics and wellsite storage services to oil and gas producers and service companies. Its operations include Oakdale, Wisconsin and, following a September 2020 acquisition, the Utica, Illinois mine and Peru transload facility; the acquired New Auburn, Wisconsin mine was idle.
The year was sharply affected by COVID-19, lower oil demand and oil-market volatility. North American proppant demand fell about 50% in 2020, to approximately 46 million tons, according to the industry data cited by the company.
Financial Results and Liquidity
| Metric | 2020 | 2019 |
|---|---|---|
| Revenue | $122.3 million | $233.1 million |
| Gross profit / margin | $18.1 million / 14.8% | $81.1 million / 34.8% |
| Operating income (loss) | $(13.0) million | $43.5 million |
| Net income | $38.0 million | $31.6 million |
| Adjusted EBITDA | $20.5 million | $87.1 million |
| Operating cash flow | $25.5 million | $44.6 million |
| Free cash flow | $16.9 million | $19.1 million |
| Tons sold | 1.886 million | 2.462 million |
Revenue declined 48%; sand sales fell 35%, shortfall revenue fell 53%, and logistics revenue fell 62%. Gross margin contracted materially as sales volumes and contractual shortfall revenue fell. Adjusted EBITDA declined about 77%. Annual net income increased despite the operating loss, mainly because of a $39.6 million acquisition-related bargain purchase gain and a $13.0 million income tax benefit; it should not be read as evidence of improved underlying operations. The tax benefit included CARES Act loss carrybacks.
At year-end, cash was $11.7 million, working capital was $74.8 million, and total available liquidity was reported at $26.2 million: cash, $9.5 million of ABL availability and $5.0 million available under the acquisition support facility. The company reported $29.3 million of net debt on the balance sheet (current and long-term debt combined), no ABL borrowings, and compliance with ABL covenants. Contractual debt payments totaled $34.1 million before stated interest and financing-cost deductions. Management said liquidity was sufficient for the next 12 months. The company forecast 2021 capital expenditures of $10–$15 million.
Fourth-quarter 2020 revenue was $25.3 million and the company reported a net loss of $2.9 million, or $(0.07) per share. Quarterly results were unaudited.
Material Changes and Unusual Items
- In September, Smart Sand acquired Eagle Proppants Holdings for approximately $2.1 million in stock. The acquired net assets were valued at $41.7 million, producing the $39.6 million bargain purchase gain. Utica and Peru operations began in October; the acquired business contributed $3.2 million of revenue and a $3.0 million pretax loss from acquisition through year-end.
- The company recorded a $5.1 million impairment of Permian Basin assets, citing no near-term development plans. It also incurred $1.3 million to settle a multi-year sales-tax audit and $0.9 million of acquisition costs.
- Operating cash flow declined from 2019. Free cash flow was supported by a reduction in capital spending; 2020 property, plant and equipment purchases were $8.6 million, versus $25.5 million in 2019.
- Smart Sand issued 1.5 million shares to Eagle as acquisition consideration and repurchased 778,300 shares for approximately $1.0 million during 2020. The repurchase authorization ended in September.
Outlook, Risks, and Contingencies
Management expected 2021 frac-sand demand to be flat or slightly higher than 2020 and planned to prioritize SmartSystems growth, facility maintenance and cost control. The company cited longer well laterals and more fracturing stages as potential demand supports, but noted that pricing depends on drilling activity and the balance of supply and demand. These are expectations, not guaranteed results.
Customer and litigation exposure are significant. Three customers generated 64% of 2020 revenue. U.S. Well Services accounted for $54.6 million of accounts and unbilled receivables at year-end; the amount is subject to litigation over unpaid obligations under expired take-or-pay and railcar agreements. The trial occurred in December 2020, post-trial briefing was complete, and the company said it could not assess the likely outcome or assure collection. One customer represented 78% of accounts receivable.
Other material risks include oil and gas activity and commodity-price volatility, spot-market pricing and regional sand competition, dependence on rail and a limited number of operating sites, acquisition integration, customer creditworthiness, and environmental, mining, silica-safety and permitting requirements. The company also disclosed seasonal operating and cash-flow effects and potential exposure to higher energy, freight and labor costs. It reported no material probable environmental matters.
Investor Verification Priorities
- Track the court decision and collectability of the $54.6 million U.S. Well receivable; review subsequent payments, reserve treatment and any settlement or judgment.
- Separate recurring operating performance from the bargain purchase gain and tax benefit; assess margins, volumes, pricing and Adjusted EBITDA under the company’s non-GAAP definitions.
- Verify post-acquisition Utica performance, integration costs, utilization and the assumptions supporting the acquisition’s recorded asset values.
- Monitor liquidity and debt-service needs against working-capital quality, especially the concentration of receivables, ABL borrowing-base availability and the 2021–2025 payment schedule.
- Compare actual 2021 demand, capital spending and SmartSystems utilization with management’s outlook, and assess whether customer concentration and contract renewals are improving.