Quarterly Report (10-q)

Date : 08/07/2019 @ 10:01AM
Source : Edgar (US Regulatory)
Stock : Smart Sand Inc (SND)
Quote : 2.23  0.03 (1.36%) @ 8:59PM
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Quarterly Report (10-q)



 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
 _____________________________________________________
FORM 10-Q
 _____________________________________________________ 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2019
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from ___ to ___
Commission file number 001-37936
LOGOA05.JPG
SMART SAND, INC.
(Exact name of registrant as specified in its charter)  
Delaware
45-2809926
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification Number)
 
 
1725 Hughes Landing Blvd, Suite 800
 
The Woodlands, Texas 77380
(281) 231-2660
(Address of principal executive offices)
(Registrant’s telephone number)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
Common Stock, par value $0.001 per share
 
SND
 
Nasdaq Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.   Yes  ý  No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes  ý  No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. 
Large accelerated filer  ☐
Accelerated filer   ý
Non-accelerated filer  ☐
Smaller reporting company ý
Emerging Growth Company ý
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   ý
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).   Yes ☐ No  ý
Number of shares of common stock outstanding, par value $0.001 per share, as of July 31, 2019 : 41,318,887
 




TABLE OF CONTENTS
 
 
PAGE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


1



Certain Definitions
The following definitions apply throughout this quarterly report unless the context requires otherwise:
“We”, “Us”, “Company”, “Smart Sand” or “Our”
 
Smart Sand, Inc., a company organized under the laws of Delaware, and its subsidiaries.
 
 
 
“shares”, “stock”
 
The common stock of Smart Sand, Inc., nominal value $0.001 per share.
 
 
 
“Credit Agreement”, “Credit Facility”
 
On December 8, 2016, the Company entered into a $45 million 3-year senior secured revolving credit facility under a revolving credit agreement with Jefferies Finance LLC as administrative and collateral agent (the “Credit Agreement”). This credit facility was amended: (i) on April 8, 2018, to increase our total borrowing capacity to $60 million; (ii) on July 13, 2018, to, among other things, (A) increase the limit on our ability to sell, transfer or dispose of assets, subject to certain considerations from an aggregate amount of $25 million to $55 million, (B) increase the limit on our ability to incur capital lease obligations from an aggregate principal amount of $15 million to $30 million, and (C) exclude certain current and future earn-out obligations from the definition of indebtedness in the Credit Agreement; and (iii) on February 22, 2019, to, among other things (A) extend the maturity date to June 30, 2020, and (B) decrease our total borrowing capacity to $55 million by June 30, 2019, $52.5 million by September 30, 2019 and $50 million by December 31, 2019 (“Credit Facility”).
 
 
 
“Exchange Act”
 
The Securities Exchange Act of 1934, as amended.
 
 
 
“Securities Act”
 
The Securities Act of 1933, as amended.
 
 
 
“FCA”, “DAT”, “DAP”
 
Free Carrier, Delivered at Terminal, Delivered at Place, respectively, Incoterms 2010.
 
 
 
“FASB”, “ASU”, “ASC”, “GAAP”
 
Financial Accounting Standards Board, Accounting Standards Update, Accounting Standards Codification, Accounting Principles Generally Accepted in the United States, respectively.

2



PART I – FINANCIAL INFORMATION
ITEM 1.  FINANCIAL STATEMENTS
SMART SAND, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
 
June 30,
2019
 
December 31,
2018
 
(unaudited)
 
 
(in thousands, except share amounts)
Assets
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
1,253

 
$
1,466

Accounts receivable, net
45,652

 
18,989

Unbilled receivables
7,311

 
7,823

Inventories
12,381

 
18,575

Prepaid expenses and other current assets
1,902

 
3,243

Total current assets
68,499

 
50,096

Property, plant and equipment, net
250,978

 
248,396

Operating right-of-use assets
32,417

 

Intangible assets, net
17,233

 
18,068

Other assets
3,374

 
3,732

Total assets
$
372,501

 
$
320,292

Liabilities and Stockholders’ Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
8,050

 
$
11,336

Accrued and other expenses
10,237

 
8,392

Deferred revenue
3,401

 
4,095

Current portion of long-term debt
40,238

 
829

Current portion of operating lease liabilities
13,339

 

Total current liabilities
75,265

 
24,652

Long-term debt, net of current portion
6,396

 
47,893

Long-term operating lease liabilities, net of current portion
19,702

 

Long-term deferred tax liabilities, net
22,185

 
17,898

Asset retirement obligation
15,185

 
13,322

Contingent consideration
4,400

 
7,167

Total liabilities
143,133

 
110,932

Commitments and contingencies (Note 16)


 


Stockholders’ equity
 
 
 
Common stock, $0.001 par value, 350,000,000 shares authorized; 40,949,849 issued and 40,209,409 outstanding at June 30, 2019; 40,673,513 issued and 39,974,478 outstanding at December 31, 2018
40

 
40

Treasury stock, at cost, 740,440 and 699,035 shares at June 30, 2019 and December 31, 2018, respectively
(2,978
)
 
(2,839
)
Additional paid-in capital
163,797

 
162,195

Retained earnings
68,586

 
50,277

Accumulated other comprehensive loss
(77
)
 
(313
)
Total stockholders’ equity
229,368

 
209,360

Total liabilities and stockholders’ equity
$
372,501

 
$
320,292

 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

3



SMART SAND, INC.
CONDENSED CONSOLIDATED INCOME STATEMENTS
(UNAUDITED)  
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
 
(in thousands, except per share amounts)
Revenues
$
67,941

 
$
54,448

 
$
119,716

 
$
97,076

Cost of goods sold
43,068

 
34,678

 
83,673

 
70,091

Gross profit
24,873

 
19,770

 
36,043

 
26,985

Operating expenses:


 


 
 
 
 
Salaries, benefits and payroll taxes
2,798

 
2,790

 
5,508

 
5,362

Depreciation and amortization
655

 
476

 
1,331

 
664

Selling, general and administrative
2,790

 
3,595

 
5,590

 
6,696

Change in the estimated fair value of contingent consideration
(575
)
 

 
(1,542
)
 

Total operating expenses
5,668

 
6,861

 
10,887

 
12,722

Operating income
19,205

 
12,909

 
25,156

 
14,263

Other income (expenses):


 


 
 
 
 
Interest expense, net
(994
)
 
(500
)
 
(1,975
)
 
(680
)
Other income
37

 
25

 
74

 
58

Total other income (expenses), net
(957
)
 
(475
)
 
(1,901
)
 
(622
)
Income before income tax expense
18,248

 
12,434

 
23,255

 
13,641

Income tax expense
3,972

 
2,413

 
4,946

 
2,645

Net income
$
14,276

 
$
10,021

 
$
18,309

 
$
10,996

Net income per common share:


 


 
 
 
 
Basic
$
0.36

 
$
0.25

 
$
0.46

 
$
0.27

Diluted
$
0.36

 
$
0.25

 
$
0.46

 
$
0.27

Weighted-average number of common shares:


 


 
 
 
 
Basic
40,074

 
40,499

 
40,035

 
40,455

Diluted
40,173

 
40,550

 
40,117

 
40,550

 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

4



SMART SAND, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
 
(in thousands)
Net income
$
14,276

 
$
10,021

 
$
18,309

 
$
10,996

Other comprehensive income:
 
 
 
 
 
 
 
Foreign currency translation adjustment
91

 
76

 
236

 
76

Comprehensive income
$
14,367

 
$
10,097

 
$
18,545

 
$
11,072

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


5



SMART SAND, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(UNAUDITED)  

Six months ended June 30, 2019
 
Common Stock
 
Treasury Stock
 
Additional Paid-in Capital
 
 
 
Accumulated Other Comprehensive Loss
 
Total Stockholders’ Equity
 
Outstanding
Shares
 
Par Value
 
Shares
 
Amount
 
 
Retained
Earnings
 
 
 
(in thousands, except share amounts)
Balance at December 31, 2018
39,974,478

 
$
40

 
699,035

 
$
(2,839
)
 
$
162,195

 
$
50,277

 
$
(313
)
 
$
209,360

Foreign currency translation adjustment

 

 

 

 

 

 
145

 
145

Vesting of restricted stock
30,729

 

 

 

 

 

 

 

Stock-based compensation

 

 

 

 
790

 

 

 
790

Employee stock purchase plan compensation

 

 

 

 
9

 

 

 
9

Employee stock purchase plan issuance
20,954

 

 

 

 
40

 

 

 
40

Restricted stock buy back
(5,714
)
 

 
5,714

 
(23
)
 

 

 

 
(23
)
Net income

 

 

 

 

 
4,033

 

 
4,033

Balance at March 31, 2019
40,020,447

 
40

 
704,749

 
(2,862
)
 
163,034

 
54,310

 
(168
)
 
214,354

Foreign currency translation adjustment

 

 

 

 

 

 
91

 
91

Vesting of restricted stock
224,653

 

 

 

 

 

 

 

Stock-based compensation

 

 

 

 
754

 

 

 
754

Employee stock purchase plan compensation

 

 

 

 
9

 

 

 
9

Employee stock purchase plan issuance

 

 

 

 

 

 

 

Restricted stock buy back
(35,691
)
 

 
35,691

 
(116
)
 

 

 

 
(116
)
Net income

 

 

 

 

 
14,276

 

 
14,276

Balance at June 30, 2019
40,209,409

 
$
40

 
740,440

 
$
(2,978
)
 
$
163,797

 
$
68,586

 
$
(77
)
 
$
229,368




6



SMART SAND, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (Continued)
(UNAUDITED)  

Six months ended June 30, 2018
 
Common Stock
 
Treasury Stock
 
Additional Paid-in Capital
 
 
 
Accumulated Other Comprehensive Loss
 
Total Stockholders’ Equity
 
Outstanding
Shares
 
Par Value
 
Shares
 
Amount
 
 
Retained
Earnings
 
 
 
(in thousands, except share amounts)
December 31, 2017
40,393,033

 
$
40

 
81,052

 
$
(666
)
 
$
159,059

 
$
31,589

 
$

 
$
190,022

Vesting of restricted stock
96,713

 

 

 

 

 

 

 

Stock-based compensation

 

 

 

 
610

 

 

 
610

Employee stock purchase plan issuance
9,639

 

 

 

 
70

 

 

 
70

Restricted stock buy back
(8,822
)
 

 
8,822

 
(54
)
 

 

 

 
(54
)
Net income

 

 

 

 

 
975

 

 
975

Balance at March 31, 2018
40,490,563

 
40

 
89,874

 
(720
)
 
159,739

 
32,564

 

 
191,623

Foreign currency translation adjustment

 

 

 

 

 

 
76

 
76

Vesting of restricted stock
59,400

 

 

 

 

 

 

 

Stock-based compensation

 

 

 

 
650

 

 

 
650

Employee stock purchase plan compensation

 

 

 

 
38

 

 

 
38

Employee stock purchase plan issuance

 

 

 

 
1

 

 

 
1

Restricted stock buy back
(20,781
)
 

 
20,781

 
(119
)
 

 

 

 
(119
)
Net income

 

 

 

 

 
10,021

 

 
10,021

Balance at June 30, 2018
40,529,182

 
$
40

 
110,655

 
$
(839
)
 
$
160,428

 
$
42,585

 
$
76

 
$
202,290

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

7



SMART SAND, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
Six Months Ended June 30,
 
2019
 
2018
 
(in thousands)
Operating activities:
 

 
 

Net income
$
18,309

 
$
10,996

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation, depletion and accretion of asset retirement obligation
12,501

 
7,359

Amortization of intangible assets
837

 
284

Asset retirement obligation settlement
(1,883
)
 
(1,783
)
Amortization of deferred financing cost
117

 
138

Accretion of debt discount
331

 
116

Deferred income taxes
4,287

 
2,647

Stock-based compensation, net
1,544

 
1,298

Employee stock purchase plan compensation
18

 

Change in contingent consideration fair value
(1,542
)
 

Changes in assets and liabilities, net of effects of acquisitions:
 
 
 
Accounts receivable
(26,663
)
 
(597
)
Unbilled receivables
512

 
(3,715
)
Inventories
6,194

 
(315
)
Prepaid expenses and other assets
1,587

 
(2,975
)
Deferred revenue
(694
)
 
4,805

Accounts payable
(1,977
)
 
(3,057
)
Accrued and other expenses
3,925

 
3,712

Net cash provided by operating activities
17,403

 
18,913

Investing activities:
 
 
 
Acquisition of businesses, net of cash acquired

 
(29,878
)
Purchases of property, plant and equipment
(13,869
)
 
(66,841
)
Net cash used in investing activities
(13,869
)
 
(96,719
)
Financing activities:
 
 
 
Proceeds from the issuance of notes payable
4,696

 

Repayments of notes payable
(734
)
 
(288
)
Payments under equipment financing obligations
(50
)
 
(140
)
Payment of deferred financing and debt issuance costs
(835
)
 
(146
)
Proceeds from revolving credit facility
22,750

 
59,000

Repayment of revolving credit facility
(28,250
)
 
(14,000
)
Payment of contingent consideration
(1,225
)
 

Proceeds from equity issuance
40

 
71

Purchase of treasury stock
(139
)
 
(173
)
Net cash (used in) provided by financing activities
(3,747
)
 
44,324

Effect of exchange rate changes on cash and cash equivalents

 

Net decrease in cash and cash equivalents
(213
)
 
(33,482
)
Cash and cash equivalents at beginning of year
1,466

 
35,227

Cash and cash equivalents at end of period
$
1,253

 
$
1,745

Supplemental disclosure of cash flow information
 
 
 
Non-cash investing activities:
 
 
 
Contingent consideration
$

 
$
9,200

Asset retirement obligation
$
3,301

 
$
2,086

Non-cash financing activities:
 
 
 
Capitalized expenditures in accounts payable and accrued expenses
$
1,237

 
$
6,585

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

8

SMART SAND, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)


NOTE 1 — Organization and Nature of Business
Smart Sand, Inc. and its subsidiaries are headquartered in The Woodlands, Texas. The Company was incorporated in July 2011, and is a fully integrated frac sand supply and services company, offering complete mine to wellsite logistics solutions. The Company is engaged in the excavation, processing and sale of industrial sand, or proppant, for use in hydraulic fracturing operations for the oil and natural gas industry. Its integrated Oakdale facility, with on-site rail infrastructure and wet and dry sand processing facilities, has access to two Class I rail lines that enables the Company to process and cost-effectively deliver products to its customers. The Company also offers proppant logistics solutions to its customers through, among other things, its in-basin transloading terminal and its SmartSystems TM wellsite proppant storage solution capabilities.
The Company completed construction of the first phase of its mine and processing facility in Oakdale, Wisconsin and commenced operations in July 2012, and subsequently expanded its operations in 2014, 2015 and 2018 to the current annual processing capacity of approximately 5.5 million tons.
On March 15, 2018, the Company acquired the rights to operate a unit train capable transloading terminal in Van Hook, North Dakota to service the Bakken Formation in the Williston Basin and began providing Northern White Sand in-basin in April 2018.
On June 1, 2018, the Company acquired substantially all of the assets of Quickthree Solutions, Inc. (“Quickthree”), a manufacturer of portable vertical proppant storage solution systems. This is now part of our SmartSystems proppant storage solutions under which we offer various solutions that create efficiencies, flexibility, enhanced safety and reliability for customers by providing the capability to unload, store and deliver proppant at the wellsite, as well as the ability to rapidly set up, takedown and transport the entire system. The SmartDepot TM silo system includes passive and active dust suppression technology, along with the capability of a gravity-fed operation.
NOTE 2 — Summary of Significant Accounting Policies
The information presented below supplements the complete description of our significant accounting policies disclosed in our 2018 Form 10-K, filed with the SEC on March 14, 2019.
Basis of Presentation and Consolidation
The accompanying unaudited quarterly condensed consolidated financial statements (“interim statements”) of the Company are presented in accordance with the rules and regulations of the Securities and Exchange Commission for quarterly reports on Form 10-Q and therefore do not include all the information and notes required by GAAP. In the opinion of management, all adjustments and disclosures necessary for a fair presentation of these interim statements have been included. All adjustments are of a normal recurring nature. The results reported in these interim statements are not necessarily indicative of the results that may be reported for the entire year. The consolidated balance sheet as of December 31, 2018 was derived from the audited consolidated financial statements as of and for the year ended December 31, 2018 . These interim statements should be read in conjunction with the Company’s consolidated financial statements for the year ended December 31, 2018 .  
Certain 2018 balance sheet items have been reclassified to conform to the current financial statement presentation. These reclassifications have no effect on previously reported net income.
Going Concern
Management evaluates at each annual and interim period whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the consolidated financial statements are issued. Management’s evaluation is based on relevant conditions and events that are known and reasonably knowable at the date that the consolidated financial statements are issued. The Credit Facility matures on June 30, 2020 and without additional sources of capital or refinancing of the Credit Facility, the maturity of the Credit Facility raises substantial doubt about the Company’s ability to continue as a going concern, which means that Smart Sand may be unable to meet its obligations as they become due. The Company is currently pursuing plans to refinance the Credit Facility and extend the current obligations beyond one year as mitigation to the substantial doubt raised regarding the Company’s ability to continue as a going concern, however there can be no assurance that sufficient liquidity can be raised or that such a transaction can be completed prior to the maturity date of the Credit Facility or that any refinancing would be on favorable terms to the Company. The Credit Facility has been recorded as a current liability in the consolidated balance sheet as of June 30, 2019.

9

SMART SAND, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

Recent Accounting Pronouncements
Adopted
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), and related amendments, which replaced the existing guidance in ASC 840, Leases. ASU 2016-02 requires lessees to recognize most leases on their balance sheets as lease liabilities with corresponding right-of-use assets. The new lease standard does not substantially change lessor accounting. The new standard is effective for interim and annual reporting periods beginning after December 15, 2018. The Company adopted ASU 2016-02 and its related updates using the optional transition practical expedients, which allow the Company to use the existing lease population, classification and determination of initial direct costs when calculating the lease liability and right-of-use asset balances. The Company also used the optional transition method, which allows the Company to initially apply the new standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings. There was no adjustment made to the opening balance of retained earnings. The Company has implemented new accounting policies and software to facilitate the recording and reporting of lease transactions and balances. The Company recorded initial operating right-of-use assets of $35,939 and related lease liabilities of $36,484 on its consolidated balance sheet on January 1, 2019. New disclosures are included in Note 9 to these interim financial statements.
Not yet adopted
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820), which modifies disclosure requirements for fair value measurements by removing the disclosure of the valuation process for Level 3 fair value measurements, among other disclosure modifications. The guidance is effective for the Company for financial statement periods beginning after December 15, 2019, although early adoption is permitted. Companies are permitted to remove or modify disclosures upon issuance while delaying adoption of the additional disclosures. The Company is currently evaluating the effects of ASU 2018-13 on its consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), which modifies how companies recognize expected credit losses on financial instruments and other commitments to extend credit held by an entity at each reporting date. Existing GAAP requires an “incurred loss” methodology whereby companies are prohibited from recording an expected loss until it is probable that the loss has been incurred. ASU 2016-13 requires companies to use a methodology that reflects current expected credit losses (“CECL”) and requires consideration of a broad range of reasonable and supportable information to record and report credit loss estimates, even when the CECL is remote. Companies will be required to record the allowance for credit losses and deduct that amount from the basis of the asset and a related expense will be recognized in selling, general and administrative expenses on the income statement, similar to bad debt expense under existing GAAP. There is much latitude given to entities in determining the methodology for calculating the CECL. The guidance is effective for the Company for financial statement periods beginning after December 15, 2019, although early adoption is permitted. While the Company is still in the process of evaluating the effects of ASU 2016-13 and its related updates on its consolidated financial statements, it believes the primary effect, will be an allowance recorded against its accounts and unbilled receivables on its balance sheet and related expense on its income statement upon adoption. The Company cannot determine the financial impact on its consolidated financial statements upon adoption as its accounts and unbilled receivables balances are affected by ongoing transactions with customers.
Changes to Accounting Policies
Leases - Lessee
The Company uses leases primarily to procure certain office space, railcars and heavy equipment as part of its operations. The majority of its lease payments are fixed and determinable with certain of its lease payments containing immaterial variable payments based on the number of hours the equipment is used. Certain of its leases have options that allow for renewal at market rates, purchase at fair market value or termination of the lease. The Company must determine that it is reasonably certain that a lease option will be exercised for such an option to be included in the right-of-use asset or lease liability. The Company is not reasonably certain that any of its lease options will be exercised and, as such, has not included those options in its right-of-use assets or lease liabilities. Certain of its equipment leases contain residual value guarantees which guarantee various parts of heavy equipment will have a remaining life when the equipment is returned to the lessor. It is possible that the Company could owe additional amounts to the lessor upon return of equipment. There are no restrictions or covenants imposed by any of the Company’s leases.

10

SMART SAND, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

The Company evaluates contracts during the negotiation process and when they are executed to determine the existence of leases. A contract contains a lease when it conveys the right to use property, plant or equipment for a stated period of time in exchange for consideration. Leases with an initial term of twelve months or less are not recorded on the balance sheet. The Company recognizes lease expense on a straight-line basis over the term of the lease. The Company evaluates the classification of its leases at the commencement date and includes both lease and non-lease components in its calculation of consideration in the contract for all classes of operating leases.
The Company applies a single discount rate to all operating leases, which is its incremental borrowing rate. The Company determined its incremental borrowing rate based on an average of collateralized borrowing rates offered by various lenders. The Company considered the nature of the assets and the life of the leases and determined that there is no significant difference in the incremental borrowing rate among its classes of assets. See Note 9 — Leases for additional disclosures regarding the Company’s leasing activity.
Leases - Lessor
The Company manufactures SmartSystems and offers the equipment for lease. The Company negotiates the terms of its leases on a case-by-case basis. There are no significant options that are reasonably certain to be exercised, residual value guarantees, restrictions or covenants in its lease contracts and have, therefore, not been included in its accounting for the leases. There are currently no contracts in place that meet the definition of a lease.
NOTE 3 — Acquisitions
Asset Acquisition - Van Hook Crude Terminal, LLC
The acquisition of the assets of Van Hook Crude Terminal, LLC occurred on March 15, 2018. The Company acquired all of the rights, title, and interest in certain properties and assigned contracts for a total consideration of $15,549 in cash. The acquisition cost has been allocated to the Company’s fixed assets as set forth below.
Machinery, equipment and tooling
$
1,478

Plant and building
1,407

Railroad and sidings
9,926

Land improvements
2,738

Total assets acquired
$
15,549

Business Combination - Quickthree Solutions Inc.
On June 1, 2018, the Company acquired substantially all of the assets of Quickthree, a manufacturer of portable vertical frac sand storage solution systems that has been integrated into the Company’s SmartSystems offerings.
The aggregate purchase price consisted of approximately $30,000 cash paid at closing, subject to adjustment based upon Quickthree’s closing date working capital, and up to $12,750 in potential earn-out payments over a three -year period after closing. Payment of the earn-out is based upon the production of SmartDepot (formerly known as Quickstand) silos and related equipment during the earn-out period. The closing portion of the purchase price was paid using cash on hand and advances under the Company’s Credit Facility. The Company expects the earn-out portion of the purchase price to be paid using cash on hand, equipment financing options available to the Company and advances under the Company’s Credit Facility. Goodwill in this transaction was attributable to planned expansion into the wellsite proppant storage solutions market, and is fully deductible for tax purposes. The table below presents the calculation of the total purchase consideration.
Base price - cash
$
30,000

Contingent consideration – earnout
9,200

Working capital adjustment
(122
)
Total purchase consideration
$
39,078


11

SMART SAND, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

The Company’s allocation of the purchase price in connection with the acquisition was calculated as follows:
 
 
Fair Value
 
Useful Life (in years)
Assets Acquired
 
 
 
 
Accounts receivable
 
$
112

 
 
Inventory
 
1,700

 
 
Prepaid expenses and other current assets
 
126

 
 
      Total current assets acquired
 
$
1,938

 
 
Property, plant and equipment
 
740

 
 
Customer relationships
 
270

 
1 year
Developed technology
 
18,800

 
13 years
Trade name
 
900

 
Indefinite
Goodwill
 
16,935

 
 
Other assets
 
225

 
 
      Total non-current assets acquired
 
37,870

 
 
      Total assets acquired
 
$
39,808

 
 

 
 
 
 
Liabilities Assumed
 
 
 
 
Accounts payable
 
$
331

 
 
Accrued and other expenses
 
399

 
 
      Total liabilities assumed
 
730

 
 
      Estimated fair value of net assets acquired
 
$
39,078

 
 
There were no acquisition costs for the Quickthree acquisition during the three and six months ended June 30, 2019 . Total acquisition costs for the Quickthree acquisition incurred during the three and six months ended June 30, 2018 were $843 and $1,159 , respectively, which are included in selling, general and administrative expense in the Company’s condensed consolidated income statements. The purchase price allocation was considered complete as of December 31, 2018.
The goodwill and trade name have been fully impaired as of December 31, 2018. The Company conducts its evaluation of goodwill at the reporting unit level on an annual basis as of December 31 and more frequently if events or circumstances indicate that the carrying value of a reporting unit exceeds its fair value. All of the Company’s operations are in one reporting unit. The Company determined the fair value of its reporting unit using both a market multiples approach and the discounted cash flows method. In the second half of 2018, the Company saw a decline in demand for frac sand, consistent with the industry as a whole, which resulted in a decline in the Company’s stock price near the measurement date. The decline in the Company’s stock price near the measurement date and the relationship between the resulting market capitalization and the equity recorded on the Company’s balance sheet resulted in a full impairment of goodwill as of December 31, 2018.
Contingent Consideration 
The Company determined the fair value of the contingent consideration to be $9,200 at June 1, 2018, the acquisition date and recorded it as a liability in the Company’s unaudited condensed consolidated balance sheets. Each reporting period, the Company reassesses its inputs including market comparable information and management assessments regarding potential future scenarios, then discounts the liabilities to present value. For the three and six months ended June 30, 2019 , the Company recorded an adjustment to the fair value of contingent consideration in the amount of $575 and $1,542 , respectively, on the condensed consolidated income statements, related to the change in fair value of contingent consideration. The Company will continue to reassess earn-out calculations related to the contingent consideration in future periods.
The Company’s contingent consideration is remeasured at fair value on a recurring basis and is comprised of payments for production of silos and related equipment during the three-year period after the acquisition. Contingent liabilities are valued using significant inputs that are not observable in the market, which are defined as Level 3 inputs according to fair value measurement accounting. The Company used a probability-weighted average between 9 and 52 manufactured SmartDepot

12

SMART SAND, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

fleets over the earnout period, as the basis of its fair value determination. The actual contingent consideration could vary from the determined amount based on the actual number of SmartDepot silos and related equipment produced and the timing thereof. The Company estimates the fair value of contingent liabilities using a Monte Carlo simulation-based, real option pricing methodology implementation of the Income Approach. This approach utilizes inputs including market comparable information and management assessments regarding potential future scenarios, then discounts the liabilities to present value. The Company believes its estimates and assumptions are reasonable, however, there is significant judgment involved. The Company’s financial instruments remeasured and carried at fair value were as follows:
 
 
June 30, 2019
 
Level 1
 
Level 2
 
Level 3
Contingent consideration
 
$
4,400

 
$

 
$

 
$
4,400

Total liabilities
 
$
4,400

 
$

 
$

 
$
4,400

The following table provides a summary of changes in the fair value of the Company’s Level 3 financial instruments for the six months ended June 30, 2019 .
Balance as of December 31, 2018
 
$
7,167

Payment of contingent consideration
 
(1,225
)
Fair value adjustment
 
(1,542
)
Balance as of June 30, 2019
 
$
4,400

NOTE 4 — Inventories
Sand inventories consisted of the following:
 
June 30, 2019
 
December 31, 2018
Raw material
$
628

 
$
1,201

Work in progress
6,067

 
10,070

Finished goods
4,769

 
4,648

Spare parts
917

 
1,356

Total sand inventory
$
12,381

 
$
17,275

SmartSystems inventory represents work in progress inventory related to existing arrangements at the time the Company acquired Quickthree and consisted of the following:
 
June 30, 2019
 
December 31, 2018
Work in progress
$

 
$
1,300

Total SmartSystems inventory
$

 
$
1,300

 
 
 
 
Total inventory
$
12,381

 
$
18,575


13

SMART SAND, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

NOTE 5 — Property, Plant and Equipment, net
Net property, plant and equipment consisted of:
 
June 30, 2019
 
December 31, 2018
Machinery, equipment and tooling
$
16,080

 
$
14,858

SmartSystems
9,532

 
5,286

Vehicles
2,214

 
1,955

Furniture and fixtures
1,217

 
1,140

Plant and building
160,413

 
158,882

Real estate properties
4,855

 
4,601

Railroad and sidings
27,347

 
27,347

Land and land improvements
27,421

 
27,167

Asset retirement obligation
19,770

 
16,469

Mineral properties
10,075

 
10,075

Deferred mining costs
1,806

 
1,806

Construction in progress
25,132

 
21,619

 
305,862

 
291,205

Less: accumulated depreciation and depletion
54,884

 
42,809

Total property, plant and equipment, net
$
250,978

 
$
248,396

Depreciation expense was $6,171 and $3,994 for the three months ended June 30, 2019 and 2018 , respectively, and $12,038 and $7,151 for the six months ended June 30, 2019 and 2018 , respectively. Depletion expense was $13 and $18 for the three months ended June 30, 2019 and 2018 , respectively, and $18 and $20 for the six months ended June 30, 2019 and 2018 , respectively.
The Company capitalized no interest expense associated with the construction of new property, plant and equipment for the three and six months ended June 30, 2019 and 2018 .
NOTE 6 — Intangible Assets, net
The following table summarizes the Company’s intangible assets as of June 30, 2019 and December 31, 2018 :
 
 
Estimated Useful Life (Years)
 
Gross Carrying Amount at December 31, 2018
 
Accumulated Amortization
 
Net Book Value at June 30, 2019
Developed technology
 
13
 
$
18,800

 
$
1,567

 
$
17,233

Customer relationships
 
1
 
270

 
270

 

 
 
 
 
$
19,070

 
$
1,837

 
$
17,233

The Company uses the straight-line method to determine the amortization expense for its definite lived intangible assets. The weighted-average remaining useful life for the intangible assets is 11.9 years . Amortization expense related to the purchased intangible assets was $407 and $284 for the three months ended June 30, 2019 and 2018, respectively, and $837 and $284 for the six months ended June 30, 2019 and 2018, respectively. The table below reflects the future estimated amortization expense for amortizable intangible assets as of June 30, 2019 .
 
 
 
Remainder of 2019
 
$
723

2020
 
1,446

2021
 
1,446

2022
 
1,446

2023
 
1,446

Thereafter
 
10,726

Total
 
$
17,233

NOTE 7 — Accrued and Other Expenses
Accrued and other expenses were comprised of the following:
 
June 30, 2019
 
December 31, 2018
Employee related expenses
$
2,993

 
$
1,894

Accrued construction related expenses
259

 
948

Accrued professional fees
428

 
465

Accrued royalties
1,678

 
1,780

Accrued freight and delivery charges
1,976

 
2,556

Accrued real estate tax
403

 

Accrued utilities
537

 

Accrued income taxes
634

 

Deferred rent

 
712

Other accrued liabilities
1,329

 
37

Total accrued liabilities
$
10,237

 
$
8,392


14

SMART SAND, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

NOTE 8 — Debt
The current portion of long-term debt consists of the following:
 
June 30, 2019
 
December 31, 2018
Credit Facility
$
38,255

 
$

Finance leases
137

 
90

Notes payable
1,846

 
739

Total current portion of long-term debt
$
40,238

 
$
829

Long-term debt, net of current portion consists of the following:
 
June 30, 2019
 
December 31, 2018
Credit Facility
$

 
$
44,255

Finance leases
498

 
547

Notes payable
5,898

 
3,091

Total long-term debt, net of current portion
$
6,396

 
$
47,893

Credit Facility
On February 22, 2019, we entered into an agreement with the existing lenders on the Credit Facility to, among other things, (i) extend the maturity date of the Credit Facility to June 30, 2020 and (ii) reduce the total capacity to $50,000 by December 31, 2019. The outstanding balance on the Credit Facility is included in long-term liabilities on our consolidated balance sheet at December 31, 2018. As of June 30, 2019 and December 31, 2018 , $39,000 and $44,500 , respectively, were outstanding under the Credit Facility and the Company was in compliance with all covenants. As of June 30, 2019 , the total borrowing capacity is $55,000 with undrawn availability at $16,000 . The Credit Facility matures on June 30, 2020 and as such, the Company has included the balance in the current portion of long-term debt as of June 30, 2019 . The Company is currently pursuing plans to refinance the Credit Facility and extend the current obligations beyond one year.

As of June 30, 2019 and December 31, 2018 , gross deferred financing fees of $1,558 and $728 are presented as a discount to the carrying value of the debt and the unamortized amount is presented as a reduction of current portion of long term debt as of June 30, 2019 and long-term debt, net of current portion, as of December 31, 2018 on the consolidated balance sheets. Certain deferred financing costs incurred when there was no balance on the Credit Facility are included in Other assets line item on the consolidated balance sheet. Accretion of debt discount of $186 and $60 is included in interest expense for the three months ended June 30, 2019 and 2018 , respectively. Accretion of debt discount of $331 and $116 is included in interest expense for the six months ended June 30, 2019 and 2018 , respectively. Amortization expense of the deferred financing charges of $55 and $78 is included in interest expense for the three months ended June 30, 2019 and 2018 , respectively. Amortization expense of the deferred financing charges of $117 and $138 is included in interest expense for the six months ended June 30, 2019 and 2018 , respectively.
 
June 30, 2019
 
December 31, 2018
Revolving credit facility
$
39,000

 
$
44,500

Less: Debt discount, net
(745
)
 
(245
)
Revolving credit facility, net
$
38,255

 
$
44,255


15

SMART SAND, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

NOTE 9 — Leases
Current Period Disclosures under ASC 842
Lessee
At June 30, 2019 , the operating and financing components of the Company’s right-of-use assets and lease liabilities on the consolidated balance sheet are as follows:
 
 
Balance Sheet Location
 
June 30, 2019
Right-of-use assets
 
 
 
 
   Operating
 
Operating right-of-use assets
 
$
32,417

   Financing
 
Property, plant and equipment, net
 
659

Total right-of use assets
 
 
 
$
33,076

 
 
 
 
 
Lease liabilities
 
 
 
 
   Operating
 
Operating lease liabilities, current and long-term portions
 
$
33,041

   Financing
 
Long-term debt, current and long-term portions
 
615

Total lease liabilities
 
 
 
$
33,656

Operating lease costs are recorded in a single expense on the income statement and allocated to the right-of-use assets and the related lease liabilities as depreciation expense and interest expense, respectively. Lease cost recognized in the consolidated income statement for the three and six months ended June 30, 2019 is as follows:
 
Three Months Ended
 
Six Months Ended
 
June 30, 2019
 
June 30, 2019
Finance lease cost
 
 
 
   Amortization of right-of-use assets
$
34

 
$
64

   Interest on lease liabilities
11

 
22

Operating lease cost
4,257

 
7,364

Short-term lease cost
120

 
134

Total lease cost
$
4,422

 
$
7,584


16

SMART SAND, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

Other information related to the Company’s leasing activity for the six months ended June 30, 2019 is as follows:
 
 
Six Months Ended
 
 
June 30, 2019
Cash paid for amounts included in the measurement of lease liabilities
 
 
   Operating cash flows used for finance leases
 
$
20

   Operating cash flows used for operating leases
 
$
7,288

   Financing cash flows used for finance leases
 
$
58

 
 
 
Right-of-use assets obtained in exchange for new finance lease liabilities
 
$
55

Right-of-use assets recorded upon adoption
 
$
35,939

Right-of-use assets obtained in exchange for new operating lease liabilities
 
$
4,100

 
 
 
 
 
 
Weighted average remaining lease term - finance leases
 
4.0 years

Weighted average discount rate - finance leases
 
6.69
%
Weighted average remaining lease term - operating leases
 
2.9 years

Weighted average discount rate - operating leases
 
5.50
%
Maturities of the Company’s lease liabilities as of June 30, 2019 are as follows:
Year
 
Operating Leases
 
Finance Leases
 
Total
Remainder of 2019
 
$
7,864

 
$
116

 
$
7,980

2020
 
12,762

 
165

 
12,927

2021
 
8,847

 
165

 
9,012

2022
 
3,979

 
151

 
4,130

2023
 
1,394

 
103

 
1,497

Thereafter
 
888

 

 
888

Total cash lease payments
 
35,734

 
700

 
36,434

Less: amounts representing interest
 
(2,693
)
 
(85
)
 
(2,778
)
Total lease liabilities
 
$
33,041

 
$
615

 
$
33,656

Prior period disclosures under ASC 840
Capital Leases
The Company entered into various lease arrangements to lease equipment. Equipment cost of $657 has been capitalized and included in the Company’s property, plant and equipment as of December 31, 2018 . Depreciation expense under leased assets was approximately $54 and $109 for the three and six months ended June 30, 2018 , respectively.
Operating Leases
Expense related to operating leases and other rental agreements was $3,363 and $6,693 for three and six months ended June 30, 2018 , respectively. Lease expense related to railcars is included in cost of goods sold in the condensed consolidated income statements.

17

SMART SAND, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

NOTE 10 — Asset Retirement Obligation
The Company had a post-closure reclamation and site restoration obligation of $15,185 as of June 30, 2019 . The following is a reconciliation of the total reclamation liability for asset retirement obligations.
Balance at December 31, 2018
$
13,322

Additions and revisions of prior estimates
3,301

Accretion expense
445

Settlement of liability
(1,883
)
Balance at June 30, 2019
$
15,185

NOTE 11 — Revenue
Disaggregation of Revenue
The following table presents the Company’s revenues disaggregated by type and percentage of total revenues for the periods indicated.
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
 
Revenue
 
Percentage of Total Revenue
 
Revenue
 
Percentage of Total Revenue
 
Revenue
 
Percentage of Total Revenue
 
Revenue
 
Percentage of Total Revenue
Sand sales revenue
$
26,862

 
39
%
 
$
34,626

 
64
%
 
$
48,008

 
40
%
 
$
56,913

 
58
%
Reservation revenue
4,500

 
7
%
 
5,838

 
11
%
 
9,000

 
8
%
 
12,466

 
13
%
Shortfall revenue
16,283

 
24
%
 
668

 
1
%
 
22,039

 
18
%
 
668

 
1
%
Logistics revenue
20,296

 
30
%
 
13,316

 
24
%
 
40,669

 
34
%
 
27,029

 
28
%
Total revenues
$
67,941

 
100
%
 
$
54,448

 
100
%
 
$
119,716

 
100
%
 
$
97,076

 
100
%
The Company recorded $4,095 of deferred revenue on the balance sheet on December 31, 2018 , of which $1,017 has been recognized in the six months ended June 30, 2019 and the Company expects to recognize an additional $578 in 2019 and the remainder in 2020.
Segment Information
Reportable operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker, or decision-making group, in making decisions on how to allocate resources and assess performance. The Company’s chief operating decision maker is the Chief Executive Officer. The Company and the Chief Executive Officer view the Company’s operations and manage its business, including the recently acquired logistics assets and wellsite proppant storage solutions business, as one reportable operating segment.
NOTE 12 — Earnings Per Share
Basic net income per share of common stock is computed by dividing net income attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the period, excluding the dilutive effects of restricted stock. Diluted net income per share of common stock is computed by dividing the net income attributable to common stockholders by the sum of the weighted-average number of shares of common stock outstanding during the period plus the potential dilutive effects of restricted stock outstanding during the period calculated in accordance with the treasury stock method, although restricted stock is excluded if their effect is anti-dilutive. The number of shares underlying equity-based awards that were excluded from the calculation of diluted earnings per share as their effect would be anti-dilutive was 765 and 670 for the three months ended June 30, 2019 and 2018 , respectively. The number of shares underlying equity-based awards that were excluded from the calculation of diluted earnings per share as their effect would be anti-dilutive was 765 and 670 for the six months ended June 30, 2019 and 2018 , respectively. The following table reconciles the weighted-average common shares outstanding used in the calculation of basic net income per share to the weighted average common shares outstanding used in the calculation of diluted net income per share.

18

SMART SAND, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Weighted average common shares outstanding
40,074

 
40,499

 
40,035

 
40,455

Assumed conversion of restricted stock
99

 
51

 
82

 
95

Diluted weighted average common stock outstanding
40,173

 
40,550

 
40,117

 
40,550

NOTE 13 Stock-Based Compensation
Equity Incentive Plans
In May 2012, the Board approved the 2012 Equity Incentive Plan (“2012 Plan”), which provides for the issuance of equity awards of up to a maximum of 440 shares of the Company’s common stock to employees, non-employee members of the Board, and consultants of the Company. During 2014, the 2012 Plan was amended to provide for the issuance of equity awards of up to 880 shares of the Company’s common stock. The awards can be issued in the form of incentive stock options, non-qualified stock options or restricted stock, and have expiration dates of 5 or 10 years after issuance, depending on whether the recipient already holds above 10% of the voting power of all classes of the Company’s shares. The exercise price will be based on the fair market value of the share on the date of issuance; vesting periods will be determined by the board upon issuance of the equity award. Subsequent to the Company’s initial public offering, no additional equity awards were made under the 2012 Plan.
In November 2016, in connection with its initial public offering, the Company adopted the 2016 Omnibus Incentive Plan (“2016 Plan”) which provides for the issuance of equity awards of up to a maximum of 3,911 shares of the Company’s common stock to employees, non-employee members of the board and consultants of the Company. Together the 2012 Plan and the 2016 Plan are referenced to as the “Plans”.
During the six months ended June 30, 2019 and 2018 , 335 and 723 shares of restricted stock were issued under the Plans, respectively. The grant date fair value per share of all the outstanding restricted stock was $2.44 - $19.00 . The shares vest over one to four years from their respective grant dates. For equity awards issued under the 2016 Plan, the grant date fair value was either the actual market price of the Company’s shares or an adjusted price using a Monte Carlo simulation for awards subject to the Company’s performance as compared to a defined peer group. For equity awards issued under the 2012 Plan, the grant date fair value was calculated based on a weighted analysis of (i) publicly-traded companies in a similar line of business to the Company (market comparable method)—Level 2 inputs, and (ii) discounted cash flows of the Company—Level 3 inputs. The Company recognized, in operating expenses on the condensed consolidated income statements, $754 and $670 of compensation expense for the restricted stock during the three months ended June 30, 2019 and 2018 , respectively. The Company recognized, in operating expenses on the consolidated income statements, $1,544 and $1,260 of compensation expense for the restricted stock during the six months ended June 30, 2019 and 2018 , respectively. At June 30, 2019 , the Company had unrecognized compensation expense of $4,981 related to granted but unvested stock awards, which is to be recognized as follows:
Remainder of 2019
 
$
1,304

2020
 
2,075

2021
 
1,040

2022
 
461

2023
 
101

 Total
 
$
4,981

 

19

SMART SAND, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

The following table summarizes restricted stock activity under the Plans from December 31, 2018 through June 30, 2019 :
 
Number of
Shares
 
Weighted
Average
Unvested, December 31, 2018
1,027

 
$
9.83

Granted
335

 
$
2.54

Vested
(256
)
 
$
7.30

Forfeited
(18
)
 
$
6.38

Unvested, June 30, 2019
1,088

 
$
9.31

Employee Stock Purchase Plan
Shares of the Company’s common stock may be purchased by eligible employees under the Company’s 2016 Employee Stock Purchase Plan in six -month intervals at a purchase price equal to at least 85% of the lesser of the fair market value of the Company’s common stock on either the first day or the last day of each six -month offering period. Employee purchases may not exceed 20% of their gross compensation during an offering period.
NOTE 14 — Income Taxes
The Company calculates its interim income tax provision by estimating the annual expected effective tax rate and applying that rate to its ordinary year-to-date earnings or loss. In addition, the effect of changes in enacted tax laws, rates or tax status is recognized in the interim period in which the change occurs.
For the three months ended June 30, 2019 and 2018 , the effective tax rate was approximately 21.8% and 19.4% , respectively, based on the annual effective tax rate net of discrete federal and state taxes. For the six months ended June 30, 2019 and 2018 , the effective tax rate was approximately 21.3% and 19.4% , respectively, based on the annual effective tax rate net of discrete federal and state taxes. For the three and six months ended June 30, 2019 and 2018 , the statutory tax rate was 21.0% . The computation of the effective tax rate includes modifications from the statutory rate such as income tax credits, among other items.
In assessing the realizability of deferred tax assets, the Company considered whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the period in which those temporary differences become deductible. At June 30, 2019 and December 31, 2018 , based on the Company’s future income projections and reversal of taxable temporary differences, management determined it was more likely than not that the Company will be able to realize the benefits of the deductible temporary differences. As of June 30, 2019 and December 31, 2018 , the Company determined no valuation allowance was necessary.
The Company has evaluated its tax positions taken as of June 30, 2019 and December 31, 2018 and believes all positions taken would be upheld under examination from income taxing authorities. Therefore, no liability for the effects of uncertain tax positions has been recorded in the accompanying consolidated balance sheets as of June 30, 2019 or December 31, 2018 . The Company is open to examination by taxing authorities beginning with the 2014 tax year.
NOTE 15 — Concentrations
As of June 30, 2019 , four customers accounted for 89% of the Company’s total accounts receivable. As of December 31, 2018 , four customers accounted for 89% of the Company’s total accounts receivable.
During the three months ended June 30, 2019 , 62% of the Company’s revenues were earned from three customers. During the three months ended June 30, 2018 , 64% of the Company’s revenues were earned from four customers. During the six months ended June 30, 2019 , 60% of the Company’s revenues were earned from three customers. During the six months ended June 30, 2018 , 65% of the Company’s revenues were earned from four customers.
As of June 30, 2019 , two vendors accounted for 37% of the Company’s accounts payable.  As of December 31, 2018 , one vendor accounted for 16% of the Company’s accounts payable.

20

SMART SAND, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

During the three months ended June 30, 2019 , two suppliers accounted for 53% of the Company’s cost of goods sold. During the three months ended June 30, 2018 , one supplier accounted for 31% of the Company’s cost of goods sold. During the six months ended June 30, 2019 , three suppliers accounted for 64% of the Company’s cost of goods sold. During the six months ended June 30, 2018 , one supplier accounted for 34% of the Company’s cost of goods sold.
Currently, the Company’s inventory and operations are primarily located in Wisconsin. There is a risk of loss if there are significant environmental, legal or economic changes to this geographic area. The Company primarily utilizes one third-party rail company to ship its products to customers from its plant. There is a risk of business loss if there are significant impacts to this third party’s operations.
NOTE 16 — Commitments and Contingencies
Future Minimum Commitments
The Company is obligated under certain contracts for minimum payments for the right to use land for extractive activities, which is not within the scope of leases under ASC 842. Future minimum annual commitments under such contracts at June 30, 2019 are as follows:
 
 
Remainder of 2019
$
208

2020
2,275

2021
2,275

2022
2,275

2023
2,275

Thereafter
31,850

Total
$
41,158

Litigation
In addition to the matters described below, we may be subject to various legal proceedings, claims and governmental inspections, audits or investigations arising out of the Company’s operations in the normal course of business, which cover matters such as general commercial, governmental and trade regulations, product liability, environmental, intellectual property, employment and other actions. Although the outcomes of these routine claims cannot be predicted with certainty, in the opinion of management, the ultimate resolution of these matters would not have a material adverse effect on the Company’s financial statements.
For those customers with which the Company has pending litigation, as described below, the Company recorded $17,573 and $24,252 of revenue for the three and six months ended June 30, 2019, respectively. As of June 30, 2019 , $34,564 of accounts and unbilled receivables are attributable to customers with which we have pending litigation.
U.S. Well Services, LLC
On January 14, 2019, Smart Sand, Inc. (plaintiff) filed suit against U.S. Well Services, LLC (defendant) in the Superior Court of the State of Delaware in and for New Castle County (C.A. No. N19C-01-144-PRW [CCLD]). In the suit, plaintiff alleges that defendant is in breach of contract for failure to pay amounts due and payable under a long-term take-or-pay Master Product Purchase Agreement and coterminous Railcar Usage Agreement and is seeking unspecified monetary damages and other appropriate relief. Plaintiff is also seeking a declaratory judgment that the relevant agreements are continuing in full force and effect despite defendant’s purported notice of termination to the contrary. Defendant has filed an Amended Answer, Affirmative Defenses and Counterclaim seeking unspecified monetary damages and declaratory relief. The Company intends to both vigorously prosecute its claims and defend against U.S. Well’s counterclaims. At this time, the Company is unable to express an opinion as to the likely outcome of the matter. Amounts recorded as accounts and unbilled receivables in the financial statements do not represent the full amounts sought in this lawsuit.
Schlumberger Technology Corporation
On January 3, 2019, Smart Sand, Inc. (plaintiff) filed suit against Schlumberger Technology Corporation (defendant) in the District Court of Harris County, Texas (Case No. 2019-00557). In the suit, plaintiff alleges that defendant is in breach of

21

SMART SAND, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

contract for failure to pay amounts due and payable under a long-term take-or-pay Master Product Purchase Agreement and is seeking unspecified monetary damages and other appropriate relief. Defendant has filed an Answer, Affirmative Defenses and Counterclaim seeking unspecified monetary damages and declaratory relief. The Company intends to both vigorously prosecute its claims and defend against defendant’s counterclaims. At this time, the Company is unable to express an opinion as to the likely outcome of the matter. Amounts recorded as accounts and unbilled receivables in the financial statements do not represent the full amounts sought in this lawsuit.


22



ITEM 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis summarizes the significant factors affecting the consolidated operating results, financial condition, liquidity and cash flows of the Company as of and for the periods presented below. The following discussion and analysis should be read in conjunction with our unaudited condensed consolidated financial statements and related information contained herein and our audited financial statements as of December 31, 2018. We use EBITDA, Adjusted EBITDA and contribution margin herein as non-GAAP measures of our financial performance. For further discussion of EBITDA, Adjusted EBITDA and contribution margin, see the section entitled “Non-GAAP Financial Measures.” We define various terms to simplify the presentation of information in this Report. All share amounts are presented in thousands.
Forward-Looking Statements
This discussion contains forward-looking statements that are based on the beliefs of our management, as well as assumptions made by, and information currently available to our management. Actual results could differ materially from those discussed in or implied by forward-looking statements as a result of various factors, including those discussed herein and in the section entitled “Risk Factors” in our Form 10-K for the year ended December 31, 2018. Our estimates and forward-looking statements are primarily based on our current expectations and estimates of future events and trends, which affect or may affect our business and operations. Although we believe that these estimates and forward-looking statements are based upon reasonable assumptions, they are subject to several risks and uncertainties and are made in light of information currently available to us. Important factors, in addition to the factors described in this quarterly report, may adversely affect our results as indicated in forward-looking statements. You should read this quarterly report and the documents that we have filed as exhibits hereto completely and with the understanding that our actual future results may be materially different from what we expect. The words “may,” “will,” “should,” “could,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “intend,” “potential,” “might,” “would,” “continue” or the negative of these terms or other comparable terminology and similar words are intended to identify estimates and forward-looking statements. Estimates and forward-looking statements speak only as of the date they were made, and, except to the extent required by law, we undertake no obligation to update, to revise or to review any estimate and/or forward-looking statement because of new information, future events or other factors. Estimates and forward-looking statements involve risks and uncertainties and are not guarantees of future performance. As a result of the risks and uncertainties described above, the estimates and forward-looking statements discussed in this quarterly report might not occur and our future results, level of activity, performance or achievements may differ materially from those expressed in these forward-looking statements due to, including, but not limited to, the factors mentioned above, and the differences may be material and adverse. Because of these uncertainties, you should not place undue reliance on these forward-looking statements.
Overview 
We are a fully integrated frac sand supply and services company, offering complete mine to wellsite logistics solutions to our customers. We produce low-cost, high quality Northern White frac sand, which is a premium proppant used to enhance hydrocarbon recovery rates in the hydraulic fracturing of oil and natural gas wells. We also offer proppant logistics solutions to our customers through our in-basin transloading terminal and our SmartSystems TM wellsite proppant storage solution capabilities. We provide our products and services primarily to oil and natural gas exploration and production companies and oilfield service companies through a combination of long-term take-or-pay contracts, spot sales in the open market and wellsite proppant storage solutions service and equipment contracts. We believe that the size and favorable geologic characteristics of our sand reserves, the strategic location and logistical advantages of our facilities, our proprietary SmartDepot TM portable wellsite proppant storage solution and the industry experience of our senior management team have positioned us as an attractive provider of frac sand and proppant logistics services from the mine to the wellsite. 
We own and operate a frac sand mine and related processing facility near Oakdale, Wisconsin, at which we have approximately 317 million tons of proven recoverable sand reserves as of December 31, 2018 . We began operations with 1.1 million tons of annual nameplate processing capacity in July 2012. After several expansions, our current annual nameplate processing capacity at our Oakdale facility is approximately 5.5 million tons of frac sand. Our integrated Oakdale facility, with onsite rail infrastructure and wet and dry sand processing facilities, has access to two Class I rail lines and enables us to process and cost-effectively deliver products to our customers.
Market Trends
From 2017 through the second quarter of 2018, improvements in oil and natural gas prices created a stable market environment. During the second half of 2018, the demand for Northern White sand decreased, which we believe was due primarily to reduced takeaway capacity and increased availability of in-basin sand in the Permian basin, a reduction in spending by oil and natural gas companies in the latter portion of the year, and decreased oil prices, particularly in the fourth quarter of 2018. Beginning late in the first quarter of 2019, demand began to improve as completions activity resumed.

23



We generally expect the price of frac sand to correlate with the level of drilling activity for oil and natural gas, although the increasing supply of sand, particularly in-basin sand, could keep the price depressed. The willingness of exploration and production companies to engage in new drilling is determined by a number of factors, the most important of which are the prevailing and projected prices of oil and natural gas, the cost to drill, complete and operate a well, the availability and cost of capital and environmental and government regulations, as well as their ability to acquire the sand at the wellsite. We generally expect the level of drilling to correlate with long-term trends in commodity prices. Similarly, oil and natural gas production levels nationally and regionally tend to correlate with drilling activity.
Our sand is sold through long-term take-or-pay contracts or through spot market pricing. Our long-term take-or-pay contracts reduce exposure to fluctuations in price and provide predictability of volumes and price over the contract term. Our take-or-pay contracts typically adjust quarterly based on Average Cushing Oklahoma WTI Spot Prices (“WTI Prices”). Average WTI Prices were down in the first quarter of 2019, and accordingly we adjusted many of our contract prices downward for the second quarter of 2019. By contrast, the spot market provides us with direct access to current market-based prices, offering an outlet to sell excess production at opportunistic times or during favorable market conditions, which also comes with accompanying exposure to price volatility and uncertainty.
GAAP Results of Operations
Three Months Ended June 30, 2019 Compared to Three Months Ended June 30, 2018
The following table summarizes our revenue and expenses for the periods indicated.
 
Three Months Ended June 30,
 
Change
 
2019
 
2018
 
Dollars
 
Percentage
 
(in thousands)
 
 
 
 
Revenues
$
67,941

 
$
54,448

 
$
13,493

 
25
 %
Cost of goods sold
43,068

 
34,678

 
8,390

 
24
 %
Gross profit
24,873

 
19,770

 
5,103

 
26
 %
Operating expenses:
 
 
 
 
 
 
 
Salaries, benefits and payroll taxes
2,798

 
2,790

 
8

 
 %
Depreciation and amortization
655

 
476

 
179

 
38
 %
Selling, general and administrative
2,790

 
3,595

 
(805
)
 
(22
)%
Change in the estimated fair value of contingent consideration
(575
)
 

 
(575
)
 
Not meaningful

Total operating expenses
5,668

 
6,861

 
(1,193
)
 
(17
)%
Operating income
19,205

 
12,909

 
6,296

 
49
 %
Other income (expenses):
 
 
 
 
 
 
 
Interest expense, net
(994
)
 
(500
)
 
(494
)
 
99
 %
Other income
37

 
25

 
12

 
48
 %
Total other expenses, net
(957
)
 
(475
)
 
(482
)
 
101
 %
Income before income tax expense
18,248

 
12,434

 
5,814

 
47
 %
Income tax expense
3,972

 
2,413

 
1,559

 
65
 %
Net income
$
14,276

 
$
10,021

 
$
4,255

 
42
 %
Revenues
Revenues were $67.9 million for the three months ended June 30, 2019 , during which time we sold approximately 741,000 tons of sand. Revenues for the three months ended June 30, 2018 were $54.4 million , during which time we sold approximately 839,000 tons of sand. The key factors contributing to the increase in revenues for the three months ended June 30, 2019 as compared to the three months ended June 30, 2018 were as follows:
We had $16.3 million of shortfall revenue for the three months ended June 30, 2019 compared to $0.7 million shortfall revenue for the three months ended June 30, 2018 . Our customer contracts dictate whether customers are invoiced quarterly or at the end of their respective contract year for shortfall payments. We recognize revenue to the extent of the unfulfilled minimum contracted quantity at the shortfall price per ton as stated in the contract.
Sand sales revenue decreased from $34.6 million for the three months ended June 30, 2018 to $26.9 million for the three months ended June 30, 2019 as a result of lower total volumes sold.
Logistics revenue, which includes freight for certain mine gate sand sales, railcar usage and logistics services, was approximately $20.3 million for the three months ended June 30, 2019 compared to $13.3 million for the three months ended June 30, 2018 . The increase in transportation revenue was due to increased in-basin sales volumes in the second quarter of 2019 and wellsite proppant storage solutions sold under contracts existing prior to our acquisition of Quickthree Solutions, Inc. (“Quickthree”).
Cost of Goods Sold
Cost of goods sold was $43.1 million and $34.7 million for the three months ended June 30, 2019 and 2018 , respectively. Cost of goods sold increased for the three months ended June 30, 2019 as compared to the same period in 2018 , primarily due to increased transportation costs as a result of increased in-basin sales volumes, increased depreciation and amortization due to our Oakdale expansion project becoming operational, and costs of goods sold for the wellsite proppant storage solutions sold under contracts existing prior to our acquisition of Quickthree, partially offset by a decrease in labor costs.
Gross Profit
Gross profit was $24.9 million and $19.8 million for the three months ended June 30, 2019 and 2018 , respectively. The increase in gross profit for the three months ended June 30, 2019 was primarily due to higher shortfall revenue and logistics revenue partially offset by increased transportation costs as a result of increased in-basin sales volumes and lower total sales volumes.
Operating Expenses
Operating expenses were $5.7 million and $6.9 million for the three months ended June 30, 2019 and 2018 , respectively. Operating expenses are comprised primarily of wages and benefits, professional services fees and other administrative expenses. Salaries, benefits and payroll taxes remained constant at $2.8 million for the three months ended June 30, 2019 and 2018 , respectively. Selling, general and administrative expenses decreased from $3.6 million for the three months ended June 30, 2018 to $2.8 million for the three months ended June 30, 2019 , primarily as a result of decreased development costs. We recorded a $0.6 million reduction to the fair value of contingent consideration related to our acquisition of Quickthree, which further reduced our operating expenses for the three months ended June 30, 2019 .
Interest Expense
We incurred $1.0 million and $0.5 million of net interest expense for the three months ended June 30, 2019 and 2018 , respectively. The increase in interest expense for the three months ended June 30, 2019 was primarily due to borrowings under the Credit Facility, which were primarily used to fund acquisition activity in 2018.  
Income Tax Expense
For the three months ended June 30, 2019 and 2018 , our effective tax rate was approximately 21.8% and 19.4% , respectively, based on the annual effective tax rate net of discrete federal and state taxes. The computation of the effective tax rate includes modifications for income tax credits, among other items.
Net Income
Net income was $14.3 million and $10.0 million for the three months ended June 30, 2019 and 2018 , respectively. The increase in net income for the three months ended June 30, 2019 as compared to the same period in the prior year was primarily due to increased shortfall revenue, and decreased operating expenses.

24



Six Months Ended June 30, 2019 Compared to Six Months Ended June 30, 2018
The following table summarizes our revenue and expenses for the periods indicated.
 
Six Months Ended June 30,
 
Change
 
2019
 
2018
 
Dollars
 
Percentage
 
(in thousands)
 
 
 
 
Revenues
$
119,716

 
$
97,076

 
$
22,640

 
23
 %
Cost of goods sold
83,673

 
70,091

 
13,582

 
19
 %
Gross profit
36,043

 
26,985

 
9,058

 
34
 %
Operating expenses:
 
 
 
 
 
 
 
Salaries, benefits and payroll taxes
5,508

 
5,362

 
146

 
3
 %
Depreciation and amortization
1,331

 
664

 
667

 
100
 %
Selling, general and administrative
5,590

 
6,696