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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
 _____________________________________________________
FORM 10-Q
 _____________________________________________________ 
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2021
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
SND-20210930_G1.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 ☐
Non-accelerated Filer  ý
Smaller reporting company ☒
Emerging Growth Company ☒
 
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.  ☒
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 November 2, 2021: 45,265,601



TABLE OF CONTENTS
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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.
“ABL Credit Facility”, “ABL Credit Agreement”,
“ABL Security Agreement”		 The five-year senior secured asset-based lending credit facility (the “ABL Credit Facility”) pursuant to: (i) an ABL Credit Agreement, dated December 13, 2019, between the Company and Jefferies Finance LLC (the “ABL Credit Agreement”); and (ii) a Guarantee and Collateral Agreement, dated December 13, 2019, between the Company and Jefferies Finance LLC, as agent (the “Security Agreement”).
“Oakdale Equipment Financing”, “MLA” The five-year Master Lease Agreement, dated December 13, 2019, between Nexseer Capital (“Nexseer”) and related lease schedules in connection therewith (collectively, the “MLA”). The MLA is structured as a sale-leaseback of substantially all of the equipment at the Company’s mining and processing facility located near Oakdale, Wisconsin. The Oakdale Equipment Financing is considered a lease under article 2A of the Uniform Commercial Code but is considered a financing arrangement (and not a lease) for accounting or financial reporting purposes.
“Loan Agreement”, “Acquisition Liquidity Support Facility”
In connection with the Company’s acquisition of Eagle Oil and Gas Proppants Holdings LLC from Eagle Materials Inc., which acquisition was completed on September 18, 2020, the Company, as borrower, entered into a Loan and Security Agreement, dated September 18, 2020 (the “Loan Agreement”), with Eagle Materials Inc., as lender, secured by certain property rights and assets of the acquired business, whereby the Company may draw loans in an aggregate amount up to $5.0 million during the twelve-month period ending September 19, 2021. (the “Acquisition Liquidity Support Facility”). This facility was terminated on September 20, 2021.
“Exchange Act” The Securities Exchange Act of 1934, as amended.
“Securities Act” The Securities Act of 1933, as amended.
“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
September 30, 2021 December 31, 2020
(unaudited)
  (in thousands, except share amounts)
Assets    
Current assets:    
Cash and cash equivalents $ 36,678  $ 11,725 
Accounts receivable 15,589  69,720 
Unbilled receivables 986  127 
Inventory 15,381  19,136 
Prepaid expenses and other current assets 14,032  11,378 
Total current assets 82,666  112,086 
Property, plant and equipment, net 263,119  274,676 
Operating lease right-of-use assets 29,478  32,099 
Intangible assets, net 7,659  8,253 
Other assets 446  563 
Total assets $ 383,368  $ 427,677 
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable $ 4,825  $ 3,268 
Accrued expenses and other liabilities 11,244  13,142 
Deferred revenue, current 9,234  6,875 
Long-term debt, net, current 7,281  6,901 
Operating lease liabilities, current 7,405  7,077 
Total current liabilities 39,989  37,263 
Deferred revenue, net 7,215  3,482 
Long-term debt, net 16,974  22,445 
Operating lease liabilities, long-term 24,733  27,020 
Deferred tax liabilities, long-term, net 25,438  32,981 
Asset retirement obligation 16,291  14,996 
Contingent consideration —  180 
Other non-current liabilities 508  503 
Total liabilities 131,148  138,870 
Commitments and contingencies (Note 15)
Stockholders’ equity
Common stock, $0.001 par value, 350,000,000 shares authorized; 43,567,743 issued and 41,850,938 outstanding at September 30, 2021; 43,193,394 issued and 41,575,129 outstanding at December 31, 2020
 42  42 
Treasury stock, at cost, 1,716,805 and 1,618,265 shares at September 30, 2021 and December 31, 2020, respectively
 (4,427) (4,134)
Additional paid-in capital 173,426  171,209 
Retained earnings 82,826  121,267 
Accumulated other comprehensive income 353  423 
Total stockholders’ equity 252,220  288,807 
Total liabilities and stockholders’ equity $ 383,368  $ 427,677 

 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 September 30, Nine Months Ended September 30,
  2021 2020 2021 2020
  (in thousands, except per share amounts)
Revenues:
Sand sales revenue $ 31,343  $ 12,445  $ 83,291  $ 50,809 
Shortfall revenue 2,680  6,842  4,421  22,148 
Logistics revenue 456  4,122  3,856  24,046 
Total revenue 34,479  23,409  91,568  97,003 
Cost of goods sold 36,526  18,227  100,952  71,221 
Gross profit (2,047) 5,182  (9,384) 25,782 
Operating expenses:
Salaries, benefits and payroll taxes 2,490  2,058  7,150  7,115 
Depreciation and amortization 352  440  1,490  1,354 
Selling, general and administrative 3,867  3,933  10,876  10,393 
Bad debt expense —  —  19,592  — 
Change in the estimated fair value of contingent consideration —  —  —  (1,020)
Total operating expenses 6,709  6,431  39,108  17,842 
Operating (loss) income (8,756) (1,249) (48,492) 7,940 
Other income (expenses):
Gain on bargain purchase —  39,889  —  39,889 
Interest expense, net (467) (497) (1,527) (1,576)
Other income 1,792  80  5,457  162 
Total other (expenses) income, net 1,325  39,472  3,930  38,475 
(Loss) income before income tax (benefit) expense (7,431) 38,223  (44,562) 46,415 
Income tax (benefit) expense (169) 1,941  (6,121) 5,576 
Net (loss) income $ (7,262) $ 36,282  $ (38,441) $ 40,839 
Net (loss) income per common share:
Basic $ (0.17) $ 0.91  $ (0.92) $ 1.02 
Diluted $ (0.17) $ 0.91  $ (0.92) $ 1.02 
Weighted-average number of common shares:
Basic 41,850  39,973  41,743  39,903 
Diluted 41,850  39,973  41,743  39,903 
 
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 September 30, Nine Months Ended September 30,
2021 2020 2021 2020
(in thousands)
Net (loss) income $ (7,262) $ 36,282  $ (38,441) $ 40,839 
Other comprehensive income:
Foreign currency translation adjustment (239) 96  (70) 317 
Comprehensive (loss) income $ (7,501) $ 36,378  $ (38,511) $ 41,156 

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) 
Nine months ended September 30, 2021
  Common Stock Treasury Stock Additional Paid-in Capital   Accumulated Other Comprehensive Income Total Stockholders’ Equity
  Outstanding
Shares		 Par Value Shares Amount Retained
Earnings
  (in thousands, except share amounts)
Balance at December 31, 2020 41,575,129  $ 42  1,618,265  $ (4,134) $ 171,209  $ 121,267  $ 423  $ 288,807 
Foreign currency translation adjustment —  —  —  —  —  —  125  125 
Acquisition stock issuance 14,430  —  —  —  20  —  —  20 
Vesting of restricted stock 158,364  —  —  —  —  —  —  — 
Stock-based compensation —  —  —  —  678  —  —  678 
Employee stock purchase plan compensation —  —  —  —  7  —  —  7 
Employee stock purchase plan issuance 19,483  —  —  —  17  —  —  17 
Restricted stock buy back (48,077) —  48,077  (140) —  —  —  (140)
Net loss —  —  —  —  —  (3,912) —  (3,912)
Balance at March 31, 2021 41,719,329  $ 42  1,666,342  $ (4,274) $ 171,931  $ 117,355  $ 548  $ 285,602 
Foreign currency translation adjustment —  —  —  —  —  —  44  44 
Vesting of restricted stock 162,253  —  —  —  —  —  —  — 
Stock-based compensation —  —  —  —  574  —  —  574 
Employee stock purchase plan compensation —  —  —  —  7  —  —  7 
Restricted stock buy back (48,793) —  48,793  (148) —  —  —  (148)
Net loss —  —  —  —  —  (27,267) —  (27,267)
Balance at June 30, 2021 41,832,789  $ 42  1,715,135  $ (4,422) $ 172,512  $ 90,088  $ 592  $ 258,812 
Foreign currency translation adjustment —  —  —  —  —  —  (239) (239)
Vesting of restricted stock 4,875  —  —  —  —  —  —  — 
Stock-based compensation —  —  —  —  879  —  —  879 
Employee stock purchase plan compensation —  —  —  —  10  —  —  10 
Employee stock purchase plan issuance 14,944  —  —  —  25  —  —  25 
Restricted stock buy back (1,670) —  1,670  (5) —  —  —  (5)
Net loss —  —  —  —  —  (7,262) —  (7,262)
Balance at September 30, 2021 41,850,938  $ 42  1,716,805  $ (4,427) $ 173,426  $ 82,826  $ 353  $ 252,220 

6

SMART SAND, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (continued)
(UNAUDITED) 
Nine months ended September 30, 2020
  Common Stock Treasury Stock Additional Paid-in Capital   Accumulated Other Comprehensive (Loss) Income Total Stockholders’ Equity
  Outstanding
Shares		 Par Value Shares Amount Retained
Earnings
  (in thousands, except share amounts)
Balance at December 31, 2019 40,234,451  $ 40  740,957  $ (2,979) $ 165,223  $ 83,313  $ (41) $ 245,556 
Foreign currency translation adjustment —  —  —  —  —  —  (163) (163)
Vesting of restricted stock 139,947  —  —  —  —  —  —  — 
Stock-based compensation —  —  —  —  1,025  —  —  1,025 
Employee stock purchase plan compensation —  —  —  —  14  —  —  14 
Employee stock purchase plan issuance 21,486  —  —  —  46  —  —  46 
Restricted stock buy back (10,468) —  10,468  (14) —  —  —  (14)
Shares repurchased (778,300) —  778,300  (1,000) —  —  —  (1,000)
Net loss —  —  —  —  —  (84) —  (84)
Balance at March 31, 2020 39,607,116  $ 40  1,529,725  $ (3,993) $ 166,308  $ 83,229  $ (204) 245,380 
Foreign currency translation adjustment —  —  —  —  —  —  384  384 
Vesting of restricted stock 177,628  —  —  —  —  —  —  — 
Stock-based compensation —  —  —  —  943  —  —  943 
Employee stock purchase plan compensation —  —  —  —  12  —  —  12 
Employee stock purchase plan issuance —  —  —  —  —  —  —  — 
Restricted stock buy back (30,673) —  30,673  (31) —  —  —  (31)
Net income —  —  —  —  —  4,641  —  4,641 
Balance at June 30, 2020 39,754,071  $ 40  1,560,398  $ (4,024) $ 167,263  $ 87,870  $ 180  $ 251,329 
Foreign currency translation adjustment —  —  —  —  —  —  96  96 
Acquisition stock issuance 1,503,759  2  —  —  2,059  —  —  2,061 
Vesting of restricted stock 6,375  —  —  —  —  —  —  — 
Stock-based compensation —  —  —  —  941  —  —  941 
Employee stock purchase plan compensation —  —  —  —  3  —  —  3 
Employee stock purchase plan issuance 18,148  —  —  —  16  —  —  16 
Restricted stock buy back (770) —  770  (1) —  —  —  (1)
Net income —  —  —  —  —  36,282  —  36,282 
Balance at September 30, 2020 41,281,583  $ 42  1,561,168  $ (4,025) $ 170,282  $ 124,152  $ 276  $ 290,727 

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)
Nine Months Ended September 30,
  2021 2020
  (in thousands)
Operating activities:    
Net (loss) income $ (38,441) $ 40,839 
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation, depletion and accretion of asset retirement obligation 18,937  16,092 
Amortization of intangible assets 596  596 
Loss on disposal of assets 223  299 
Provision for bad debt 19,592  — 
Amortization of deferred financing cost 79  79 
Accretion of debt discount 140  138 
Deferred income taxes (7,543) 238 
Stock-based compensation, net 2,131  2,909 
Employee stock purchase plan compensation 24  29 
Change in contingent consideration fair value —  (1,020)
Gain on bargain purchase, net of cash acquired —  (39,580)
Changes in assets and liabilities:
Accounts receivable 34,791  (7,029)
Unbilled receivables (1,113) (4,491)
Inventory 3,755  306 
Prepaid expenses and other assets (1,886) 3,751 
Deferred revenue 6,092  3,912 
Accounts payable 1,564  (205)
Accrued and other expenses (1,397) (607)
Income taxes payable —  5,968 
Net cash provided by operating activities 37,544  22,224 
Investing activities:
Purchases of property, plant and equipment (6,976) (7,444)
Proceeds from disposal of assets 78  51 
Net cash used in investing activities (6,898) (7,393)
Financing activities:
Proceeds from the issuance of notes payable —  952 
Repayments of notes payable (5,168) (3,527)
Payments under equipment financing obligations (92) (87)
Payment of deferred financing and debt issuance costs —  (20)
Proceeds from revolving credit facility —  6,000 
Repayment of revolving credit facility —  (8,500)
Payment of contingent consideration (180) (310)
Proceeds from equity issuance 42  62 
Purchase of treasury stock (294) (1,046)
Net cash used in financing activities (5,692) (6,476)
Net increase in cash and cash equivalents 24,954  8,355 
Cash and cash equivalents at beginning of year 11,725  2,639 
Cash and cash equivalents at end of period $ 36,679  $ 10,994 
Supplemental disclosure of cash flow information
Capitalized expenditures in accounts payable and accrued expenses $ 267  $ 157 
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 & Market Update
Organization and Nature of Business
The Company was incorporated in July 2011 and is headquartered in The Woodlands, Texas. The Company is a fully integrated frac sand supply and services company, offering complete mine to wellsite proppant supply, logistics and storage solutions. The Company is engaged in the excavation, processing and sale of sand, or proppant, for use in hydraulic fracturing operations for the oil and natural gas industry and offers proppant logistics and wellsite storage solutions through its SmartSystemsTM products and services.
The Company commenced mining operations at its Oakdale, Wisconsin facility in July 2012. Through multiple expansions at Oakdale and the acquisition in September 2020 of the Utica, Illinois mine and processing facilities, the Company has current annual processing capacity of approximately 7.1 million tons.
The Company provides complete logistics solutions through its frac sand facilities with access to three Class I rail lines and its in-basin unit train capable transloading terminal in Van Hook, North Dakota to service the Bakken Formation in the Williston Basin. In September 2021, the Company acquired the rights to construct and operate another transloading terminal in Waynesburg, Pennsylvania to service the Appalachian Basin, including the Marcellus and Utica Formations. The Company expects this terminal to become operational in the fourth quarter of 2021. These logistics solutions enable the Company to cost-effectively deliver products to its customers anywhere in the United States.
The Company provides proppant storage and management solutions through its SmartSystems products and services under which it offers 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 SmartDepotTM silo system includes passive and active dust suppression technology, along with the capability of a gravity-fed operation. The Company has developed a new transload technology, the self-contained SmartPathTM transloader, to complement its existing solutions. The SmartPath is a mobile sand transloading system designed to work with bottom dump trailers and features a drive over conveyor, surge bin, and dust collection system. Rapid deployment trailers are designed for quick setup, takedown and transportation of the entire SmartSystem, and they detach from the wellsite equipment, which allows for removal from the wellsite during operation.

NOTE 2 — Summary of Significant Accounting Policies
The information presented below supplements the complete description of our significant accounting policies disclosed in our 2020 Form 10-K, filed with the Securities and Exchange Commission (“SEC”) on March 3, 2021.
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 SEC 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, 2020 was derived from the audited consolidated financial statements as of and for the year ended December 31, 2020. These interim statements should be read in conjunction with the Company’s consolidated financial statements for the year ended December 31, 2020.
Use of Estimates
The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Significant estimates used in the preparation of these financial statements include, but are not limited to: the sand reserves and their impact on calculating the depletion expense under the units-of-production method; the depreciation and amortization associated with property, plant and equipment and definite-lived intangible assets, impairment considerations of assets (including impairment of
9

SMART SAND, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
identified intangible assets and other long-lived assets); estimated cost of future asset retirement obligations; fair value of acquired assets and assume liabilities; stock-based compensation; recoverability of deferred tax assets; inventory reserve; collectability of receivables; and certain liabilities.
Actual results could differ materially from management’s best estimates as additional information or actual results become available in the future. The decreased demand related to the coronavirus (“COVID-19”) pandemic caused dramatic swings in oil prices and significant volatility in the oilfield service sector since March 2020. The Company is currently unable to estimate the impact of these events on its future financial position and results of operations. Therefore, the Company can give no assurances that these events will not have a material adverse effect on its financial position or results of operations.
Employee Retention Credit
The Company qualified for federal government assistance through employee retention credit provisions of the Consolidated Appropriations Act of 2021. During the three and nine months ended September 30, 2021, the Company recorded $1,674 and $5,026, respectively, of employee retention credits in other income on its consolidated income statements and included in prepaid expenses and other current assets on the consolidated balance sheet as of September 30, 2021. The calculation of the credit is based on employees continued employment and represents a portion of the wages paid to them. For income tax purposes, the credit will result in decreased expense related to the wages it offsets in the period received.
Recent Accounting Pronouncements
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, 2022, 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 the consolidated financial statements, at the time of adoption, it believes the primary effect, if any will be an allowance recorded against its accounts and unbilled receivables on its balance sheet and related expense on its income statement. 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.

NOTE 3 — Business Combination
Eagle Proppants Holdings
On September 18, 2020, the Company entered into an Equity Purchase and Sale Agreement (the “Purchase Agreement”) with Eagle Materials Inc., a Delaware corporation (“Eagle”), pursuant to which the Company acquired all of the issued and outstanding interests in Eagle Oil and Gas Proppants Holdings LLC, a Delaware limited liability company and wholly-owned subsidiary of Eagle (“Eagle Proppants Holdings”), from Eagle for aggregate non-cash consideration of approximately $2,080. In satisfaction of the purchase price, the Company issued to Eagle 1,504 shares of its common stock; the Company issued an additional 14 shares of its common stock in January 2021 as settlement of the net working capital adjustment. The number of
10

SMART SAND, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
shares issued was determined by the weighted average trading price of the Company’s common stock over the twenty days preceding the date of the Purchase Agreement.
The primary assets of Eagle Proppants Holdings and its subsidiaries include a frac sand mine and related processing facility in Utica, Illinois and a transload facility in nearby Peru, Illinois. The Utica facility has approximately 1.6 million tons of annual processing capacity and has access to the BNSF rail line through the Peru, Illinois transload facility.
The table below presents the calculation of the total purchase consideration:
Base price consideration $ 2,000 
20-day volume weighted average price of Smart Sand stock $ 1.33 
Shares issued 1,504 
Closing share price on September 18, 2020 $ 1.37 
Total equity issued $ 2,060 
Net working capital adjustment $ 20 
Total purchase consideration $ 2,080 

The Company’s final allocation of the purchase price in connection with the acquisition was calculated as follows:
Fair Value
Assets Acquired
Cash $ 309 
Accounts receivable 75 
Inventory 2,459 
Prepaid expenses and other current assets 124 
Property, plant and equipment 60,310 
Right-of-use assets 9,603 
Total assets acquired 72,880 
Liabilities Assumed
Accounts payable 16 
Accrued expenses and other liabilities 2,008 
Asset retirement obligations 8,424 
Operating lease liabilities 9,603 
Deferred income taxes 11,149 
Total liabilities assumed 31,200 
Estimated fair value of net assets acquired $ 41,680 

The estimated aggregate fair value of the net assets acquired was $41,680, which exceeded the total consideration and results in a bargain purchase gain of $39,600 on the acquisition date, which is included in net income for the year ended December 31, 2020. The Company believes that the seller wanted to exit the business relatively quickly and that there were a limited number of potential buyers due to the downturn in the market, which resulted in the bargain purchase gain.
The Company determined the fair values of the acquired assets and assumed liabilities based on the highest and best use of such assets as required by GAAP. Cash, accounts receivable, prepaid expenses and other current assets, accounts payable, accrued expenses and other liabilities were based on underlying assets and liabilities whose carrying value approximates fair value. The Company acquired $2,050 of contractual receivables; however, it does not expect to collect on $1,975 of such contractual receivables as these customers are in bankruptcy proceedings. The fair value of inventory was determined using market prices the Company expected to receive for the inventory when it is sold. Operating leases were considered to be at
11

SMART SAND, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
market rates and the fair values of the associated operating lease liabilities and right-of-use assets were determined using the Company’s lease accounting policies. The fair value of the asset retirement obligations was calculated consistently with the Company’s other asset retirement obligations and includes assumptions about inflation and discount rates over time to represent the estimated future cost of dismantling, restoring and reclaiming the plant and mines in accordance with legal obligations. Deferred income taxes represent the temporary differences between future expenses for GAAP purposes and income tax purposes at the Company’s applicable enacted tax rate. The Company determined the fair values of the property, plant and equipment with the assistance of external valuation specialists. The fair value was based on the highest and best use, as required by GAAP, which was determined to be the orderly liquidation value rather than the value imputed by other valuation methods. Total acquisition costs incurred in the year ended December 31, 2020 were $891. The Company’s allocation of the purchase price was complete as of December 31, 2020.

NOTE 4 — Inventory
Inventory consisted of the following:
  September 30, 2021 December 31, 2020
Raw material $ 176  $ 428 
Work in progress 5,789  10,465 
Finished goods 5,475  4,400 
Spare parts 3,941  3,843 
Total inventory $ 15,381  $ 19,136 


NOTE 5 — Property, Plant and Equipment, net
Net property, plant and equipment consisted of:
September 30, 2021 December 31, 2020
Machinery, equipment and tooling $ 30,456  $ 29,002 
SmartSystems
 27,159  22,352 
Vehicles 3,014  2,893 
Furniture and fixtures 1,326  1,302 
Plant and building 199,958  199,867 
Real estate properties 6,496  6,458 
Railroad and sidings 27,703  27,703 
Land and land improvements 33,155  33,040 
Asset retirement obligation 20,730  19,993 
Mineral properties 7,442  7,442 
Deferred mining costs 2,455  2,123 
Construction in progress 6,894  7,489 
366,788  359,664 
Less: accumulated depreciation and depletion 103,669  84,988 
Total property, plant and equipment, net $ 263,119  $ 274,676 

Depreciation expense was $6,111 and $5,328 for the three months ended September 30, 2021 and 2020, respectively, and $18,325 and $15,856 for the nine months ended September 30, 2021 and 2020, respectively.
12

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

NOTE 6 — Accrued and Other Expenses
Accrued and other expenses were comprised of the following:
  September 30, 2021 December 31, 2020
Employee related expenses $ 1,168  $ 1,048 
Accrued equipment
 —  55 
Accrued professional fees 980  1,129 
Accrued royalties 2,380  2,624 
Accrued freight and delivery charges 1,770  2,901 
Accrued real estate tax 2,046  1,637 
Accrued utilities 862  748 
Sales tax liability 723  1,386 
Other accrued liabilities 1,315  1,614 
Total accrued liabilities $ 11,244  $ 13,142 

NOTE 7 — Debt
The current portion of long-term debt consists of the following:
  September 30, 2021 December 31, 2020
Oakdale Equipment Financing $ 3,760  $ 3,600 
Finance leases 120  123 
Notes Payable 3,401  3,178 
Long-term debt, net, current $ 7,281  $ 6,901 

Long-term debt, net of current portion consists of the following:
  September 30, 2021 December 31, 2020
ABL Credit Facility $ —  $ — 
Oakdale Equipment Financing, net 12,536  15,236 
Finance Leases 263  351 
Notes Payable 4,175  6,858 
Long-term debt, net $ 16,974  $ 22,445 
13

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

The follow summarizes the maturity of our debt:
ABL Credit Facility Oakdale Equipment Financing Notes Payable Finance Leases Total
Remainder of 2021 $ —  $ 1,160  $ 1,056  $ 38  $ 2,254 
2022 —  4,638  3,387  137  8,162 
2023 —  4,638  2,371  245  7,254 
2024 —  6,888  807  —  7,695 
2025 —  1,724  187  —  1,911 
2026 and thereafter —  —  355  —  355 
Total minimum payments —  19,048  8,163  420  27,631 
Amount representing interest —  (2,158) (587) (37) (2,782)
Amount representing unamortized lender fees —  (594) —  (594)
Present value of payments 383 
Less: current portion —  (3,760) (3,401) (120) (7,281)
Total long-term debt, net $ —  $ 12,536  $ 4,175  $ 263  $ 16,974 

ABL Credit Facility
On December 13, 2019, the Company entered into a $20,000 five-year senior secured asset-based credit facility with Jefferies Finance LLC. The available borrowing amount under the ABL Credit Facility as of September 30, 2021 was $17,764 and is based on the Company’s eligible accounts receivable and inventory, as described in the ABL Credit Agreement. As of September 30, 2021, there were no amounts outstanding under the ABL Credit Facility, $1,232 letters of credit and $16,532 was available to be drawn. As of September 30, 2021 and December 31, 2020, the Company was in compliance with all financial covenants.
Oakdale Equipment Financing
On December 13, 2019, the Company received net proceeds of $23,000 in an equipment financing arrangement with Nexseer. Substantially all of the Company’s mining and processing equipment at its Oakdale facility are pledged as collateral under the Oakdale Equipment Financing. The Oakdale Equipment Financing bears interest at a fixed rate of 5.79%.
Notes Payable
The Company has entered into various financing arrangements, primarily to finance its manufactured wellsite proppant storage solutions equipment. Upon completion of the equipment manufacturing, title to the subject equipment passes to the financial institutions as collateral. In June 2020, the Company executed a note payable to defer certain near-term minimum royalty payments. All notes payable bear interest at rates between 4.00% and 7.49%.
Acquisition Liquidity Support Facility
In connection with the Company’s acquisition of Eagle Proppants Holdings, the Company, as borrower, also entered into a Loan Agreement with Eagle, as lender, secured by certain property rights and assets of the acquired business, whereby the Company may draw loans in an aggregate amount up to $5,000 during the twelve month period ending September 18, 2021. This facility was terminated on September 20, 2021 and there were no borrowings under this facility.
14

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

NOTE 8 — Leases
Lessee
The operating and financing components of the Company’s right-of-use assets and lease liabilities on the consolidated balance sheet were as follows:
Balance Sheet Location September 30, 2021 December 31, 2020
Right-of-use assets
   Operating Operating right-of-use assets $ 29,478  $ 32,099 
   Financing Property, plant and equipment, net 262  373 
Total right-of use assets $ 29,740  $ 32,472 
Lease liabilities
   Operating Operating lease liabilities, current and long-term portions $ 32,138  $ 34,097 
   Financing Long-term debt, current and long-term portions 383  474 
Total lease liabilities $ 32,521  $ 34,571 

Operating lease costs are recorded as 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 nine months ended September 30, 2021 and 2020 was as follows:
Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020
Finance lease cost
   Amortization of right-of-use assets $ 35  $ 35  $ 105  $ 104 
   Interest on lease liabilities 7  9  22  28 
Operating lease cost 2,610  2,729  8,375  9,824 
Short-term lease cost 86  4  120  238 
Total lease cost $ 2,738  $ 2,777  $ 8,622  $ 10,194 
15

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 three and nine months ended September 30, 2021 and 2020 is as follows:
Nine months ended September 30,
2021 2020
Cash paid for amounts included in the measurement of lease liabilities
   Operating cash flows used for finance leases $ 22  $ 28 
   Operating cash flows used for operating leases $ 7,680  $ 9,158 
   Financing cash flows used for finance leases $ 92  $ 85 
Right-of-use assets obtained in exchange for new operating lease liabilities $ 4,401  $ 13,936 
Weighted average remaining lease term - finance leases 1.9 years 2.9 years
Weighted average discount rate - finance leases 6.60  % 6.60  %
Weighted average remaining lease term - operating leases 3.8 years 3.7 years
Weighted average discount rate - operating leases 5.81  % 5.71  %

Maturities of the Company’s lease liabilities as of September 30, 2021 are as follows:
Operating Leases Finance Leases Total
Remainder of 2021 $ 1,632  $ 38  $ 1,670 
2022 9,857  137  9,994 
2023 9,098  245  9,343 
2024 7,519  —  7,519 
2025 3,773  —  3,773 
Thereafter 4,450  —  4,450 
Total cash lease payments 36,329  420  36,749 
Less: amounts representing interest (4,191) (37) (4,228)
Total lease liabilities $ 32,138  $ 383  $ 32,521 

NOTE 9 — Asset Retirement Obligation
The Company had a post-closure reclamation and site restoration obligation of $16,291 as of September 30, 2021. The following is a reconciliation of the total reclamation liability for asset retirement obligations.
Balance at December 31, 2020 $ 14,996 
Additions 737 
Accretion expense 558 
Balance at September 30, 2021 $ 16,291 
16

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

NOTE 10 — 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 September 30, Nine Months Ended September 30,
2021 2020 2021 2020
Revenue Percentage of Total Revenue Revenue Percentage of Total Revenue Revenue Percentage of Total Revenue Revenue Percentage of Total Revenue
Sand sales revenue $ 31,343  91  % $ 12,445  53  % $ 83,291  91  % $ 50,809  52  %
Shortfall revenue 2,680  8  % 6,842  29  % 4,421  5  % 22,148  23  %
Logistics revenue 456  1  % 4,122  18  % 3,856  4  % 24,046  25  %
Total revenue $ 34,479  100  % $ 23,409  100  % $ 91,568  100  % $ 97,003  100  %

The Company recorded $10,357 of deferred revenue on the balance sheet on December 31, 2020, of which $6,875 has been recognized in the nine months ended September 30, 2021. Of the remaining amount, the Company expects to recognize no more through December 31, 2021 and the remainder through 2023.

NOTE 11 — Earnings Per Share
Basic net (loss) income per share of common stock is computed by dividing net loss 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 (loss) income per share of common stock is computed by dividing the net (loss) 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. Because the impact of these items is anti-dilutive during periods of net loss, there was no difference between basic and diluted net loss per share of common stock for the three and nine months ended September 30, 2021. Because their effect would be anti-dilutive, 2,237 shares of common stock underlying equity-based awards were excluded from the calculation of diluted earnings per share for both three and nine months ended September 30, 2020. There is no reconciliation between weighted average common shares outstanding and diluted weighted average shares of common stock outstanding for any period presented.

NOTE 12 — Stock-Based Compensation
Equity Incentive 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 Awards (as defined in the 2016 Plan) of up to a maximum of 3,911 shares of the Company’s common stock to employees, non-employee members of the Company’s board of directors and consultants of the Company. On April 3, 2020, the Company’s board of directors adopted an amendment to the 2016 Plan to increase the available shares of common stock authorized for issuance by an additional 2,088 shares. On July 27, 2021, the Company’s board of directors authorized 231 shares currently held in treasury stock for issuance under the 2016 Plan. During the nine months ended September 30, 2021 and 2020, 1,982 and 0 shares of restricted stock were issued under the 2016 Plan, respectively. The grant date fair value per share of all the outstanding restricted stock was $2.44 - $7.79. 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. The Company recognized, in operating expenses and cost of goods sold on the condensed consolidated income statements, $879 and $941 of compensation expense for the restricted stock during the three months ended September 30, 2021 and 2020, respectively. The Company recognized, in operating
17

SMART SAND, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
expenses and cost of goods sold on the condensed consolidated income statements, $2,131 and $2,910 of compensation expense for the restricted stock during the nine months ended September 30, 2021 and 2020, respectively. There is no impact to the cash flows of the Company related to stock-based compensation expense. At September 30, 2021, the Company had unrecognized compensation expense of $7,201 related to granted but unvested stock awards, which is to be recognized as follows:
Remainder of 2021 $ 1,022 
2022 2,632 
2023 1,917 
2024 1,158 
2025 472 
 Total $ 7,201 
 
The following table summarizes restricted stock activity under the Plans from December 31, 2020 through September 30, 2021:
  Number of
Shares		 Weighted
Average
Unvested, December 31, 2020 1,886  $ 5.14 
Granted 1,982  $ 2.88 
Vested (325) $ 8.31 
Forfeited (138) $ 6.26 
Unvested, September 30, 2021 3,405  $ 3.04 

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 13 — 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 September 30, 2021 and 2020, the effective tax rate was approximately 2.3% and 5.1%, respectively, based on the annual effective tax rate net of discrete federal and state taxes. For the nine months ended September 30, 2021 and 2020, the effective tax rate was approximately 13.7% and 12.0%, respectively, based on the annual effective tax rate net of discrete federal and state taxes. For the three and nine months ended September 30, 2021 and 2020, 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, tax depletion deduction, carrybacks, and state apportionment changes, among other items.
The Company has recorded a liability of $2,172 for uncertain tax positions included in deferred tax liabilities, long-term, net on its consolidated balance sheet as of September 30, 2021, related to its depletion deduction methodology, and a corresponding increase to the income tax expense on its condensed consolidated income statements. There was no liability for uncertain tax positions as of December 31, 2020.
As of September 30, 2021, the Company determine it is more likely than not that it will not be able to fully realize the benefits of certain existing deductible temporary differences and has recorded a valuation allowance against the deferred tax
18

SMART SAND, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
liabilities, long-term, net on its consolidated balance sheet in the amount of $1,305, and a corresponding increase to the income tax expense on its condensed consolidated income statements.
The Company’s federal income tax returns subsequent to 2017 remain open to audit by taxing authorities. The Company has not been informed that its tax returns are the subject of any audit or investigation by taxing authorities.


NOTE 14 — Concentrations
As of September 30, 2021, two customers accounted for 55% of the Company’s total accounts receivable. As of December 31, 2020, 78% of the Company’s total accounts receivable balance was with one customer and was subject to ongoing litigation. The litigation was settled during the second quarter of 2021 as described in Note 15.
During the three months ended September 30, 2021, 50% of the Company’s revenues were earned from three customers. During the three months ended September 30, 2020, 85% of the Company’s revenues were earned from three customers. During the nine months ended September 30, 2021, 68% of the Company’s revenues were earned from four customers. During the nine months ended September 30, 2020, 69% of the Company’s revenues were earned from three customers.
As of September 30, 2021, one vendor accounted for 23% of the Company’s accounts payable.  As of December 31, 2020, three vendors accounted for 42% of the Company’s accounts payable.
During the three months ended September 30, 2021, one supplier accounted for 23% of the Company’s cost of goods sold. During the three months ended September 30, 2020, two suppliers accounted for 70% of the Company’s cost of goods sold. During the nine months ended September 30, 2021, one supplier accounted for 22% of the Company’s cost of goods sold. During the nine months ended September 30, 2020, two suppliers accounted for 64% of the Company’s cost of goods sold.
The Company’s primary product is Northern White frac sand and its mining operations are limited to Wisconsin and Illinois. There is a risk of loss if there are significant environmental, legal or economic changes to this geographic areas of our mines, the oil and natural gas producing basins they serve, or the transportation routes between them.

NOTE 15 — 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 September 30, 2021 are as follows:
Remainder of 2021 $ 1,554 
2022 2,467 
2023 2,573 
2024 2,469 
2025 2,462 
Thereafter 26,886 
Total $ 38,411 

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 our operations in the normal course of business, which cover matters such as general commercial, governmental and trade regulations, product liability, environmental, intellectual property, employment
19

SMART SAND, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
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 will not have a material adverse effect on our financial statements.
U.S. Well Services, LLC
On January 14, 2019, the Company, as 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]) (the “Court”). In the suit, the Company alleged that defendant was 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. The trial took place in December 2020. On June 17, 2021, the Court issued an Order of Final Judgment (the “Order”) awarding $50,896 in damages to the Company. On June 28, 2021, the Company entered into a Settlement Agreement and Release (“Settlement Agreement”) with defendant, pursuant to which defendant paid to the Company a $35,000 cash payment, and defendant and the Company each agreed to withdraw appeals of certain rulings that they each filed after the Order was issued. The Company and defendant also entered into a two year Right of First Refusal Agreement covering all purchases of Northern White frac sand by defendant and its affiliates in the continental United States from January 1, 2022 through December 31, 2023. The Company recorded $19,592 as non-cash bad debt expense, which is the difference between the $54,592 accounts receivable balance that was under litigation and the cash received under the Settlement Agreement.
Bonds
The Company has performance bonds with various public and private entities regarding reclamation, permitting and maintenance of public roadways. Total aggregate principal amount of performance bonds outstanding as of September 30, 2021 was $9,478.
20

SMART SAND, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)
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, 2020 contained in our Annual Report on Form 10-K. We use contribution margin, EBITDA, Adjusted EBITDA and free cash flow herein as non-GAAP measures of our financial performance. For further discussion of contribution margin, EBITDA, Adjusted EBITDA and free cash flow, see the section entitled “Non-GAAP Financial Measures.” We define various terms to simplify the presentation of information in this Quarterly Report on Form 10-Q (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, 2020. 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 Report, may adversely affect our results as indicated in forward-looking statements. You should read this 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 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 

The Company
We are a fully integrated frac sand supply and services company, offering complete mine to wellsite proppant supply and 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 SmartSystemsTM wellsite proppant storage capabilities. We market our products and services, as one operating segment, primarily to oil and natural gas exploration and production companies and oilfield service companies. We sell our sand under a combination of contract and spot sales in the open market, and provide wellsite proppant storage solutions services and equipment under flexible contract terms custom tailored to meet the needs of our customers. We believe that, among other things, the size and favorable geologic characteristics of our sand reserves, the strategic location and logistical advantages of our facilities, our proprietary SmartDepotTM portable wellsite proppant storage silos, SmartPathTM transloader, and the industry experience of our senior management team make us as a highly attractive provider of frac sand and proppant logistics services from the mine to the wellsite.
We incorporated in Delaware in July 2011 and began operations with 1.1 million tons of annual processing capacity in July 2012. After several expansions and an acquisition, our current operational annual processing capacity is approximately 7.1 million tons of frac sand. Our mine and related processing facility near Oakdale, Wisconsin, at which we have approximately
21

SMART SAND, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)
315 million tons of proven recoverable sand reserves as of December 31, 2020, has approximately 5.5 million tons of annual processing capacity. This integrated facility, with on-site rail infrastructure and wet and dry sand processing facilities, has onsite access to the Canadian Pacific Class I rail line and access to the Union Pacific Class I rail line through the Byron, Wisconsin transload facility located nearby. Our mine and processing facility in Utica, Illinois, has approximately 130 million tons of proven and probable sand reserves as of December 31, 2020, and has approximately 1.6 million tons of annual processing capacity. This facility has access to the BNSF Class I rail line through the Peru, Illinois transload facility located nearby. We began operating the Utica, Illinois mine and Peru, Illinois transload facility in October 2020.
We operate a unit train capable transloading terminal in Van Hook, North Dakota to service the Bakken Formation in the Williston Basin. We operate this terminal under a long-term agreement with Canadian Pacific Railway to service the Van Hook terminal directly along with the other key oil and natural gas exploration and production basins of North America. In September 2021, we acquired the rights to construct and operate an additional transloading terminal in Waynesburg, Pennsylvania to service the Appalachian Basin, including the Marcellus and Utica Formations. We expect this terminal to become operational in the fourth quarter of 2021. These terminals allow us to offer more efficient delivery options to our customers.
We also offer to our customers portable wellsite proppant storage and management solutions through our SmartSystems products and services. Our SmartSystems provide our customers with 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. This capability creates efficiencies, flexibility, enhanced safety and reliability for customers. Through our SmartSystems wellsite proppant storage solutions, we offer the SmartDepot and SmartDepotXL™ silo systems, SmartPath transloader, and our rapid deployment trailers. Our SmartDepot silos include passive and active dust suppression technology, along with the capability of a gravity-fed operation. Our self-contained SmartPath transloader is a mobile sand transloading system designed to work with bottom dump trailers and features a drive over conveyor, surge bin, and dust collection system, and we believe the system has the ability to keep up with any hydraulic fracturing operation. Our rapid deployment trailers are designed for quick setup, takedown and transportation of the entire SmartSystem, and detach from the wellsite equipment, which allows for removal from the wellsite during operation. We have also developed a proprietary software program, the SmartSystem Tracker™, which allows our SmartSystems customers to monitor silo-specific information, including location, proppant type and proppant inventory.

Business Combination

On September 18, 2020, we acquired Eagle Oil and Gas Proppants Holdings LLC (“Eagle Proppants Holdings”), for aggregate consideration of approximately $2.1 million. The estimated aggregate fair value of the net assets acquired was $41.7 million, which exceeded the total consideration and resulted in a bargain purchase gain of $39.6 million on the acquisition date.
The Utica, Illinois mining and processing assets were idle at the date of acquisition; we started mining and selling sand out of this location in the fourth quarter of 2020.

Market Trends
Our historical results of operations and cash flows are not indicative of results of operations and cash flows to be expected in the future.
In recent years, the increasing supply of sand, particularly in-basin sand, relative to demand, has led to a continued depression of frac sand prices. During most of 2020, demand for frac sand declined significantly as a result of decreased demand for oil and natural gas as a result of the ongoing effects of the coronavirus (“COVID-19”) pandemic, which caused a global decrease in all means of travel, the closure of borders between countries and a general slowing of economic activity worldwide. Activity in the oil and gas industry began to rebound in the fourth quarter of 2020 and through the nine months ended September 2021 as the global distribution of COVID-19 vaccines ramped up and travel restrictions lessened. We have seen an increase in the volume of sand sold since the global economy began reopening, however the prices of frac sand have continued to be depressed due to overbuilt capacity and we cannot predict when frac sand prices will increase or stabilize.
Northern White frac sand, which is found predominantly in Wisconsin and limited portions of Minnesota, Illinois, and Missouri, is considered a premium proppant due to its favorable physical characteristics. While we anticipate that regional sand will continue to affect the demand for Northern White sand in some of the oil and natural gas producing basins in which we operate, we believe there will continue to be demand for our high-quality Northern White frac sand. In particular, we believe
22

SMART SAND, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)

that Northern White frac sand has logistical advantages in the Marcellus, Bakken, and western basins of Colorado and Wyoming. We expect demand for our frac sand to continue to be supported by customers who are focused on long-term well performance and ultimate recovery of reserves from the oil and natural gas wells they are completing as well as those interested in the efficiency of their logistics supply chain and delivery of sand to the wellsite. Additionally, we believe market trends continue to support increased proppant usage per well drilled due to operator focus on well efficiencies through increasing lengths of drilling laterals, use of simul-fracking techniques and other well enhancement strategies. Finally, we believe that the adoption of our SmartSystems in the marketplace, which has a smaller footprint on customer sites than other solutions, will allow us to sell more sand when packaged with our last mile solutions.


23

SMART SAND, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)


GAAP Results of Operations

Three Months Ended September 30, 2021 Compared to Three Months Ended September 30, 2020
The following table summarizes our revenue and expenses for the periods indicated.
  Three Months Ended September 30, Change
  2021 2020 Dollars Percentage
 
Revenues:
Sand sales revenue $ 31,343  $ 12,445  $ 18,898  152  %
Shortfall revenue 2,680  6,842  (4,162) (61) %
Logistics revenue 456  4,122  (3,666) (89) %
Total revenue 34,479  23,409  11,070  47  %
Cost of goods sold 36,526  18,227  18,299  100  %
Gross profit (2,047) 5,182  (7,229) (140) %
Operating expenses:
Salaries, benefits and payroll taxes 2,490  2,058  432  21  %
Depreciation and amortization 352  440  (88) (20) %
Selling, general and administrative 3,867  3,933  (66) (2) %
Total operating expenses 6,709  6,431  278  4  %
Operating (loss) income (8,756) (1,249) (7,507) 601  %
Other income (expenses):
Gain on bargain purchase —  39,889  (39,889) Not meaningful
Interest expense, net (467) (497) 30  (6) %
Other income 1,792  80  1,712  2,140  %
Total other (expenses) income, net 1,325  39,472  (38,147) (97) %
(Loss) income before income tax (benefit) expense (7,431) 38,223  (45,654) (119) %
Income tax (benefit) expense (169) 1,941  (2,110) (109) %
Net (loss) income $ (7,262) $ 36,282  $ (43,544) (120) %

Revenues
Revenues were $34.5 million for the three months ended September 30, 2021, during which time we sold approximately 790,000 tons of sand. Revenues for the three months ended September 30, 2020 were $23.4 million, during which time we sold approximately 309,000 tons of sand. The key factors contributing to the increase in revenues for the three months ended September 30, 2021 as compared to the three months ended September 30, 2020 were as follows:
•Sand sales revenue increased from $12.4 million for the three months ended September 30, 2020 to $31.3 million for the three months ended September 30, 2021 as a result of higher total volumes sold. The volumes sold during the third quarter of 2020 were negatively impacted by depressed oil prices driven by oversupply relative to the decreased demand due to the COVID-19 coronavirus pandemic.
•We had $2.7 million contractual shortfall revenue for the three months ended September 30, 2021 compared to $6.8 million of contractual shortfall revenue for the three months ended September 30, 2020. Our customer contracts
24

SMART SAND, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)

dictate whether shortfall is earned quarterly or at the end of their respective contract year. We recognize revenue to the extent of the unfulfilled minimum contracted quantity at the shortfall price per ton as stated in the contract.
•Logistics revenue, which includes freight for certain mine gate sand sales, railcar usage, logistics services, and SmartSystems rentals, was approximately $0.5 million for the three months ended September 30, 2021 compared to $4.1 million for the three months ended September 30, 2020. The decrease in logistics revenue was due to the shift from mine gate sales to in-basin sales, which include transportation and any other handling services.
Cost of Goods Sold
Cost of goods sold was $36.5 million and $18.2 million for the three months ended September 30, 2021 and 2020, respectively. The increase was primarily due to higher volumes sold and increased freight cost due to the shift of sales to more in-basin deliveries. In 2020, headcount reductions and other cost savings measures were implemented as a result of the onset of COVID-19. Headcount has since increased to support the increased sales activity, though we remain focused on other cost-saving measures.
Gross Profit
Gross profit was $(2.0) million for the three months ended September 30, 2021, compared to $5.2 million for the three months ended September 30, 2020. The decline in profitability for the three months ended September 30, 2021 as compared to the three months ended September 30, 2020 was primarily due to decreased shortfall revenue and lower average sales price relative to our cost to produce and deliver sand to our customers.
Operating Expenses
Operating expenses were $6.7 million for the three months ended September 30, 2021 as compared to $6.4 million for the three months ended September 30, 2020. Salaries, benefits and payroll taxes were $2.5 million for the three months ended September 30, 2021 as compared to $2.1 million for the three months ended September 30, 2020. Depreciation and amortization was also relatively consistent at $0.4 million for the three months ended September 30, 2021 and 2020. Selling, general and administrative expenses remained consistent at $3.9 million for the three months ended September 30, 2020 and $3.9 million for the three months ended September 30, 2021.
Other Income
We qualified for federal government assistance through employee retention credit provisions of the Consolidated Appropriations Act of 2021. During the three months ended September 30, 2021, the Company recorded $1.7 million of employee retention credits. The calculation of the credit is based on employees continued employment and represents a portion of the wages paid to them. For income tax purposes, the credit will result in decreased expense related to the wages it offsets in the period received. There was a change in existing legislation and we do not expect to continue to qualify for the employee retention credit in the fourth quarter of 2021.
Interest Expense
We incurred $0.5 million of net interest expense for each of the three months ended September 30, 2021 and 2020, respectively. We continue to reduce debt levels and decrease interest expense through scheduled amortizing payments.
Income Tax Expense
For the three months ended September 30, 2021 and 2020, our effective tax rate was approximately 2.3% and 5.1%, respectively, based on the annual effective tax rate net of discrete federal and state taxes. The computation of the effective tax rate includes modifications from the statutory rate such as income tax credits, tax depletion deduction, carrybacks, and state apportionment changes, among other items.
As of September 30, 2021, we have recorded $2.2 million of uncertain tax positions included in deferred tax liabilities, long-term, net on our balance sheet, related to our depletion deduction methodology. As of September 30, 2021, we have determined it is more likely than not that it will not be able to fully realize the benefits of certain existing deductible temporary differences and have recorded a valuation allowance against the deferred tax liabilities, long-term, net on our balance sheet in
25

SMART SAND, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)

the amount of $1.3 million, and a corresponding increase to the income tax expense on our condensed consolidated income statements.
Net (Loss) Income
Net loss was $(7.3) million for the three months ended September 30, 2021 as compared to net income of $36.3 million for the three months ended September 30, 2020. The net loss for the three months ended September 30, 2021 is primarily attributable to continued low average selling prices relative to our cost to produce and deliver products to our customers. Net income for the three months ended September 30, 2020 was primarily due to the gain on bargain purchase related to our acquisition of Eagle Proppants Holdings.

Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020
The following table summarizes our revenue and expenses for the periods indicated.
 
Nine Months Ended September 30,
 Change
  2021 2020 Dollars Percentage
  (in thousands)
Revenues:
Sand sales revenue $ 83,291  $ 50,809  32,482  64  %
Shortfall revenue 4,421  22,148  (17,727) (80) %
Logistics revenue 3,856  24,046  (20,190) (84) %
Total revenue 91,568  97,003  (5,435) (6) %
Cost of goods sold 100,952  71,221  29,731  42  %
Gross profit (9,384) 25,782  (35,166) (136) %
Operating expenses:
Salaries, benefits and payroll taxes 7,150  7,115  35  —  %
Depreciation and amortization 1,490  1,354  136  10  %
Selling, general and administrative 10,876  10,393  483  5  %
Bad debt expense 19,592  —  19,592  Not meaningful
Change in the estimated fair value of contingent consideration —  (1,020) 1,020  (100) %
Total operating expenses 39,108  17,842  21,266  119  %
Operating (loss) income (48,492) 7,940  (56,432) (711) %
Other income (expenses):
Gain on bargain purchase —  39,889  (39,889) Not meaningful
Interest expense, net (1,527) (1,576) 49  (3) %
Other income 5,457  162  5,295  3,269  %
Total other (expenses) income, net 3,930  38,475  (34,545) (90) %
(Loss) income before income tax (benefit) expense (44,562) 46,415  (90,977) (196) %
Income tax (benefit) expense (6,121) 5,576  (11,697) (210) %
Net (loss) income $ (38,441) $ 40,839  $ (79,280) (194) %
Revenues
Revenues were $91.6 million for the nine months ended September 30, 2021, during which time we sold approximately 2,317,000 tons of sand. Revenues for the nine months ended September 30, 2020 were $97.0 million, during which time we sold approximately 1,273,000 tons of sand. The key factors contributing to the decrease in revenues for the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020 were as follows:
26

SMART SAND, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)

•Sand sales revenue increased from $50.8 million for the nine months ended September 30, 2020 to $83.3 million for the nine months ended September 30, 2021 as a result of higher total volumes sold, partially offset by lower prices compared to the prior period. The volumes sold during the third quarter of 2020 were negatively impacted by depressed oil prices driven by the oversupply caused by decreased demand due to the COVID-19 pandemic.
•We had $4.4 million of contractual shortfall revenue for the nine months ended September 30, 2021 compared to $22.1 million of contractual shortfall revenue for the nine months ended September 30, 2020. Our customer contracts dictate whether shortfall is earned quarterly or at the end of their respective contract year. We recognize revenue to the extent of the unfulfilled minimum contracted quantity at the shortfall price per ton as stated in the contract.
•Logistics revenue, which includes freight for certain mine gate sand sales, railcar usage, logistics services, and SmartSystems rentals, was approximately $3.9 million for the nine months ended September 30, 2021 compared to $24.0 million for the nine months ended September 30, 2020. The decrease in logistics revenue was due to the shift from mine gate sales to in-basin sales, which include transportation and any other handling services.
Cost of Goods Sold
Cost of goods sold was $101.0 million and $71.2 million for the nine months ended September 30, 2021 and September 30, 2020, respectively. The increase was primarily due to higher volumes sold and increased freight cost due to the shift of sales to more in-basin deliveries. During 2020, headcount reductions and other cost savings measures were implemented as a result of the onset of COVID-19. Headcount has increased in the first nine months of 2021 to support increased sales activity, though we remain focused on other cost-saving measures.
Gross Profit
Gross profit was $(9.4) million and $25.8 million for the nine months ended September 30, 2021 and September 30, 2020, respectively. The decline in profitability for the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020 was primarily due to decreased shortfall revenue and low average sales price of our sand relative to the cost to produce and deliver products to our customers.
Operating Expenses
Operating expenses were $39.1 million and $17.8 million for the nine months ended September 30, 2021 and September 30, 2020, respectively. We recorded $19.6 million as non-cash bad debt expense, which is the difference between the $54.6 million accounts receivable balance that was subject to litigation and the $35.0 million cash payment received under the Settlement Agreement. Salaries, benefits and payroll taxes increased to $7.2 million for the three months ended September 30, 2021 as compared to $7.1 million for the nine months ended September 30, 2020. Depreciation and amortization increased slightly from $1.4 million for the nine months ended September 30, 2020 to $1.5 million for the nine months ended September 30, 2021. Selling, general and administrative expenses were $10.9 million for the nine months ended September 30, 2021 compared to $10.4 million for the nine months ended September 30, 2020. The nine months ended September 30, 2020 included a $1.0 million gain on contingent consideration.
Other Income
We qualified for federal government assistance through employee retention credit provisions of the Consolidated Appropriations Act of 2021. During the nine months ended September 30, 2021, the Company recorded $5.0 million of employee retention credits. The calculation of the credit is based on employees’ continued employment and represents a portion of the wages paid to them. For income tax purposes, the credit will result in decreased expense related to the wages it offsets in the period received. Unless there is a change in existing legislation, we expect to continue to qualify for the employee retention credit for approximately $1.7 million for the fourth quarter of 2021.
Interest Expense
We incurred $1.5 million and $1.6 million of net interest expense for the nine months ended September 30, 2021 and September 30, 2020, respectively. We continue to reduce debt levels and decrease interest expense through scheduled amortizing payments.
27

SMART SAND, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)

Income Tax (Benefit) Expense
For the nine months ended September 30, 2021 and September 30, 2020, our effective tax rate was approximately 13.7% and 12.0%, respectively, based on the annual effective tax rate net of discrete federal and state taxes. The computation of the effective tax rate includes modifications from the statutory rate such as income tax credits, tax depletion deduction, carrybacks, and state apportionment changes, among other items.
As of September 30, 2021, we have recorded $2.2 million of uncertain tax positions included in deferred tax liabilities, long-term, net on our balance sheet, related to our depletion deduction methodology. As of September 30, 2021, we determined it is more likely than not that it will not be able to fully realize the benefits of certain existing deductible temporary differences and have recorded a valuation allowance against the deferred tax liabilities, long-term, net on our balance sheet in the amount of $1.3 million, and a corresponding increase to the income tax expense on our condensed consolidated income statements.
Net (Loss) Income
Net loss was $(38.4) million for the nine months ended September 30, 2021 as compared to the net income of $40.8 million for the nine months ended September 30, 2020. The difference was primarily due to non-cash bad debt expense recorded against the residual balance of accounts receivable that were previously the subject of litigation recorded in 2021 combined with lower average sale prices per ton of our sand, substantially lower shortfall revenue in the current period, and the gain on bargain purchase related to our acquisition of Eagle Proppants Holdings in September 2020.

Non-GAAP Financial Measures
Contribution margin, EBITDA, Adjusted EBITDA and free cash flow are not financial measures presented in accordance with GAAP. We believe that the presentation of these non-GAAP financial measures will provide useful information to investors in assessing our financial condition and results of operations. Gross profit is the GAAP measure most directly comparable to contribution margin, net income is the GAAP measure most directly comparable to EBITDA and Adjusted EBITDA and net cash provided by operating activities is the GAAP measure most directly comparable to free cash flow. Our non-GAAP financial measures should not be considered as alternatives to the most directly comparable GAAP financial measures. Each of these non-GAAP financial measures has important limitations as analytical tools because they exclude some but not all items that affect the most directly comparable GAAP financial measures. You should not consider contribution margin, EBITDA, Adjusted EBITDA or free cash flow in isolation or as substitutes for an analysis of our results as reported under GAAP. Because contribution margin, EBITDA, Adjusted EBITDA and free cash flow may be defined differently by other companies in our industry, our definitions of these non-GAAP financial measures may not be comparable to similarly titled measures of other companies, thereby diminishing their utility.

Contribution Margin
We use contribution margin, which we define as total revenues less cost of goods sold excluding depreciation, depletion and accretion of asset retirement obligations, to measure our financial and operating performance. Contribution margin excludes other operating expenses and income, including costs not directly associated with the operations of our business such as accounting, human resources, information technology, legal, sales and other administrative activities. 
We believe that reporting contribution margin and contribution margin per ton sold provides useful performance metrics to management and external users of our financial statements, such as investors and commercial banks, because these metrics provide an operating and financial measure of our ability, as a combined business, to generate margin in excess of our operating cost base.
Gross profit is the GAAP measure most directly comparable to contribution margin. Contribution margin should not be considered an alternative to gross profit presented in accordance with GAAP. Since contribution margin may be defined differently by other companies in our industry, our definition of contribution margin may not be comparable to similarly titled measures of other companies, thereby diminishing its utility. The following table presents a reconciliation of contribution
28

SMART SAND, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)

margin to gross profit.
  Three Months Ended September 30, Nine Months Ended September 30,
  2021 2020 2021 2020
(in thousands, except per ton amounts)
Revenue $ 34,479  $ 23,409  $ 91,568  $ 97,003 
Cost of goods sold 36,526  18,227  100,952  71,221 
      Gross profit (2,047) 5,182  (9,384) 25,782 
Depreciation, depletion, and accretion of asset retirement obligations 6,145  5,177  18,009  15,351 
      Contribution margin $ 4,098  $ 10,359  $ 8,625  $ 41,133 
      Contribution margin per ton $ 5.19  $ 33.52  $ 3.72  $ 32.31 
Total tons sold 790  309  2,317  1,273 
Contribution margin was $4.1 million and $10.4 million, or $5.19 and $33.52 per ton sold, for the three months ended September 30, 2021 and 2020, respectively. The decrease in contribution margin and contribution margin per ton was due primarily to $4.2 million higher shortfall revenue in the prior period and low average sale price relative to our cost to produce and deliver sand to our customers in the current period.
Contribution margin was $8.6 million and $41.1 million, or $3.72 and $32.31 per ton sold, for the nine months ended September 30, 2021 and 2020, respectively. The decrease in overall contribution margin and contribution margin per ton was due primarily to $17.7 million higher shortfall revenue in the prior period and low average sale price relative to our cost to produce and deliver sand to our customers in the current period.

EBITDA and Adjusted EBITDA 
We define EBITDA as net income, plus: (i) depreciation, depletion and amortization expense; (ii) income tax expense (benefit); (iii) interest expense; and (iv) franchise taxes. We define Adjusted EBITDA as EBITDA, plus: (i) gain or loss on sale of fixed assets or discontinued operations; (ii) integration and transition costs associated with specified transactions; (iii) equity compensation; (iv) acquisition and development costs; (v) non-recurring cash charges related to restructuring, retention and other similar actions; (vi) earn-out, contingent consideration obligations and other acquisition and development costs; and (vii) non-cash charges and unusual or non-recurring charges. Adjusted EBITDA is used as a supplemental financial measure by management and by external users of our financial statements, such as investors and commercial banks, to assess:
•the financial performance of our assets without regard to the impact of financing methods, capital structure or historical cost basis of our assets;
•the viability of capital expenditure projects and the overall rates of return on alternative investment opportunities;
•our ability to incur and service debt and fund capital expenditures;
•our operating performance as compared to those of other companies in our industry without regard to the impact of financing methods or capital structure; and
•our debt covenant compliance, as Adjusted EBITDA is a key component of critical covenants to the ABL Credit Facility.
29

SMART SAND, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)

We believe that our presentation of EBITDA and Adjusted EBITDA will provide useful information to investors in assessing our financial condition and results of operations. Net income is the GAAP measure most directly comparable to EBITDA and Adjusted EBITDA. EBITDA and Adjusted EBITDA should not be considered alternatives to net income presented in accordance with GAAP. Because EBITDA and Adjusted EBITDA may be defined differently by other companies in our industry, our definitions of EBITDA and Adjusted EBITDA may not be comparable to similarly titled measures of other companies, thereby diminishing their utility. The following table presents a reconciliation of EBITDA and Adjusted EBITDA to net income for each of the periods indicated.
  Three Months Ended September 30, Nine Months Ended September 30,
  2021 2020 2021 2020
  (in thousands)
Net (loss) income $ (7,262) $ 36,282  $ (38,441) $ 40,839 
Depreciation, depletion and amortization 6,165  5,529  18,941  16,466 
Income tax (benefit) expense (169) 1,941  (6,121) 5,576 
Interest expense 484  506  1,554  1,605 
Franchise taxes 42  63  237  212 
EBITDA $ (740) $ 44,321  $ (23,830) $ 64,698 
Loss on sale of fixed assets 281  (27) 223  248 
Equity compensation (1)
 784  832  2,050  2,600 
Employee retention credit (2)
 (1,674) —  (5,026) — 
Acquisition and development costs (3)
 —  823  17  145 
Gain on bargain purchase —  (39,889) —  (39,889)
Cash charges related to restructuring and retention of employees 8  —  9  82 
Accretion of asset retirement obligations 332  88  558  239 
Adjusted EBITDA $ (1,009) $ 6,148  $ (25,999) $ 28,123 
(1)Represents the non-cash expenses for stock-based awards issued to our employees and employee stock purchase plan compensation expense.
(2)Employee retention credit is part of the Consolidated Appropriations Act of 2021 and is recorded in other income on the income statements for the three and nine months ended September 30, 2021.
(3)The three and nine months ended September 30, 2020 include acquisition cost of $817 and $875, respectively. The nine months ended September 2020 was offset by $1,020 fair value adjustment of contingent consideration.
____________________

Adjusted EBITDA was $(1.0) million for the three months ended September 30, 2021 compared to $6.1 million for the three months ended September 30, 2020. The decrease in Adjusted EBITDA was primarily due to $4.2 million less shortfall revenue in the current period and low average sale prices of our sand relative to the cost to produce and deliver it despite having higher overall volumes in the current period.
Adjusted EBITDA was $(26.0) million for the nine months ended September 30, 2021 compared to $28.1 million for the nine months ended September 30, 2020. The decrease in Adjusted EBITDA was primarily due to $19.6 million of non-cash bad debt expense in the current period related to collecting less than the amount recorded as a receivable from the settlement of litigation, $17.7 million less shortfall revenue in the current period and lower average sale prices of our sand relative to the cost to produce and deliver products to our customers despite having higher overall volumes in the current period.

Free Cash Flow
Free cash flow, which we define as net cash provided by operating activities less purchases of property, plant and equipment, is used as a supplemental financial measure by our management and by external users of our financial statements, such as investors and commercial banks, to measure the liquidity of our business.
30

SMART SAND, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)

Net cash provided by operating activities is the GAAP measure most directly comparable to free cash flows. Free cash flows should not be considered an alternative to net cash provided by operating activities presented in accordance with GAAP. Because free cash flows may be defined differently by other companies in our industry, our definition of free cash flows may not be comparable to similarly titled measures of other companies, thereby diminishing its utility. The following table presents a reconciliation of free cash flows to net cash provided by operating activities.
  Three Months Ended September 30, Nine Months Ended September 30,
  2021 2020 2021 2020
(in thousands, except per ton amounts)
Net cash provided by operating activities $ 1,064  $ (3,618) $ 37,544  $ 22,224 
Purchases of property, plant and equipment (1,933) (1,021) (6,976) (7,393)
Free cash flow $ (869) $ (4,639) $ 30,568  $ 14,831 

Free cash flow was $(0.9) million for the three months ended September 30, 2021 compared to $(4.6) million for the three months ended September 30, 2020. The increase in free cash flow was primarily attributable to cash collections from higher sand volumes sold to customers, offset by lower average sale prices of our sand recognized in the three months ended September 30, 2021 compared to the three months ended September 30, 2020.
Free cash flow was $30.6 million for the nine months ended September 30, 2021 compared to $14.8 million for the nine months ended September 30, 2020. The increase in free cash flow was primarily attributable to cash collections from higher sand volumes sold to customers, including the $35.0 million cash payment received under the Settlement Agreement, offset by lower average sale prices of our sand recognized in the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020. Capital expenditures for the nine months ended September 30, 2021, compared to the same period in 2020, were lower as we continue to focus on maintaining positive cash flow.


Liquidity and Capital Resources
Our primary sources of liquidity are cash flow generated from operations and availability under our ABL Credit Facility and other equipment financing sources. As of September 30, 2021, cash on hand was $36.7 million and we had $16.5 million in undrawn availability on our ABL Credit Facility.
Based on our balance sheet, cash flows, current market conditions, and information available to us at this time, we believe that we have sufficient liquidity and other available capital resources, to meet our cash needs for the next twelve months, including continued investment in our SmartSystems wellsite proppant storage solutions, completion of our new Waynesburg terminal to service the Marcellus and other capital projects.


Working Capital
Working capital is a measure of our ability to pay our liabilities as they become due. The following table presents the components of our working capital as of September 30, 2021 compared to December 31, 2020.
  September 30, 2021 December 31, 2020
  (in thousands)
Total current assets $ 82,666  $ 112,086 
Total current liabilities 39,989  37,263 
Working capital $ 42,677  $ 74,823 

31

SMART SAND, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)

Our working capital was $42.7 million at September 30, 2021 compared to $74.8 million at December 31, 2020.  The decrease in working capital was primarily due to the removal of $19.6 million of accounts receivable to non-cash bad debt expense, related to collecting less than the amount recorded as a receivable from the settlement of litigation, reduced inventory levels related to the increased sales volume activity in 2021 and a decline in profitability as frac sand prices continue to be depressed as a result of oversupply. As of December 31, 2020, $54.6 million of accounts receivable was attributable to U.S. Well and subject to ongoing litigation. The Company settled the litigation for a $35.0 million cash payment, which was collected during the second quarter of 2021.

Summary Cash Flows for the Nine Months Ended September 30, 2021 and September 30, 2020:
  Nine Months Ended September 30,
  2021 2020
  (in thousands)
Net cash provided by operating activities 37,544  22,224 
Net cash used in investing activities (6,898) (7,393)
Net cash used in financing activities (5,692) (6,476)
Net Cash Provided by Operating Activities
Net cash provided by operating activities was $37.5 million for the nine months ended September 30, 2021, which included net loss of $(38.4) million, net non-cash items of $34.2 million, the $35.0 million cash payment received under the Settlement Agreement, and a decrease of $6.8 million in other operating assets and liabilities.
Net cash provided by operating activities was $22.2 million for the nine months ended September 30, 2020, which included net income of $40.8 million, non-cash expenses of $(20.2) million, and $1.6 million in changes in operating assets and liabilities.
Net Cash Used in Investing Activities
Net cash used in investing activities was $6.9 million for the nine months ended September 30, 2021, which was primarily for manufacturing of our SmartSystems equipment.
Net cash used in investing activities was $7.4 million for the nine months ended September 30, 2020, which was primarily for manufacturing of our SmartSystems equipment.

Net Cash Used in Financing Activities
Net cash used in financing activities was $5.7 million for the nine months ended September 30, 2021, which consisted primarily of $5.3 million of net repayment for notes payable and finance leases, $0.3 million of share repurchases, and $0.2 million of payments of contingent consideration related to the manufacture of our SmartSystems equipment.
Net cash used in financing activities was $6.5 million for the nine months ended September 30, 2020, which consisted primarily of $2.5 million of net repayments on our ABL Credit Facility, $2.7 million of net repayment for notes payable and finance leases, $1.0 million of share repurchases, and $0.3 million of payments of contingent consideration related to the manufacture of our SmartSystems equipment.
32

SMART SAND, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)


Indebtedness
The follow summarizes the maturity of our debt:
ABL Credit Facility Oakdale Equipment Financing Notes Payable Finance Leases Total
(in thousands)
Remainder of 2021 $ —  $ 1,160  $ 1,056  $ 38  $ 2,254 
2022 —  4,638  3,387  137  $ 8,162 
2023 —  4,638  2,371  245  $ 7,254 
2024 —  6,888  807  —  $ 7,695 
2025 —  1,724  187