SMART SAND, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
2018
|
|
2017
|
|
(in thousands)
|
Operating activities:
|
|
|
|
|
|
Net income
|
$
|
23,121
|
|
|
$
|
10,648
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
Depreciation, depletion and accretion of asset retirement obligation
|
12,141
|
|
|
5,210
|
|
Amortization of intangible assets
|
572
|
|
|
—
|
|
Asset retirement obligation settlement
|
(2,219
|
)
|
|
—
|
|
Loss on disposal of assets
|
253
|
|
|
187
|
|
Amortization of deferred financing cost
|
223
|
|
|
339
|
|
Accretion of debt discount
|
180
|
|
|
—
|
|
Deferred income taxes
|
7,258
|
|
|
3,804
|
|
Stock-based compensation
|
2,133
|
|
|
1,378
|
|
Employee stock purchase plan compensation
|
56
|
|
|
19
|
|
Change in contingent consideration fair value
|
(2,100
|
)
|
|
—
|
|
Changes in assets and liabilities, net of effects of acquisitions:
|
|
|
|
Accounts receivable
|
(6,386
|
)
|
|
(15,148
|
)
|
Unbilled receivables
|
(23
|
)
|
|
(639
|
)
|
Inventories
|
(5,170
|
)
|
|
5,834
|
|
Prepaid expenses and other assets
|
(3,087
|
)
|
|
(1,222
|
)
|
Deferred revenue
|
4,030
|
|
|
(1,615
|
)
|
Accounts payable
|
(2,517
|
)
|
|
4,561
|
|
Accrued and other expenses
|
5,258
|
|
|
2,261
|
|
Income taxes payable
|
—
|
|
|
(7,058
|
)
|
Net cash provided by operating activities
|
33,723
|
|
|
8,559
|
|
Investing activities:
|
|
|
|
Acquisition of businesses, net of cash acquired
|
(29,921
|
)
|
|
—
|
|
Purchases of property, plant and equipment
|
(81,654
|
)
|
|
(27,582
|
)
|
Proceeds from disposal of assets
|
22
|
|
|
14
|
|
Net cash used in investing activities
|
(111,553
|
)
|
|
(27,568
|
)
|
Financing activities:
|
|
|
|
Repayments of notes payable
|
(288
|
)
|
|
(282
|
)
|
Payments under equipment financing obligations
|
(166
|
)
|
|
(276
|
)
|
Payment of deferred financing and debt issuance costs
|
(210
|
)
|
|
(193
|
)
|
Proceeds from revolving credit facility
|
71,500
|
|
|
—
|
|
Repayment of revolving credit facility
|
(27,000
|
)
|
|
—
|
|
Proceeds from equity issuance
|
127
|
|
|
26,251
|
|
Payment of equity transaction costs
|
—
|
|
|
(2,083
|
)
|
Purchase of treasury stock
|
(174
|
)
|
|
(127
|
)
|
Net cash provided by financing activities
|
43,789
|
|
|
23,290
|
|
Effect of exchange rate changes on cash, cash equivalents and restricted cash
|
—
|
|
|
—
|
|
Net (decrease) increase in cash, cash equivalents and restricted cash
|
(34,041
|
)
|
|
4,281
|
|
Cash and cash equivalents and restricted cash at beginning of year
|
35,227
|
|
|
47,534
|
|
Cash and cash equivalents and restricted cash at end of period
|
$
|
1,186
|
|
|
$
|
51,815
|
|
Supplemental disclosure of cash flow information
|
|
|
|
Cash paid for interest
|
$
|
870
|
|
|
$
|
145
|
|
Cash paid for taxes
|
$
|
725
|
|
|
$
|
7,657
|
|
Non-cash investing activities:
|
|
|
|
Contingent consideration
|
$
|
9,200
|
|
|
$
|
—
|
|
Asset retirement obligation
|
$
|
1,561
|
|
|
$
|
—
|
|
Non-cash financing activities:
|
|
|
|
Write-off of remaining balance of returned equipment under capital lease
|
$
|
398
|
|
|
$
|
194
|
|
Capitalized expenditures in accounts payable and accrued expenses
|
$
|
7,920
|
|
|
$
|
11,924
|
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
SMART SAND, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
1. Organization and Nature of Business
Smart Sand, Inc. and its subsidiaries (collectively, the “Company”) are headquartered in The Woodlands, Texas. The Company was incorporated in July 2011, and is a fully integrated frac sand services company, offering complete mine to wellsite solutions for our customers. The Company is engaged in the excavation, processing and sale of industrial sand, or proppant, for use in hydraulic fracturing operations for the oil and gas industry. The Company’s integrated Oakdale facility, with onsite rail infrastructure and wet and dry sand processing facilities, has access to two Class I rail lines and enables the Company to process and cost effectively deliver products to its customers. The Company also offers logistics solutions to its customers through, among other things, its in-basin transloading terminal and wellsite storage capabilities.
The Company completed construction of the first phase of its mine and and processing facility in Oakdale, Wisconsin and commenced operations in July 2012, subsequently expanded its operations in 2014 and 2015 and substantially completed the expansion of annual processing capacity to approximately
5.5 million
tons in May 2018.
On March 15, 2018, the Company acquired the rights to operate a unit train capable transloading terminal in Van Hook, North Dakota to service the Bakken Formation. The Company paid consideration of
$15,549
to acquire certain assets at the Van Hook terminal, and entered into a long-term lease agreement in connection with the transaction. On June 1, 2018, the Company acquired substantially all of the assets of Quickthree Solutions, Inc., a manufacturer of portable vertical frac sand storage solution systems. The consideration consisted of approximately
$30,000
of cash paid at closing and up to
$12,750
in potential earn-out payments, which are to be paid as system components are built and made available for sale or lease over a
three
-year period.
2. Basis of Presentation
The accompanying unaudited interim condensed consolidated financial statements (“interim statements”) of the Company have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), issued by the SEC. Accordingly, they do not include all the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments and disclosures necessary for a fair presentation of these interim statements have been included. 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, 2017
was derived from the audited consolidated financial statements as of and for the year ended
December 31, 2017
. These interim statements should be read in conjunction with the Company’s consolidated financial statements for the year ended
December 31, 2017
.
3. Summary of Significant Accounting Policies
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 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 its impact on calculating the depletion expense under the units-of-production method, the depreciation associated with property and equipment, purchase price allocation for businesses acquired, impairment considerations of assets (including impairment of identified intangible assets, goodwill and other long-lived assets), estimated cost of future asset retirement obligations, stock-based compensation, recoverability of deferred tax assets, inventory reserve, contingent consideration and collectability of receivables and certain liabilities. Actual results could differ from management’s best estimates as additional information or actual results become available in the future, and those differences could be material.
Revenue Recognition
On January 1, 2018, the Company adopted new accounting standard Accounting Standards Codification (“ASC”) 606, “Revenue from Contracts with Customers” and all the related amendments (“ASC 606”) in relation to all contracts that were not completed or expired as of January 1, 2018, using the modified retrospective method. There was no adjustment made to the opening balance of retained earnings as a result of applying the new revenue standard. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while the comparative information is not restated and will continue to be reported under the accounting standards in effect for those periods.
SMART SAND, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
With the adoption of the standard, the consolidated financial statements are supplemented by new disclosure requirements. Areas of focus and updated presentation requirements include disclosures regarding contracts with customers, disaggregation of revenue, contract balances, performance obligations, significant judgments used in the application of the guidance and transaction price allocation to remaining performance obligations.
Revenue Recognition
Revenues are recognized when control of the promised goods or services is transferred to our customers, the amount of which reflects the consideration the Company expects to be entitled to in exchange for those goods or services.
Sand Sales Revenue
The Company derives its sand sales revenue by mining and processing sand. Its revenues are primarily a function of the price per ton realized and the volumes sold. The Company’s sales are generally free carrier (“FCA”) at the origination point at the Company’s facility, with title passing as the product is loaded into railcars hired by the customer or provided by the Company and revenue being recognized when title transfers at the Company’s facility. For sand delivered in-basin to certain contract and spot-rate customers, the Company recognizes the revenue when title passes at the destination, delivery at terminal, (“DAT”). The amount invoiced reflects product, transportation and any other additional handling services, such as storage or transloading the product from railcar to truck.
Prices under the Company’s long-term agreements with customers are generally indexed to the Average Cushing Oklahoma WTI Spot Prices and contain provisions allowing for adjustments including: (i) annual percentage price increases; and/or (ii) market factor adjustments, including a natural gas surcharge/reduction and a propane surcharge/reduction which are applied if the Average Natural Gas Price or the Average Quarterly Mont Belvieu TX Propane Spot Price, respectively, as listed by the U.S. Energy Information Administration, are above or below the applicable benchmark set forth in the contract for the preceding calendar quarter.
Shortfall Payments
The Company’s shortfall revenues are based on negotiated contract terms and are recognized when rights of use are expired. The Company recognizes revenue to the extent of the unfulfilled minimum contracted quantity at the shortfall price per ton as stated in the contract once payment is received or probable. For the three months ended
September 30, 2018
and
2017
, the Company recognized
$1,426
and
$1,169
, respectively, of revenue for shortfall payments relating to minimum commitments under take-or-pay contracts. For the
nine
months ended
September 30, 2018
and
2017
, the Company recognized
$2,094
and
$1,244
, respectively, of revenue for shortfall payments relating to minimum commitments under take-or-pay contracts.
Railcar Usage Revenue
Railcar usage revenue consists of revenue derived from the usage of the Company’s railcars by customers under long-term contracts or on an as-used basis. Based on the customer contract, the Company either recognizes revenue on the usage of railcars based on when the terms of the agreement state that the railcar is available to the customer for use, or based on a specified price per ton shipped. For the three months ended
September 30, 2018
and
2017
, the Company recognized
$2,234
and
$2,021
, respectively, of railcar revenue. For the
nine
months ended
September 30, 2018
and
2017
, the Company recognized
$6,126
and
$5,605
, respectively, of railcar revenue.
Transportation Revenue
Transportation revenue consists primarily of railway transportation and transload services to deliver products to customers. The Company’s transportation revenue fluctuates based on many factors, including the volume of product it transports and the distance between its plant and customers. Revenue generated from transportation was
$14,796
and
$13,925
, respectively, for the three months ended
September 30, 2018
and
2017
. Revenue generated from transportation was
$37,929
and
$31,547
, respectively, for the
nine
months ended
September 30, 2018
and
2017
.
Contract Balances
The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled receivables and deferred revenue on the consolidated balance sheet. For the Company’s sand sales, amounts are billed as sand is loaded on
SMART SAND, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
the railcars to fill customer orders for FCA origination point sales or when sand is received at the destination for FCA or DAT destination point sales and recorded as accounts receivable. For the Company’s freight revenue, amounts billed depend on the shipping terms and are recorded as receivables accordingly. Generally, billing occurs subsequent to revenue recognition, though certain billing occurs in advance, resulting in contract assets and liabilities, respectively. In addition, the Company sometimes receives shortfall payments from its customers and recognizes the revenue once the rights of use are expired. Changes in the contract asset and liability balances during the
three and nine
months ended
September 30, 2018
were not materially impacted by any other factors.
Deferred Revenues
The Company receives advance payments from certain customers in order to secure and procure a reliable provision and delivery of product. The Company classifies such advances as current or noncurrent liabilities depending upon the anticipated timing of delivery of the supplied product. Revenue is recognized upon the delivery of the product.
The Company may receive an advance payment from a customer, based on the terms of the customer’s long-term contract, for a certain volume of product to be delivered. Revenue is recognized as product is delivered and the deferred revenue is reduced.
Revenue recognized for the
nine
months ended
September 30, 2018
that was included in the deferred revenue balance at the beginning of the year was
$0
. The deferred revenue balance at
September 30, 2018
and
December 31, 2017
was
$4,030
and
$0
, respectively, and classified as a current liability in the accompanying condensed consolidated balance sheets.
Performance Obligations
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in accordance with ASC 606. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. Generally, the Company’s contracts include a single performance obligation that is separately identifiable, and therefore, distinct. Under ASC 606, the allocation of transaction price is not necessary if only one performance obligation is identified. The Company expects to recognize approximately
14%
of this remaining performance obligation as revenue throughout the remainder of 2018 and expects to recognize the remaining
86%
as revenue by 2022.
Revenue from sand sales are recognized at a point in time, either upon shipment or upon delivery, and accounted for
70%
and
56%
of the Company’s revenue for the three months ended
September 30, 2018
and
2017
, respectively, and for
71%
and
59%
of the Company’s revenue for the
nine
months ended
September 30, 2018
and
2017
, respectively. Revenue from railcar usage and transportation is recognized at a point in time, upon shipment, and accounted for
27%
and
41%
of revenue for the three months ended
September 30, 2018
and
2017
, respectively, and for
27%
and
39%
of revenue for the
nine
months ended
September 30, 2018
and
2017
, respectively.
Significant Judgments
Accounting for long-term contracts involves the use of various techniques to estimate total contract revenue, costs and satisfaction of performance obligation. The Company satisfies its performance obligation and subsequently recognizes revenue, at a point in time, upon shipment of the products as the customer obtains control over the goods once the sand is loaded into the railcars or sand is delivered to the customer’s destination. In the case of sand being delivered to customers, the transaction price is variable in nature and is directly tied to the Average Cushing Oklahoma WTI Spot Prices per barrel. There were no changes to the significant judgments used by the Company to determine the timing of satisfaction of the performance obligation under ASC 606.
Costs to Obtain or Fulfill Contracts
The Company’s costs to fulfill or obtain contracts with customers primarily consist of commissions and legal costs. Under take-or-pay contracts, the Company provides sales team members with commissions at set per ton prices. These commissions are paid on a monthly basis, when and if the sand is taken by the customer. Although sales commissions are incremental in nature and are only incurred when a contract is obtained, there is no up-front commission paid on the satisfactory obtainment of a contract, resulting in no sales commissions being capitalized at
September 30, 2018
. The Company also incurs legal costs relating to the drafting and negotiating of contracts with select customers. Because legal costs are not incremental in nature and
SMART SAND, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
are incurred regardless of whether a contract is ultimately obtained, there were no legal costs capitalized as of
September 30, 2018
. As a result, the Company did not record amortization of costs incurred to obtain the contract or any impairment losses for the
three and nine
months ended
September 30, 2018
.
Accounts Receivable and Unbilled Receivables
Accounts receivable represents customer transactions that have been invoiced as of the balance sheet date; unbilled receivables represent customer transactions that have not yet been invoiced as of the balance sheet date. Accounts receivable are due within
30
days from the date of invoice, or in accordance with terms agreed upon with customers, and are stated at amounts due from customers net of any allowance for doubtful accounts. The Company considers accounts outstanding longer than the payment terms are past due. The Company determines the allowance by considering a number of factors, including the length of time trade accounts receivable are past due, previous loss history, the customer’s current ability to pay its obligation, and the condition of the general economy and the industry as a whole. Accounts receivable are written off when they are deemed uncollectible, and payments subsequently received on such receivables are credited to bad debt expense. As of
September 30, 2018
and
December 31, 2017
, the Company determined
no
allowance for doubtful accounts was necessary. As of
September 30, 2018
and
December 31, 2017
, no portion of unbilled revenue represents transactions included in deferred revenue.
Transportation
Transportation costs are classified as cost of goods sold. Transportation costs consist of railway transportation and transload costs to deliver products to customers. Cost of sales generated from transportation was
$23,128
and
$15,390
for the three months ended
September 30, 2018
and
2017
, respectively. Cost of sales generated from transportation was
$53,611
and
$33,544
for the
nine
months ended
September 30, 2018
and
2017
, respectively.
Inventories
The Company’s sand inventory consists of raw material (sand that has been excavated but not processed), work-in-progress (sand that has undergone some but not all processing) and finished goods (sand that has been completely processed and is ready for sale). Costs applied to sand inventory include direct excavation costs, processing costs, overhead allocation, depreciation and depletion, transportation and additional service costs, as applicable. Stockpile tonnages are calculated by measuring the number of tons added and removed from the stockpile. Costs are calculated on a per ton basis and are applied to the stockpiles based on the number of tons in the stockpile. The Company performs monthly physical inventory measurements to verify the quantity of sand inventory on hand. Due to variation in sand density and moisture content and production processes utilized to manufacture the Company’s products, physical inventories will not necessarily detect all variances. To mitigate this risk, the Company recognizes a yield adjustment on its inventories. Sand inventory is stated at the lower of cost or net realizable value using the average cost method. For the
three and nine
months ended
September 30, 2018
and
2017
, the Company had
no
write-down of sand inventory as a result of any lower of cost or net realizable value assessment.
The spare parts inventory consists of critical spare parts. Spare parts inventory is accounted for on a first-in, first-out basis at the lower of cost or net realizable value.
Deferred Financing Charges
Direct costs incurred in connection with the Credit Facility (as defined in Note 11) have been capitalized and are being amortized using the straight-line method, which approximates the effective interest method, over the term of the debt. Fees attributable to the lender and third parties of
$1,372
were presented as components of deferred financing charges since there was no outstanding balance on the Credit Facility as of
December 31, 2017
. As of
September 30, 2018
, fees attributable to the lender of
$728
are presented as a discount to the carrying value of the debt and the unamortized amount is presented as a reduction of long-term debt on the consolidated balance sheets.
Amortization expense of the deferred financing charges of
$85
and
$116
is included in interest expense for the three months ended
September 30, 2018
and
2017
, respectively. Amortization expense of the deferred financing charges of
$223
and
$339
is included in interest expense for the
nine
months ended
September 30, 2018
and
2017
, respectively.
Accretion of debt discount of
$65
and
$0
is included in interest expense for the three months ended
September 30, 2018
and
2017
, respectively. Accretion of debt discount of
$181
and
$0
is included in interest expense for the
nine
months ended
September 30, 2018
and
2017
, respectively.
SMART SAND, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Financial Instruments
The carrying value of the Company’s financial instruments, consisting of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses, approximates their fair value due to the short maturity of such instruments. Financial instruments also consist of debt for which fair value approximates carrying values as the debt bears interest at a variable rate which is reflective of current rates otherwise available to the Company. Unless otherwise noted, it is management’s opinion that the Company is not exposed to significant interest, currency or credit risks arising from these financial instruments.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Costs related to researching, surveying, drilling, and related activities are recorded at cost and capitalized once a determination has been made that the Company’s property has proven and probable reserves. Capitalized mining costs are depleted using the units-of-production method. Construction in progress is primarily comprised of machinery and equipment which has not been placed in service and is not depreciated until the related assets or improvements are ready to be placed in service. Depreciation is calculated using the straight-line method over the estimated useful lives of the property, plant and equipment, which are:
|
|
|
|
Years
|
Land improvements
|
10
|
Plant and buildings
|
5-15
|
Real estate properties
|
10-40
|
Railroad and sidings
|
30
|
Vehicles
|
3-5
|
Machinery, equipment and tooling
|
3-15
|
Wellsite storage solutions
|
5-15
|
Furniture and fixtures
|
3-10
|
Deferred stripping costs
|
3
|
Expenditures for maintenance and repairs are charged against income as incurred; betterments that increase the value or materially extend the life of the related assets are capitalized. Upon sale or disposition of property and equipment, the cost and related accumulated depreciation and amortization are removed from the accounts and any resulting gain or loss is recognized in the consolidated income statements.
Acquisitions
The Company determines whether a transaction or other event is a business combination, which requires that the assets acquired and liabilities assumed constitute a business. Each business combination is then accounted for by applying the acquisition method. If the assets acquired are not a business, the Company accounts for the transaction or other event as an asset acquisition. Under both methods, the Company recognizes the identifiable assets acquired, the liabilities assumed, contingent considerations and any non-controlling interest in the acquired entity. In addition, for transactions that are business combinations, the Company evaluates the existence of goodwill or a gain from a bargain purchase. The Company capitalizes acquisition-related costs and fees associated with asset acquisitions and expenses acquisition-related costs and fees associated with business combinations in the period in which they are incurred.
Long-Lived Assets, Including Definite-Lived Intangible Assets
Long-lived assets, other than goodwill and other indefinite-lived intangibles, are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable through the estimated undiscounted future cash flows derived from such assets. Definite-lived intangible assets primarily consist of developed technology and customer relationships. For long-lived assets used in operations, impairment losses are only recorded if the asset’s carrying amount is not recoverable through its undiscounted, probability-weighted future cash flows. The Company measures the impairment loss based on the difference between the carrying amount and the estimated fair value. When an impairment exists, the related assets are written down to fair value.
SMART SAND, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Goodwill and Other Indefinite-Lived Intangible Assets
The Company conducts its evaluation of goodwill and other indefinite-lived intangible assets at the reporting unit level on an annual basis as of December 31 and more frequently if events or circumstances indicate that the carrying value of a reporting unit exceeds its fair value. Prior to performing an impairment test, the Company assesses qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the qualitative assessment determines that an impairment is more likely than not, the Company performs a quantitative comparison of the fair value with the carrying amount, including goodwill. If this comparison reflects impairment, then the loss would be measured as the excess of recorded goodwill, or other intangible assets with indefinite lives, over its implied fair value.
Fair Value Measurements
The Company has categorized its assets and liabilities that are measured at fair value on a recurring and non-recurring basis into a three-level fair value hierarchy, of which the first two are considered observable and the last unobservable, which are as follows:
|
|
•
|
Level 1—Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date;
|
|
|
•
|
Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active or other inputs corroborated by observable market data for substantially the full term of the assets or liabilities; and
|
|
|
•
|
Level 3—Unobservable inputs that reflect the Company’s assumptions that market participants would use in pricing assets or liabilities based on the best information available.
|
Contingent Consideration
The Company’s contingent consideration is measured at fair value on a recurring basis and is comprised of payments for production of silos and related equipment during the
three
-year period after the Quickthree acquisition (Note 4). Contingent liabilities are valued using significant inputs that are not observable in the market, which are defined as Level 3 inputs according to fair value measurement accounting. The Company used a probability-weighted average between
9
and
63
manufactured fleets over the earnout period, as the basis of its fair value determination. The actual contingent consideration could vary from the determined amount based on the actual number of silos and related equipment produced and the timing thereof. The Company estimates the fair value of contingent liabilities using a Monte Carlo simulation-based, real option pricing methodology implementation of the Income Approach. This approach utilizes inputs including market comparable information and management assessments regarding potential future scenarios, then discounts the liabilities to present value. The Company believes its estimates and assumptions are reasonable, however, there is significant judgment involved.
The fair value of the Company’s financial instruments carried at fair value were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Contingent consideration
|
|
$
|
7,100
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
7,100
|
|
Total liabilities
|
|
$
|
7,100
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
7,100
|
|
The following table provides a summary of changes in the fair value of the Company’s Level 3 financial instruments for the
nine
months ended
September 30, 2018
:
|
|
|
|
|
|
Balance as of January 1, 2018
|
|
$
|
—
|
|
Contingent consideration pursuant to acquisition
|
|
9,200
|
|
Payment of contingent consideration
|
|
—
|
|
Unrealized gain
|
|
(2,100
|
)
|
Balance as of September 30, 2018
|
|
$
|
7,100
|
|
SMART SAND, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Stock-Based Compensation
The Company issues restricted stock to certain employees and members of the board of directors of the Company (the “Board”) for their services on the Board. The Company estimates the grant date fair value of each share of restricted stock at issuance. For awards subject to service-based vesting conditions, the Company recognizes, in the consolidated income statements, stock-based compensation expense, net of estimated forfeitures, equal to the grant date fair value of the award on a straight-line basis over the requisite service period, which is generally the vesting term. For awards subject to both performance and service-based vesting conditions, the Company recognizes stock-based compensation expense using the straight-line recognition method when it is probable that the performance condition will be achieved. Forfeitures are accounted for when they occur.
Share-based payments issued to non-employees are recorded at their fair values, and are periodically revalued as the equity instruments vest and are recognized as expense, in the consolidated income statements, over the related service period. Once the Company’s shares became publicly traded on November 4, 2016, the Company began to use the actual market price of its shares as the grant date fair value for restricted stock awards.
Income Taxes
On December 22, 2017, the U.S. Tax Cuts and Jobs Act (the “Tax Reform Act”) was signed into law. As a result of the Tax Reform Act, the Company recorded a tax benefit of approximately
$8,500
due to a re-measurement of deferred tax assets and liabilities in the fourth quarter of 2017. The Company has finalized the accounting for the income tax effects of the Tax Reform Act.
The Company applies the provisions of ASC 740, “Income Taxes” (“ASC 740”), which principally utilizes a balance sheet approach to provide for income taxes. Under this method, deferred tax assets and liabilities are recognized for the expected future tax consequences of net operating loss carryforwards and temporary differences between the carrying amounts and the tax bases of assets and liabilities.
ASC 740 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. The impact of an uncertain income tax position on the income tax returns must be recognized at the largest amount that is more-likely-than-not to be required to be recognized upon audit by the relevant taxing authority. This standard also provides guidance on de-recognition, measurement, classification, interest and penalties, accounting for interim periods, disclosure and transition issues with respect to tax positions. The Company includes interest and penalties as a component of income tax expense in the consolidated income statements. For the periods presented,
no
interest and penalties were recorded.
Environmental Matters
The Company is subject to various federal, state and local laws and regulations relating to the protection of the environment. Management has established procedures for the ongoing evaluation of the Company’s operations, to identify potential environmental exposures and to comply with regulatory policies and procedures. Environmental expenditures that relate to current operations are expensed or capitalized as appropriate. Expenditures that relate to an existing condition caused by past operations and do not contribute to current or future revenue generation are expensed as incurred. Liabilities are recorded when environmental costs are probable, and the costs can be reasonably estimated. The Company maintains insurance which may cover in whole or in part certain environmental expenditures. As of
September 30, 2018
and
December 31, 2017
, there were
no
probable environmental matters.
SMART SAND, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Other Comprehensive Income
Other comprehensive income represents foreign currency translation adjustments. The following table presents the changes in accumulated other comprehensive income during the
three and nine
months ended
September 30, 2018
.
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30, 2018
|
|
Nine Months Ended
September 30, 2018
|
|
|
Foreign currency translation adjustments
|
|
Foreign currency translation adjustments
|
Beginning balance
|
|
$
|
76
|
|
|
$
|
—
|
|
Other comprehensive income before reclassifications
|
|
(130
|
)
|
|
(54
|
)
|
Amounts reclassed from accumulated other comprehensive income
|
|
—
|
|
|
—
|
|
Ending balance
|
|
$
|
(54
|
)
|
|
$
|
(54
|
)
|
Segment Information
Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker, or decision-making group, in making decisions on how to allocate resources and assess performance. The Company’s chief operating decision maker is the Chief Executive Officer. The Company and the Chief Executive Officer view the Company’s operations and manage its business, including the recently acquired logistics assets and wellsite storage solutions business, as
one
operating segment. Substantially all long-lived assets of the Company reside in the United States.
Basic and Diluted Net Income Per Share of Common Stock
Basic net income per share of common stock is computed by dividing net income attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the period, excluding the dilutive effects of restricted stock. Diluted net income per share of common stock is computed by dividing the net income attributable to common stockholders by the sum of the weighted-average number of shares of common stock outstanding during the period plus the potential dilutive effects of restricted stock outstanding during the period calculated in accordance with the treasury stock method, although restricted stock is excluded if their effect is anti-dilutive. The number of shares underlying equity-based awards that were excluded from the calculation of diluted earnings per share as their effect would be anti-dilutive was
1,022
and
451
for each of the three months ended
September 30, 2018
and
2017
, respectively. The number of shares underlying equity-based awards that were excluded from the calculation of diluted earnings per share as their effect would be anti-dilutive was
646
and
252
for each of the
nine
months ended
September 30, 2018
and
2017
, respectively. The following table reconciles the weighted-average common shares outstanding used in the calculation of basic net income per share to the weighted average common shares outstanding used in the calculation of diluted net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Weighted average common shares outstanding
|
40,541
|
|
|
40,384
|
|
|
40,483
|
|
|
40,145
|
|
Assumed conversion of restricted stock
|
10
|
|
|
32
|
|
|
65
|
|
|
112
|
|
Diluted weighted average common stock outstanding
|
40,551
|
|
|
40,416
|
|
|
40,548
|
|
|
40,257
|
|
Reclassification
Certain 2017 balance sheet items have been reclassified to conform to the current financial statement presentation. These reclassifications have no effect on previous reported net income.
Recent Accounting Pronouncements
Adopted
In January 2017, the Financial Accounting Standards Board (“FASB”) issued ASU 2017-01, “Business Combinations (Topic 805) Clarifying the Definition of a Business” (“ASU 2017-01”), which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions,
SMART SAND, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
disposals, goodwill, and consolidation. ASU 2017-01 is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. The Company adopted this standard on January 1, 2018. The adoption of this guidance did not have a material effect on the Company’s financial position, results of operation or cash flows.
In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts and Cash Payments” (“ASU 2016-15”), which eliminates the diversity in practice related to the classification of certain cash receipts and payments for debt prepayment or extinguishment costs, the maturing of a zero-coupon bond, the settlement of contingent liabilities arising from a business combination, proceeds from insurance settlements, distributions from certain equity method investees and beneficial interests obtained in a financial asset securitization. ASU 2016-15 designates the appropriate cash flow classification, including requirements to allocate certain components of these cash receipts and payments among operating, investing and financing activities. The guidance is effective for the Company beginning after December 15, 2017. The Company adopted this guidance effective January 1, 2018. The adoption of this guidance did not have a material effect on the Company’s financial position, results of operation or cash flows.
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”). The objective of ASU 2014-09 is to establish a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and will supersede most of the existing revenue recognition guidance, including industry specific guidance. The core principle of ASU 2014-09 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In applying the new guidance, an entity will: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the contract’s performance obligations; and (5) recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 applies to all contracts with customers except those that are within the scope of other topics in the FASB ASC. In April and May 2016, the FASB issued ASU 2016-10, “Revenue from Contracts with Customers - Identifying Performance Obligations and Licensing”, ASU 2016-11, “Revenue Recognition and Derivatives and Hedging - Recession of SEC Guidance”, ASU 2016-12, “Revenue from Contracts with Customers - Narrow-Scope Improvements and Practical Expedients”, and ASU 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers”. These ASUs each affect the guidance of the new revenue recognition standard in ASU 2014-09 and related subsequent ASUs. The new guidance is effective for annual reporting periods (including interim periods within those periods) beginning after December 15, 2017 for public companies. The Company adopted this standard on January 1, 2018.
Not yet adopted
In August 2018, the FASB issued ASU 2018-13 “Fair Value Measurement (Topic 820)” (“ASU 2018-13”), which modifies disclosure requirements for fair value measurements by removing the disclosure of the valuation process for Level 3 fair value measurements, among other disclosure modifications. The guidance is effective for the Company beginning after December 15, 2019, although early adoption is permitted. Companies are permitted to remove or modify disclosures upon issuance while delaying adoption of the additional disclosures. The Company is currently evaluating the effects of ASU 2018-13 on its consolidated financial statements.
In August 2017, the FASB issued ASU 2017-12 “Derivatives and Hedging (Topic 815) Targeted Improvements to Accounting for Hedging Activities” (“ASU 2017-12”), which eliminates the requirement to separately measure and report hedge ineffectiveness and generally requires the entire change in the fair value of a hedging instrument to be presented in the same income statement line as the hedged item. The guidance also eases certain documentation and assessment requirements and modifies the accounting for components excluded from the assessment of hedge effectiveness. The guidance is effective for the Company beginning after December 15, 2018, although early adoption is permitted. The Company is currently evaluating the effects of ASU 2017-12 on its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842) (“ASU 2016-02”), which replaces the existing guidance in ASC 840, “Leases.” ASU 2016-02 requires lessees to recognize most leases on their balance sheets as lease liabilities with corresponding right of use assets. The new lease standard does not substantially change lessor accounting. The new standard is effective for interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted. The Company intends to adopt ASU 2016-02 and its related updates using the transition practical expedients, which allows the Company to use the existing lease population, classification and determination of initial direct costs when calculating the lease liability and right of use asset balances. The Company also intends to implement ASU 2016-02 using the optional transition method, which allows the Company to initially apply the new standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings. The Company has implemented new accounting
SMART SAND, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
software to facilitate the recording and reporting of lease transactions and balances. While the Company is still in the process of evaluating the impact of the adoption of ASU 2016-02 and its related updates on its consolidated financial statements, it expects to record material right of use assets and related liabilities on its consolidated balance sheet and add significant new disclosures in the notes to the financial statements, but it does not expect there to be a material impact on the other consolidated financial statements. However, the full effect of ASU 2016-02 cannot be determined until the end of 2018, as it will be affected by contracts executed through the remainder of the year.
4. Acquisitions
Asset Acquisition - Van Hook Crude, LLC
The acquisition of the assets of Van Hook Crude, LLC occurred on March 15, 2018. The Company acquired all of the rights, title, and interest in certain properties and assigned contracts (collectively, the “Assets”) for a total consideration of
$15,549
in cash.
The acquisition cost has been allocated over the assets as set forth below.
|
|
|
|
|
Machinery, equipment and tooling
|
$
|
1,478
|
|
Plant and building
|
1,407
|
|
Railroad and sidings
|
9,926
|
|
Land improvements
|
2,738
|
|
Total assets acquired
|
$
|
15,549
|
|
Business Combination - Quickthree Solutions Inc.
On June 1, 2018, the Company acquired substantially all of the assets of Quickthree Solutions, Inc., a manufacturer of portable vertical frac sand storage solution systems.
The aggregate purchase price consisted of approximately
$30,000
cash paid at closing, subject to adjustment based upon Quickthree’s closing date working capital, and up to
$12,750
in potential earn-out payments over a
three
-year period after closing. Payment of the earn-out is based upon the production of silos and related equipment during the earn-out period. The closing portion of the purchase price was paid using cash on hand and advances under the Company’s Credit Facility. The Company expects the earn-out portion of the purchase price to be paid using cash on hand, equipment financing options available to the Company and advances under the Company’s Credit Facility. Goodwill in this transaction is attributable to planned expansion into the wellsite storage solutions market, and is fully deductible for tax purposes.
The table below presents the calculation of the total purchase consideration:
|
|
|
|
|
Base price - cash
|
$
|
30,000
|
|
Contingent consideration – earnout
|
9,200
|
|
Working capital adjustment
|
(122
|
)
|
Total purchase consideration
|
$
|
39,078
|
|
SMART SAND, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
The Company’s allocation of the purchase price in connection with the acquisition was calculated as follows.
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
Useful Life (in years)
|
Assets Acquired
|
|
|
|
|
Accounts receivable
|
|
$
|
112
|
|
|
|
Inventory
|
|
1,700
|
|
|
|
Prepaid expenses and other current assets
|
|
126
|
|
|
|
Total current assets acquired
|
|
$
|
1,938
|
|
|
|
Property, plant and equipment
|
|
740
|
|
|
|
Customer relationships
|
|
270
|
|
|
1 year
|
Developed technology
|
|
18,800
|
|
|
13 years
|
Trade name
|
|
900
|
|
|
Indefinite
|
Goodwill
|
|
16,935
|
|
|
|
Other assets
|
|
225
|
|
|
|
Total non-current assets acquired
|
|
37,870
|
|
|
|
Total assets acquired
|
|
$
|
39,808
|
|
|
|
|
|
|
|
|
Liabilities Assumed
|
|
|
|
|
Accounts payable
|
|
$
|
331
|
|
|
|
Accrued and other expenses
|
|
399
|
|
|
|
Total liabilities assumed
|
|
730
|
|
|
|
Estimated fair value of net assets acquired
|
|
$
|
39,078
|
|
|
|
Total acquisition costs for the Quickthree Solutions acquisition incurred during the
three and nine
months ended
September 30, 2018
were
$0
and
$1,159
, respectively, which are included in selling, general and administrative expense on the Company’s condensed consolidated income statements. During the quarter ended September 30, 2018, there were no changes to the allocation of the fair value of assets and liabilities acquired.
The Company determined the fair value of the contingent consideration to be
$9,200
at June 1, 2018, the acquisition date and recorded it as a liability in the Company’s unaudited condensed consolidated balance sheets. Each reporting period, the Company reassesses its inputs including market comparable information and management assessments regarding potential future scenarios, then discounts the liabilities to present value. For the three months ended
September 30, 2018
, the Company recorded an unrealized gain on contingent consideration in the amount of
$2,100
on the condensed consolidated income statements, related the change in fair value of contingent consideration. The Company will continue to reassess earn-out calculations related to the contingent consideration in future periods.
5. Cash, Cash Equivalents and Restricted Cash
Cash
The Company considers all highly liquid money market instruments to be cash equivalents. Cash is maintained at financial institutions and, at times, balances may exceed federally insured limits of $250 at each financial institution. The Company has not experienced any losses related to these balances.
Restricted Cash
Restricted cash represents cash held as collateral relating to an outstanding short-term bond assuring performance under an agreement with a pipeline common carrier. As of April 13, 2018, the Company no longer had any restrictions on cash.
SMART SAND, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
6. Inventories
Sand inventories consisted of the following:
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
December 31, 2017
|
Raw material
|
$
|
153
|
|
|
$
|
298
|
|
Work in progress
|
8,927
|
|
|
7,825
|
|
Finished goods
|
3,582
|
|
|
832
|
|
Spare parts
|
1,649
|
|
|
577
|
|
Total sand inventory
|
$
|
14,311
|
|
|
$
|
9,532
|
|
Wellsite storage solutions inventory represents work in progress inventory related to existing arrangements at the time the Company acquired Quickthree and consisted of the following:
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
December 31, 2017
|
Work in progress
|
$
|
2,091
|
|
|
$
|
—
|
|
Total wellsite storage solutions inventory
|
$
|
2,091
|
|
|
$
|
—
|
|
|
|
|
|
Total inventory
|
$
|
16,402
|
|
|
$
|
9,532
|
|
7. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets were comprised of the following:
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
December 31, 2017
|
Prepaid insurance
|
$
|
103
|
|
|
$
|
551
|
|
Prepaid expenses
|
1,914
|
|
|
1,112
|
|
Prepaid income taxes
|
1,750
|
|
|
1,382
|
|
Rail rebate receivables
|
477
|
|
|
776
|
|
Other receivables
|
623
|
|
|
28
|
|
Total prepaid expenses and other current assets
|
$
|
4,867
|
|
|
$
|
3,849
|
|
SMART SAND, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
8. Property, Plant and Equipment, net
Net property, plant and equipment consisted of:
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
December 31, 2017
|
Machinery, equipment and tooling
|
$
|
11,179
|
|
|
$
|
7,802
|
|
Wellsite storage solutions
|
307
|
|
|
—
|
|
Vehicles
|
1,735
|
|
|
1,546
|
|
Furniture and fixtures
|
837
|
|
|
720
|
|
Plant and building
|
147,642
|
|
|
81,561
|
|
Real estate properties
|
4,441
|
|
|
4,432
|
|
Railroad and sidings
|
25,691
|
|
|
10,254
|
|
Land and land improvements
|
24,981
|
|
|
16,378
|
|
Asset retirement obligation
|
10,484
|
|
|
8,408
|
|
Mineral properties
|
10,074
|
|
|
9,878
|
|
Deferred mining costs
|
782
|
|
|
657
|
|
Construction in progress
|
32,363
|
|
|
56,493
|
|
|
270,516
|
|
|
198,129
|
|
Less: accumulated depreciation and depletion
|
37,335
|
|
|
26,367
|
|
Total property, plant and equipment, net
|
$
|
233,181
|
|
|
$
|
171,762
|
|
Depreciation expense was
$4,608
and
$1,744
for the three months ended
September 30, 2018
and
2017
, respectively, and
$11,751
and
$5,094
for the
nine
months ended
September 30, 2018
and
2017
, respectively. Depletion expense was
$31
and
$12
for the three months ended
September 30, 2018
and
2017
, respectively, and
$51
and
$22
for the
nine
months ended
September 30, 2018
and
2017
, respectively.
The Company capitalized
no
interest expense associated with the construction of new property, plant and equipment for the
three and nine
months ended
September 30, 2018
and
2017
.
9. Intangible Assets, Net and Goodwill
The following table summarizes the Company’s intangible assets as of
September 30, 2018
and
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Useful Life (Years)
|
|
Gross Carrying Amount at December 31, 2017
|
|
Assets Acquired Pursuant to Business Combination
|
|
Accumulated Amortization
|
|
Net Book Value at September 30, 2018
|
Developed technology
|
|
13
|
|
$
|
—
|
|
|
$
|
18,800
|
|
|
$
|
482
|
|
|
$
|
18,318
|
|
Customer relationships
|
|
1
|
|
—
|
|
|
270
|
|
|
90
|
|
|
180
|
|
Trade name
|
|
Indefinite
|
|
—
|
|
|
900
|
|
|
—
|
|
|
900
|
|
|
|
|
|
$
|
—
|
|
|
$
|
19,970
|
|
|
$
|
572
|
|
|
$
|
19,398
|
|
The Company uses the straight-line method to determine the amortization expense for its definite lived intangible assets. The weighted-average remaining useful life for the intangible assets is
12.5 years
. Amortization expense related to the purchased intangible assets was
$289
and
$572
for the
three and nine
months ended
September 30, 2018
, respectively.
SMART SAND, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
The table below reflects the future estimated amortization expense for amortizable intangible assets as of
September 30, 2018
.
|
|
|
|
|
|
Twelve Month Period Ending September 30,
|
|
|
2019
|
|
$
|
1,626
|
|
2020
|
|
1,446
|
|
2021
|
|
1,446
|
|
2022
|
|
1,446
|
|
2023
|
|
1,446
|
|
Thereafter
|
|
11,088
|
|
Total
|
|
$
|
18,498
|
|
Goodwill represents the excess of the cost of businesses acquired over the fair market value of identifiable net assets at the dates of acquisition. The following table summarizes the Company’s goodwill as of
September 30, 2018
:
|
|
|
|
|
|
|
|
Total Goodwill
|
Balance at January 1, 2018
|
|
$
|
—
|
|
Goodwill attributable to Quickthree Solutions, Inc. acquisition
|
|
16,935
|
|
Balance at September 30, 2018
|
|
$
|
16,935
|
|
10. Accrued and Other Expenses
Accrued and other expenses were comprised of the following:
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
December 31, 2017
|
Employee related expenses
|
$
|
2,599
|
|
|
$
|
667
|
|
Accrued construction related expenses
|
5,299
|
|
|
2,197
|
|
Accrued legal expenses
|
43
|
|
|
90
|
|
Accrued professional fees
|
430
|
|
|
529
|
|
Accrued royalties
|
1,497
|
|
|
206
|
|
Accrued freight and delivery charges
|
2,849
|
|
|
2,197
|
|
Accrued real estate tax
|
731
|
|
|
—
|
|
Accrued utilities
|
329
|
|
|
176
|
|
Accrued interest
|
223
|
|
|
—
|
|
Sales tax liability
|
134
|
|
|
19
|
|
Deferred rent
|
750
|
|
|
861
|
|
Other accrued liabilities
|
1,510
|
|
|
634
|
|
Total accrued liabilities
|
$
|
16,394
|
|
|
$
|
7,576
|
|
11. Credit Facility
On December 8, 2016, the Company entered into a
$45,000
three
-year senior secured revolving credit facility (the “Credit Facility”) under a revolving credit agreement with Jefferies Finance LLC as administrative and collateral agent (the “Credit Agreement”). Substantially all of the assets of the Company are pledged as collateral under the Credit Facility. The Credit Facility expires on December 8, 2019. On April 8, 2018, the Credit Facility was amended to increase the Company’s total borrowing capacity under the Credit Facility to
$60,000
. The amendment was considered a modification of the Credit Facility. On July 13, 2018, the Credit Facility was amended to (i) increase the limit on the Company’s ability to sell, transfer or dispose of assets, subject to certain considerations, from an aggregate amount of
$25,000
to
$55,000
, (ii) increase the limit on the Company’s ability to incur capital lease obligations from an aggregate principal amount of
$15,000
to
$30,000
and (iii) exclude certain current and future earn-out obligations from the definition of indebtedness in the Credit Agreement.
The Credit Facility contains various reporting requirements, negative covenants and restrictive provisions and requires maintenance of financial covenants, including a fixed charge coverage ratio and a leverage ratio, as defined in the Credit Agreement. As of
September 30, 2018
and
December 31, 2017
,
$44,500
and
$0
, respectively, were outstanding under the Credit
SMART SAND, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Facility and the Company was in compliance with all covenants. As of
September 30, 2018
, the total undrawn availability was
$15,500
.
As of
September 30, 2018
, fees attributable to the lender of
$728
are presented as a discount to the carrying value of the debt and the unamortized amount is presented as a reduction of long-term debt on the balance sheet.
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
December 31, 2017
|
Revolving credit facility
|
$
|
44,500
|
|
|
$
|
—
|
|
Less: Debt discount, net
|
(310
|
)
|
|
—
|
|
Revolving credit facility, net
|
$
|
44,190
|
|
|
$
|
—
|
|
12. Equipment Lease Obligations
The Company entered into various lease arrangements to lease equipment. Equipment cost of
$50
has been capitalized and included in the Company’s property, plant and equipment as of
September 30, 2018
and
December 31, 2017
, respectively. Depreciation expense under lease assets was approximately
$3
and
$73
for the three months ended
September 30, 2018
and
2017
, respectively. Depreciation expense under lease assets was approximately
$113
and
$219
for the
nine
months ended
September 30, 2018
and
2017
, respectively.
As of
September 30, 2018
, the remaining minimum lease payment for equipment lease obligations is
$8
, which is due within one year.
13. Asset Retirement Obligation
The Company had a post-closure reclamation and site restoration obligation of
$8,654
as of
September 30, 2018
. The following is a reconciliation of the total reclamation liability for asset retirement obligations:
|
|
|
|
|
Balance at December 31, 2017
|
$
|
8,982
|
|
Additions and revisions of prior estimates
|
1,561
|
|
Accretion expense
|
330
|
|
Settlement of liability
|
(2,219
|
)
|
Balance at September 30, 2018
|
$
|
8,654
|
|
14. Stock-Based Compensation
Equity Incentive Plan
In May 2012, the Board approved the 2012 Equity Incentive Plan (“2012 Plan”), which provides for the issuance of equity awards of up to a maximum of
440
shares of the Company’s common stock to employees, non-employee members of the Board, and consultants of the Company. During 2014, the 2012 Plan was amended to provide for the issuance of equity awards of up to
880
shares of the Company’s common stock. The awards can be issued in the form of incentive stock options, non-qualified stock options or restricted stock, and have expiration dates of
5
or
10 years
after issuance, depending on whether the recipient already holds above
10%
of the voting power of all classes of the Company’s shares. The exercise price will be based on the fair market value of the share on the date of issuance; vesting periods will be determined by the board upon issuance of the equity award. Subsequent to the Company’s initial public offering,
no
additional equity awards were made under the 2012 Plan.
In November 2016, in connection with its initial public offering, the Company adopted the 2016 Omnibus Incentive Plan (“2016 Plan”) which provides for the issuance of equity awards of up to a maximum of
3,911
shares of the Company’s common stock to employees, non-employee members of the board and consultants of the Company. Together the 2012 Plan and the 2016 Plan are referenced to as the “Plans”.
During the
nine
months ended
September 30, 2018
and
2017
,
742
and
353
shares of restricted stock were issued under the Plans, respectively. The grant date fair value per share of all the outstanding restricted stock was
$3.03
-
$19.00
. The shares vest over
one
to
five years
from their respective grant dates. For equity awards issued under the 2016 Plan, the grant date fair value was either the actual market price of the Company’s shares or an adjusted price using a Monte Carlo simulation for awards subject to the Company’s performance as compared to a defined peer group. For equity awards issued under the 2012 Plan, the
SMART SAND, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
grant date fair value was calculated based on a weighted analysis of (i) publicly-traded companies in a similar line of business to the Company (market comparable method)—Level 2 inputs, and (ii) discounted cash flows of the Company—Level 3 inputs. The Company recognized, in operating expenses on the consolidated income statements,
$873
and
$618
of compensation expense for the restricted stock during the three months ended
September 30, 2018
and
2017
, respectively. The Company recognized, in operating expenses on the consolidated income statements,
$2,133
and
$1,378
of compensation expense for the restricted stock during the
nine
months ended
September 30, 2018
and
2017
, respectively. At
September 30, 2018
, the Company had unrecognized compensation expense of
$6,040
related to granted but unvested stock awards, which is to be recognized as follows:
|
|
|
|
|
|
2019
|
|
$
|
2,900
|
|
2020
|
|
1,980
|
|
2021
|
|
891
|
|
2022
|
|
269
|
|
|
|
$
|
6,040
|
|
The following table summarizes restricted stock activity under the Plans from
December 31, 2017
through
September 30, 2018
:
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted
Average
|
Unvested, December 31, 2017
|
534
|
|
|
$
|
11.27
|
|
Granted
|
742
|
|
|
$
|
6.61
|
|
Vested
|
(177
|
)
|
|
$
|
(12.15
|
)
|
Forfeited
|
(37
|
)
|
|
$
|
(12.64
|
)
|
Unvested, September 30, 2018
|
1,062
|
|
|
$
|
9.86
|
|
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.
15. 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, 2018
and
2017
, the effective tax rate was approximately
27.6%
and
19.3%
, respectively, based on the annual effective tax rate net of discrete federal and state taxes. For the
nine
months ended
September 30, 2018
and
2017
, the effective tax rate was approximately
23.9%
and
24.0%
, respectively, based on the annual effective tax rate net of discrete federal and state taxes. The Company’s effective tax rate for the
three and nine
months ended
September 30, 2018
benefited from the decrease in the U.S. statutory tax rate from
35.0%
in the prior year to
21.0%
in the current period as a result of the Tax Reform Act that was enacted on December 22, 2017. The computation of the effective tax rate includes modifications from the statutory rate such as income tax credits, among other items. The difference in the effective tax rate relative to the statutory rate was primarily due to the change in the forecasted pretax income between quarters relative to the projected modifications to the tax rate during the
three and nine
months ended
September 30, 2018
and a benefit related to the domestic production activities deduction and stock-based compensation during the
three and nine
months ended
September 30, 2017
. For the year of 2018, the Company will record a net operating loss for tax purposes due to the significant amount of capital expenditures, which are eligible for 100% expensing available under the Tax Reform Act.
In assessing the realizability of deferred tax assets, the Company considered whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the period in which those temporary differences become deductible. At September 30, 2018 and December 31, 2017, based on the Company’s future income projections, management determined it was more
SMART SAND, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
likely than not that the Company will be able to realize the benefits of the deductible temporary differences. As of September 30, 2018 and December 31, 2017, the Company determined no valuation allowance was necessary.
The Company has evaluated its tax positions taken as of
September 30, 2018
and
December 31, 2017
and believes all positions taken would be upheld under examination from income taxing authorities. Therefore,
no
liability for the effects of uncertain tax positions has been recorded in the accompanying consolidated balance sheets as of
September 30, 2018
and
December 31, 2017
. The Company is open to examination by taxing authorities since incorporation.
16. Concentrations
As of
September 30, 2018
,
three
customers accounted for
74%
of the Company’s total accounts receivable. As of
December 31, 2017
,
three
customers accounted for
49%
of the Company’s total accounts receivable.
During the three months ended
September 30, 2018
,
82%
of the Company’s revenues were earned from
five
customers. During the three months ended
September 30, 2017
,
64%
of the Company’s revenues were earned from
three
customers. During the
nine
months ended
September 30, 2018
,
55%
of the Company’s revenues were earned from
three
customers. During the
nine
months ended
September 30, 2017
,
74%
of the Company’s revenues were earned from
four
customers.
As of
September 30, 2018
,
one
vendor accounted for
18%
of the Company’s accounts payable. As of
December 31, 2017
,
two
vendors accounted for
28%
of the Company’s accounts payable.
During the three months ended
September 30, 2018
,
three
suppliers accounted for
58%
of the Company’s cost of goods sold. During the three months ended
September 30, 2017
,
one
supplier accounted for
56%
of the Company’s cost of goods sold. During the
nine
months ended
September 30, 2018
,
two
suppliers accounted for
44%
of the Company’s cost of goods sold. During the
nine
months ended
September 30, 2017
,
one
supplier accounted for
53%
of the Company’s cost of goods sold.
Currently, the Company’s inventory and operations are primarily located in Wisconsin. There is a risk of loss if there are significant environmental, legal or economic changes to this geographic area. The Company currently primarily utilizes one third-party rail company to ship its products to customers from its plant. There is a risk of business loss if there are significant impacts to this third party’s operations.
17. Related Party Transactions
The Company reimbursed Clearlake Capital Partners II (Master), L.P.
$5
and
$0
for the three months ended
September 30, 2018
and
2017
, respectively, and
$28
and
$39
for the
nine
months ended
September 30, 2018
and
2017
, respectively, for certain out of pocket and other expenses in connection with certain management and administrative support services provided.
18. Commitments and Contingencies
Future Minimum Commitments
The Company is obligated under certain operating leases, minimum royalty payments for our leased properties in West Texas, and rental agreements for railcars, office space, and other equipment. Future minimum annual commitments under such operating leases at
September 30, 2018
are as follows:
|
|
|
|
|
Twelve Month Period Ending September 30,
|
|
2019
|
$
|
17,382
|
|
2020
|
11,818
|
|
2021
|
9,937
|
|
2022
|
6,447
|
|
2023
|
4,430
|
|
Thereafter
|
36,075
|
|
Total
|
$
|
86,089
|
|
Expense related to operating leases and rental agreements was
$3,965
and
$2,677
for three months ended
September 30, 2018
and
2017
, respectively. Expense related to operating leases and rental agreements was
$10,658
and
$6,744
for the
nine
months ended
September 30, 2018
and
2017
, respectively.
SMART SAND, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Lease expense related to railcars is included in cost of goods sold in the condensed consolidated income statements.
Litigation
The Company is periodically involved in litigation and claims incidental to its operation. Management believes that any pending litigation will not have a material impact to the Company’s financial position.
Required Capital
As of
September 30, 2018
, the Company
has commitments related to its Oakdale facility, wellsite storage solutions systems and other expansion projects of approximately
$23,000
.
Consulting Agreements
On August 1, 2010, the Company entered into a consulting agreement related to the purchase of land with a third party. The third party acted as an agent for the Company to obtain options to purchase certain identified real property in Wisconsin, as well as obtain permits and approvals necessary to open, construct and operate a sand mining and processing facility on such real property. The third party’s compensation, which continues indefinitely, consists of reimbursement of certain expenses and
$1,000
per each acre purchased as a closing fee. For the three months ended
September 30, 2018
and
2017
, the Company incurred
no
closing costs and expense reimbursements. For the
nine
months ended
September 30, 2018
and
2017
, the Company incurred
$60
and
$19
of closing costs and expense reimbursements, respectively.
The closing costs have been capitalized in property and equipment in the accompanying consolidated balance sheets when they relate to the acquisition of land.
In addition to the aforementioned fees, the third-party agreement provides for tonnage fees based upon mining operations. The payment of
$0.50
per sold ton of certain grades of sand that have been mined and sold from the properties acquired under the consulting agreement continues indefinitely. The minimum annual tonnage fee is
$200
per contract year, which runs from August 1 to July 31. During the three months ended
September 30, 2018
and
2017
, the Company incurred
$225
and
$133
related to tonnage fees, respectively. During the
nine
months ended
September 30, 2018
and
2017
, the Company incurred
$593
and
$362
related to tonnage fees, respectively. These costs are presented as operating expenses in the condensed consolidated income statement.
Bonds
The Company entered into a performance bond with Jackson County, Wisconsin and Monroe County, Wisconsin for
$4,400
and
$900
, respectively. The Company provided a performance bond to assure performance under the reclamation plan filed with each respective county. The Company entered into permit bonds amounting to
$1,350
with certain towns and counties in which it operates to use designated town and county roadways. The Company provided these permit bonds to assure maintenance and restoration of the roadways. The Company has an outstanding
$1,943
bond to assure performance under its agreement with a pipeline common carrier. As of
September 30, 2018
and
December 31, 2017
,
$0
and
$487
, respectively, of cash is being held as collateral related to the bond and is presented as restricted cash on the consolidated balance sheets. As of April 13, 2018, the Company no longer had any restrictions on cash.
19. Subsequent Events
The Company has evaluated events and transactions subsequent to the balance sheet date and through the date the condensed consolidated financial statements were available to be issued. Based on this evaluation, the Company is not aware of any other events or transactions that occurred subsequent to
September 30, 2018
that would require recognition or disclosures in the consolidated financial statements.