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 June 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

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 July 27, 2021: 43,295,834

---

TABLE OF CONTENTS

						PAGE
PART I			FINANCIAL INFORMATION
ITEM 1.			Financial Statements			3
			Condensed Consolidated Balance Sheets as of June 30, 2021 (Unaudited) and December 31, 2020			3
			Condensed Consolidated Income Statements for the Three and Six Months Ended June 30, 2021 and 2020 (Unaudited)			4
			Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2021 and 2020 (Unaudited)			5
			Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Three and Six Months Ended June 30, 2021 and 2020 (Unaudited)			6
			Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2021 and 2020 (Unaudited)			8
			Notes to the Condensed Consolidated Financial Statements (Unaudited)			9
ITEM 2.			Management’s Discussion and Analysis of Financial Condition and Results of Operations			21
ITEM 3.			Quantitative and Qualitative Disclosures about Market Risk			36
ITEM 4.			Controls and Procedures			36
PART II			OTHER INFORMATION			37
ITEM 1.			Legal Proceedings			37
ITEM 1A.			Risk Factors			37
ITEM 2.			Unregistered Sales of Equity Securities and Use of Proceeds			37
ITEM 3.			Defaults upon Senior Securities			37
ITEM 4.			Mine Safety Disclosures			37
ITEM 5.			Other Information			37
ITEM 6.			Exhibits			38
SIGNATURES						39

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”).
“Exchange Act”						The Securities Exchange Act of 1934, as amended.
“Securities Act”						The Securities Act of 1933, as amended.
“FCA”, “DAT”, “DAP”						Free Carrier, Delivered at Terminal, Delivered at Place, respectively, Incoterms 2010.
“FASB”, “ASU”, “ASC”, “GAAP”						Financial Accounting Standards Board, Accounting Standards Update, Accounting Standards Codification, Accounting Principles Generally Accepted in the United States, respectively.

2

---

PART I – FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

SMART SAND, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

			June 30, 2021						December 31, 2020
			(unaudited)
			(in thousands, except share amounts)
Assets
Current assets:
Cash and cash equivalents			$	39,278					$	11,725
Accounts receivable			10,371						69,720
Unbilled receivables			1,220						127
Inventory			15,937						19,136
Prepaid expenses and other current assets			14,860						11,378
Total current assets			81,666						112,086
Property, plant and equipment, net			268,417						274,676
Operating lease right-of-use assets			29,028						32,099
Intangible assets, net			7,857						8,253
Other assets			490						563
Total assets			$	387,458					$	427,677
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable			$	4,942					$	3,268
Accrued expenses and other liabilities			10,037						13,142
Deferred revenue, current			4,827						6,875
Long-term debt, net, current			7,177						6,901
Operating lease liabilities, current			7,602						7,077
Total current liabilities			34,585						37,263
Deferred revenue, net			6,984						3,482
Long-term debt, net			18,826						22,445
Operating lease liabilities, long-term			24,497						27,020
Deferred tax liabilities, long-term, net			27,141						32,981
Asset retirement obligation			16,108						14,996
Contingent consideration			—						180
Other non-current liabilities			505						503
Total liabilities			128,646						138,870
Commitments and contingencies (Note 15)
Stockholders’ equity
Common stock, $0.001 par value, 350,000,000 shares authorized; 43,547,924 issued and 41,832,789 outstanding at June 30, 2021; 43,193,394 issued and 41,575,129 outstanding at December 31, 2020			42						42
Treasury stock, at cost, 1,715,135 and 1,618,265 shares at June 30, 2021 and December 31, 2020, respectively			(4,422)						(4,134)
Additional paid-in capital			172,512						171,209
Retained earnings			90,088						121,267
Accumulated other comprehensive income			592						423
Total stockholders’ equity			258,812						288,807
Total liabilities and stockholders’ equity			$	387,458					$	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 June 30,												Six Months Ended June 30,
			2021						2020						2021						2020
			(in thousands, except per share amounts)
Revenues:
Sand sales revenue			$	28,801					$	7,375					$	51,948					$	38,362
Shortfall revenue			—						14,000						1,741						15,307
Logistics revenue			838						4,731						3,400						19,925
Total revenue			29,639						26,106						57,089						73,594
Cost of goods sold			31,999						11,906						64,426						52,995
Gross profit			(2,360)						14,200						(7,337)						20,599
Operating expenses:
Salaries, benefits and payroll taxes			2,285						2,155						4,660						5,057
Depreciation and amortization			577						461						1,138						914
Selling, general and administrative			3,855						2,930						7,009						6,460
Bad debt expense			19,592						—						19,592						—
Change in the estimated fair value of contingent consideration			—						—						—						(1,020)
Total operating expenses			26,309						5,546						32,399						11,411
Operating (loss) income			(28,669)						8,654						(39,736)						9,188
Other income (expenses):
Interest expense, net			(513)						(607)						(1,060)						(1,079)
Other income			3,467						63						3,665						82
Total other income (expenses), net			2,954						(544)						2,605						(997)
(Loss) income before income tax expense (benefit)			(25,715)						8,110						(37,131)						8,191
Income tax expense (benefit)			1,552						3,470						(5,952)						3,635
Net (loss) income			$	(27,267)					$	4,640					$	(31,179)					$	4,556
Net (loss) income per common share:
Basic			$	(0.65)					$	0.12					$	(0.75)					$	0.11
Diluted			$	(0.65)					$	0.12					$	(0.75)					$	0.11
Weighted-average number of common shares:
Basic			41,748						39,644						41,689						39,867
Diluted			41,748						39,644						41,689						39,867

 

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

4

---

SMART SAND, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

			Three Months Ended June 30,												Six Months Ended June 30,
			2021						2020						2021						2020
			(in thousands)
Net (loss) income			$	(27,267)					$	4,640					$	(31,179)					$	4,556
Other comprehensive income:
Foreign currency translation adjustment			44						384						169						221
Comprehensive (loss) income			$	(27,223)					$	5,024					$	(31,010)					$	4,777

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

5

---

SMART SAND, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(UNAUDITED) 

Six months ended June 30, 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

6

---

SMART SAND, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (continued)

(UNAUDITED) 

Six months ended June 30, 2020

			Common Stock												Treasury Stock												Additional Paid-in Capital												Accumulated Other Comprehensive Loss						Total Stockholders’ Equity
			Outstanding Shares						Par Value						Shares						Amount												Retained Earnings
			(in thousands, except share amounts)
Balance at December 31, 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
Restricted stock buy back			(30,673)						—						30,673						(31)						—						—						—						(31)
Net income			—						—						—						—						—						4,640						—						4,640
Balance at June 30, 2020			39,754,071						$	40					1,560,398						$	(4,024)					$	167,263					$	87,869					$	180					$	251,328

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

7

---

SMART SAND, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

			Six Months Ended June 30,
			2021						2020
			(in thousands)
Operating activities:
Net (loss) income			$	(31,179)					$	4,556
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation, depletion and accretion of asset retirement obligation			12,604						10,697
Amortization of intangible assets			398						398
Loss (gain) on disposal of assets			(60)						275
Provision for bad debt			19,592						—
Amortization of deferred financing cost			53						53
Accretion of debt discount			93						92
Deferred income taxes			(5,839)						1,004
Stock-based compensation, net			1,252						1,968
Employee stock purchase plan compensation			14						25
Change in contingent consideration fair value			—						(1,020)
Changes in assets and liabilities:
Accounts receivable			39,756						2,957
Unbilled receivables			(1,094)						4,717
Inventory			3,199						1,128
Prepaid expenses and other assets			(2,391)						460
Deferred revenue			1,215						(2,196)
Accounts payable			1,698						(361)
Accrued and other expenses			(2,831)						(2,557)
Income taxes payable			—						3,646
Net cash provided by operating activities			36,480						25,842
Investing activities:
Purchases of property, plant and equipment			(5,043)						(6,423)
Proceeds from disposal of assets			2						—
Net cash used in investing activities			(5,041)						(6,423)
Financing activities:
Proceeds from the issuance of notes payable			—						952
Repayments of notes payable			(3,370)						(2,482)
Payments under equipment financing obligations			(65)						(56)
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			17						46
Purchase of treasury stock			(288)						(1,045)
Net cash used in financing activities			(3,886)						(5,415)
Net increase in cash and cash equivalents			27,553						14,004
Cash and cash equivalents at beginning of year			11,725						2,639
Cash and cash equivalents at end of period			$	39,278					$	16,643
Supplemental disclosure of cash flow information
Non-cash investing activities:
Asset retirement obligation			$	737					$	—
Non-cash financing activities:
Capitalized expenditures in accounts payable and accrued expenses			$	172					$	225
Issuance of acquisition common stock			$	20					$	—

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 completed construction of the first phase of its frac sand mine and related processing facility in Oakdale, Wisconsin and commenced operations in July 2012. Through multiple expansions at Oakdale and the recent 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. 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 SmartPath 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 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 Securities and Exchange Commission for quarterly reports on Form 10-Q and therefore do not include all the information and notes required by GAAP. In the opinion of management, all adjustments and disclosures necessary for a fair presentation of these interim statements have been included. All adjustments are of a normal recurring nature. The results reported in these interim statements are not necessarily indicative of the results that may be reported for the entire year. The consolidated balance sheet as of December 31, 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. 

Certain 2020 statement of cash flow items have been reclassified to conform to the current financial statement presentation. These reclassifications have no effect on previously reported net income.

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

9

---

SMART SAND, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(IN THOUSANDS, EXCEPT PER SHARE DATA)

(UNAUDITED)

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 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 over the last 18 months. 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 six months ended June 30, 2021, the Company recorded $3,352 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 June 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.

In connection with the acquisition of Eagle Proppants Holdings, the Company, as borrower, also entered into a Loan Agreement with Eagle, as lender. See Note 7 - Debt, for additional information.

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

11

---

SMART SAND, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(IN THOUSANDS, EXCEPT PER SHARE DATA)

(UNAUDITED)

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 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. Company’s allocation of the purchase price was complete as of December 31, 2020.

NOTE 4 — Inventory

Inventory consisted of the following:

			June 30, 2021						December 31, 2020
Raw material			$	271					$	428
Work in progress			7,092						10,465
Finished goods			4,497						4,400
Spare parts			4,077						3,843
Total inventory			$	15,937					$	19,136

NOTE 5 — Property, Plant and Equipment, net

Net property, plant and equipment consisted of:

			June 30, 2021						December 31, 2020
Machinery, equipment and tooling			$	30,079					$	29,002
SmartSystems			26,498						22,352
Vehicles			3,021						2,893
Furniture and fixtures			1,325						1,302
Plant and building			200,202						199,867
Real estate properties			6,478						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			2,448						2,123
Construction in progress			6,864						7,489
			365,945						359,664
Less: accumulated depreciation and depletion			97,528						84,988
Total property, plant and equipment, net			$	268,417					$	274,676

12

---

SMART SAND, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(IN THOUSANDS, EXCEPT PER SHARE DATA)

(UNAUDITED)

Depreciation expense was $6,037 and $5,253 for the three months ended June 30, 2021 and 2020, respectively, and $12,213 and $10,529 for the six months ended June 30, 2021 and 2020, respectively.

NOTE 6 — Accrued and Other Expenses

Accrued and other expenses were comprised of the following:

			June 30, 2021						December 31, 2020
Employee related expenses			$	1,615					$	1,048
Accrued equipment			—						55
Accrued professional fees			1,016						1,129
Accrued royalties			2,288						2,624
Accrued freight and delivery charges			730						2,901
Accrued real estate tax			1,388						1,637
Accrued utilities			704						748
Sales tax liability			855						1,386
Other accrued liabilities			1,441						1,614
Total accrued liabilities			$	10,037					$	13,142

NOTE 7 — Debt

The current portion of long-term debt consists of the following:

			June 30, 2021						December 31, 2020
Oakdale Equipment Financing			$	3,706					$	3,600
Finance leases			124						123
Notes Payable			3,347						3,178
Long-term debt, net, current			$	7,177					$	6,901

Long-term debt, net of current portion consists of the following:

			June 30, 2021						December 31, 2020
ABL Credit Facility			$	—					$	—
Oakdale Equipment Financing, net			13,449						15,236
Finance Leases			291						351
Notes Payable			5,086						6,858
Long-term debt, net			$	18,826					$	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			$	—					$	2,319					$	1,888					$	75					$	4,282
2022			—						4,638						3,551						137						8,326
2023			—						4,638						2,405						245						7,288
2024			—						6,888						807						—						7,695
2025			—						1,724						187						—						1,911
2026 and thereafter			—						—						355						—						355
Total minimum payments			—						20,207						9,193						457						29,857
Amount representing interest			—						(2,412)						(760)						(42)						(3,214)
Amount representing unamortized lender fees			—						(640)												—						(640)
Present value of payments																					415
Less: current portion			—						(3,706)						(3,347)						(124)						(7,177)
Total long-term debt, net			$	—					$	13,449					$	5,086					$	291					$	18,826

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 June 30, 2021 was $14,105 and is based on the Company’s eligible accounts receivable and inventory, as described in the ABL Credit Agreement. As of June 30, 2021, there were no amounts outstanding under the ABL Credit Facility, $1,232 letters of credit and $12,873 was available to be drawn. As of June 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. There have been 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						June 30, 2021						December 31, 2020
Right-of-use assets
Operating						Operating right-of-use assets						$	29,028					$	32,099
Financing						Property, plant and equipment, net						295						373
Total right-of use assets												$	29,323					$	32,472
Lease liabilities
Operating						Operating lease liabilities, current and long-term portions						$	32,099					$	34,097
Financing						Long-term debt, current and long-term portions						415						474
Total lease liabilities												$	32,514					$	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 six months ended June 30, 2021 and 2020 was as follows:

			Three Months Ended June 30,												Six Months Ended June 30,
			2021						2020						2021						2020
Finance lease cost
Amortization of right-of-use assets			$	35					$	35					$	70					$	69
Interest on lease liabilities			7						9						15						19
Operating lease cost			2,878						3,105						5,765						7,095
Short-term lease cost			34						64						34						234
Total lease cost			$	2,954					$	3,213					$	5,884					$	7,417

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 six months ended June 30, 2021 and 2020 is as follows:

						Six months ended June 30,
						2021						2020
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows used for finance leases						$	15					$	19
Operating cash flows used for operating leases						$	4,693					$	6,902
Financing cash flows used for finance leases						$	61					$	56
Right-of-use assets obtained in exchange for new operating lease liabilities						$	1,743					$	4,322
Weighted average remaining lease term - finance leases						2.0 years						3.2 years
Weighted average discount rate - finance leases						6.60		%				6.60		%
Weighted average remaining lease term - operating leases						3.6 years						3.2 years
Weighted average discount rate - operating leases						5.80		%				5.68		%

Maturities of the Company’s lease liabilities as of June 30, 2021 are as follows:

						Operating Leases						Finance Leases						Total
Remainder of 2021						$	4,393					$	65					$	4,458
2022						9,370						138						9,508
2023						8,499						245						8,744
2024						6,918						—						6,918
2025						3,173						—						3,173
Thereafter						4,000						—						4,000
Total cash lease payments						36,353						448						36,801
Less: amounts representing interest						(4,254)						(33)						(4,287)
Total lease liabilities						$	32,099					$	415					$	32,514

NOTE 9 — Asset Retirement Obligation

The Company had a post-closure reclamation and site restoration obligation of $16,108 as of June 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			375
Balance at June 30, 2021			$	16,108

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 June 30,																								Six Months Ended June 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			$	28,801					97		%				$	7,375					28		%				$	51,948					91		%				$	38,362					52		%
Shortfall revenue			—						—		%				14,000						54		%				1,741						3		%				15,307						21		%
Logistics revenue			838						3		%				4,731						18		%				3,400						6		%				19,925						27		%
Total revenues			$	29,639					100		%				$	26,106					100		%				$	57,089					100		%				$	73,594					100		%

The Company recorded $10,357 of deferred revenue on the balance sheet on December 31, 2020, of which $4,194 has been recognized in the six months ended June 30, 2021. Of the remaining amount, the Company expects to recognize $2,681 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 six months ended June 30, 2021. Because their effect would be anti-dilutive, 2,253 shares of common stock underlying equity-based awards were excluded from the calculation of diluted earnings per share for both three and six months ended June 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 Board 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 six months ended June 30, 2021 and 2020, 14 and 0 shares of restricted stock were issued under the Plans, respectively. The grant date fair value per share of all the outstanding restricted stock was $2.44 - $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, $572 and $943 of compensation expense for the restricted stock during the three months ended June 30, 2021 and 2020, respectively. The Company recognized, in operating expenses and cost of goods sold on the condensed consolidated

17

---

SMART SAND, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(IN THOUSANDS, EXCEPT PER SHARE DATA)

(UNAUDITED)

income statements, $1,252 and $1,968 of compensation expense for the restricted stock during the six months ended June 30, 2021 and 2020, respectively. There is no impact to the cash flows of the Company related to stock-based compensation expense. At June 30, 2021, the Company had unrecognized compensation expense of $2,429 related to granted but unvested stock awards, which is to be recognized as follows:

Remainder of 2021						$	1,058
2022						858
2023						509
2024						3
2025						1
Total						$	2,429

 

The following table summarizes restricted stock activity under the Plans from December 31, 2020 through June 30, 2021:

			Number of Shares						Weighted Average
Unvested, December 31, 2020			1,886						$	5.14
Granted			14						$	3.07
Vested			(321)						$	8.34
Forfeited			(130)						$	6.35
Unvested, June 30, 2021			1,449						$	3.26

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 June 30, 2021 and 2020, the effective tax rate was approximately (6.0)% and 42.8%, respectively, based on the annual effective tax rate net of discrete federal and state taxes. For the six months ended June 30, 2021 and 2020, the effective tax rate was approximately 16.0% and 44.4%, respectively, based on the annual effective tax rate net of discrete federal and state taxes. For the three and six months ended June 30, 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 $2,684 for uncertain tax positions included in deferred tax liabilities, long-term, net on its balance sheet as of June 30, 2021, related to its depletion deduction methodology, and a corresponding increase to the income tax expense on its condensed consolidated income statements for the three and six months ended June 30, 2021. 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 return are the subject of any audit or investigation by taxing authorities.

18

---

SMART SAND, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(IN THOUSANDS, EXCEPT PER SHARE DATA)

(UNAUDITED)

NOTE 14 — Concentrations

As of June 30, 2021, four customers accounted for 84% 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 June 30, 2021, 75% of the Company’s revenues were earned from four customers. During the three months ended June 30, 2020, 91% of the Company’s revenues were earned from two customers. During the six months ended June 30, 2021, 66% of the Company’s revenues were earned from three customers. During the six months ended June 30, 2020, 80% of the Company’s revenues were earned from four customers.

As of June 30, 2021, one vendor accounted for 21% 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 June 30, 2021, two suppliers accounted for 53% of the Company’s cost of goods sold. During the three months ended June 30, 2020, three suppliers accounted for 50% of the Company’s cost of goods sold. During the six months ended June 30, 2021, two suppliers accounted for 51% of the Company’s cost of goods sold. During the six months ended June 30, 2020, two suppliers accounted for 57% 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 area.

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 June 30, 2021 are as follows:

Remainder of 2021			$	1,859
2022			2,467
2023			2,573
2024			2,469
2025			2,462
Thereafter			26,886
Total			$	38,716

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 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

19

---

SMART SAND, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(IN THOUSANDS, EXCEPT PER SHARE DATA)

(UNAUDITED)

take-or-pay Master Product Purchase Agreement and coterminous Railcar Usage Agreement. Discovery was completed in the fall of 2020 and the trial took place in December 2020. On June 1, 2021, the Court issued a verdict in favor of the Company and 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 June 30, 2021 was $9,132.

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 EBITDA, Adjusted EBITDA, contribution margin and free cash flow herein as non-GAAP measures of our financial performance. For further discussion of EBITDA, Adjusted EBITDA, contribution margin and free cash flow, see the section entitled “Non-GAAP Financial Measures.” We define various terms to simplify the presentation of information in this Report. All share amounts are presented in thousands.

Forward-Looking Statements

This discussion contains forward-looking statements that are based on the beliefs of our management, as well as assumptions made by, and information currently available to our management. Actual results could differ materially from those discussed in or implied by forward-looking statements as a result of various factors, including those discussed herein and in the section entitled “Risk Factors” in our Form 10-K for the year ended December 31, 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 quarterly report, may adversely affect our results as indicated in forward-looking statements. You should read this quarterly report and the documents that we have filed as exhibits hereto completely and with the understanding that our actual future results may be materially different from what we expect. The words “may,” “will,” “should,” “could,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “intend,” “potential,” “might,” “would,” “continue” or the negative of these terms or other comparable terminology and similar words are intended to identify estimates and forward-looking statements. Estimates and forward-looking statements speak only as of the date they were made, and, except to the extent required by law, we undertake no obligation to update, to revise or to review any estimate and/or forward-looking statement because of new information, future events or other factors. Estimates and forward-looking statements involve risks and uncertainties and are not guarantees of future performance. As a result of the risks and uncertainties described above, the estimates and forward-looking statements discussed in this quarterly report might not occur and our future results, level of activity, performance or achievements may differ materially from those expressed in these forward-looking statements due to, including, but not limited to, the factors mentioned above, and the differences may be material and adverse. Because of these uncertainties, you should not place undue reliance on these forward-looking statements.

Overview 

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. We provide Northern White sand in-basin at this terminal, which allows us to offer more efficient delivery options to customers operating in the Bakken Formation in the Williston Basin.

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 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 the first half of 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 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 that Northern White frac sand has logistical advantages in the Marcellus, Bakken, and western basins of Colorado and

22

---

SMART SAND, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(UNAUDITED)

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 June 30, 2021 Compared to Three Months Ended June 30, 2020

The following table summarizes our revenue and expenses for the periods indicated.

			Three Months Ended June 30,												Change
			2021						2020						Dollars						Percentage
Revenues:
Sand sales revenue			$	28,801					$	7,375					$	21,426					291		%
Shortfall revenue			—						14,000						(14,000)						(100)		%
Logistics revenue			838						4,731						(3,893)						(82)		%
Total revenue			29,639						26,106						3,533						14		%
Cost of goods sold			31,999						11,906						20,093						169		%
Gross profit			(2,360)						14,200						(16,560)						(117)		%
Operating expenses:
Salaries, benefits and payroll taxes			2,285						2,155						130						6		%
Depreciation and amortization			577						461						116						25		%
Selling, general and administrative			3,855						2,930						925						32		%
Bad debt expense			19,592						—						19,592						Not meaningful
Total operating expenses			26,309						5,546						20,763						374		%
Operating (loss) income			(28,669)						8,654						(37,323)						(431)		%
Other income (expenses):
Interest expense, net			(513)						(607)						94						(15)		%
Other income			3,467						63						3,404						5,403		%
Total other expenses, net			2,954						(544)						3,498						(643)		%
(Loss) income before income tax expense			(25,715)						8,110						(33,825)						(417)		%
Income tax expense			1,552						3,470						(1,918)						(55)		%
Net (loss) income			$	(27,267)					$	4,640					$	(31,907)					(688)		%

    Revenues

Revenues were $29.6 million for the three months ended June 30, 2021, during which time we sold approximately 767,000 tons of sand. Revenues for the three months ended June 30, 2020 were $26.1 million, during which time we sold approximately 208,000 tons of sand. The key factors contributing to the increase in revenues for the three months ended June 30, 2021 as compared to the three months ended June 30, 2020 were as follows:

•Sand sales revenue increased from $7.4 million for the three months ended June 30, 2020 to $28.8 million for the three months ended June 30, 2021 as a result of higher total volumes sold. The volumes sold during the second 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. Sand sales during the second quarter of 2021 were negatively impacted by the continued depression of frac sand prices due to oversupply.

•We had no contractual shortfall revenue for the three months ended June 30, 2021 compared to $14.0 million of contractual shortfall revenue for the three months ended June 30, 2020. Our customer contracts dictate whether

24

---

SMART SAND, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(UNAUDITED)

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 $0.8 million for the three months ended June 30, 2021 compared to $4.7 million for the three months ended June 30, 2020. The decrease in logistics revenue was due to the shift of sales to more in-basin shipments, which includes transportation and any other handling services, rather than mine gate shipments.

    Cost of Goods Sold

Cost of goods sold was $32.0 million and $11.9 million for the three months ended June 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. During the second quarter of 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 the Company remains focused on other cost-saving measures.

    Gross Profit

Gross profit was $(2.4) million for the three months ended June 30, 2021, compared to $14.2 million for the three months ended June 30, 2020. The decline in profitability for the three months ended June 30, 2021 as compared to the three months ended June 30, 2020 was primarily due to decreased shortfall revenue and lower average sales price of our sand.

    Operating Expenses

Operating expenses were $26.3 million and $5.5 million for the three months ended June 30, 2021 and 2020, respectively. We recorded $19.6 million as non-cash bad debt expense in the current period, 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 and Release, dated as of June 28, 2021 (the “Settlement Agreement”), by and between the Company and U.S. Well Services, LLC (“U.S. Well”). Salaries, benefits and payroll taxes were relatively consistent at $2.3 million for the three months ended June 30, 2021 as compared to $2.2 million for the three months ended June 30, 2020. Depreciation and amortization was also relatively consistent at $0.5 million for the three months ended June 30, 2020 as compared to $0.6 million for the three months ended June 30, 2021. Selling, general and administrative expenses increased from $2.9 million for the three months ended June 30, 2020 to $3.9 million for the three months ended June 30, 2021, primarily due to costs related to our newly acquired Illinois operating facilities and headcount increases compared to the prior period, which included reduced headcount and salaries for all employees due to COVID-19.

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 June 30, 2021, the Company recorded $3.4 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. We expect to continue to qualify for the employee retention credit for approximately $1.7 million for each of the remaining quarters of 2021.

Interest Expense

We incurred $0.5 million and $0.6 million of net interest expense for the three months ended June 30, 2021 and 2020, respectively. The decrease in interest expense for the three months ended June 30, 2021 was primarily due to lower total debt outstanding.

    Income Tax Expense

For the three months ended June 30, 2021 and 2020, our effective tax rate was approximately (6.0)% and 42.8%, 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. We recorded a liability of $2.7 million for uncertain tax positions included in

25

---

SMART SAND, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(UNAUDITED)

deferred tax liabilities, long-term, net on our balance sheet as of June 30, 2021, related to our depletion deduction methodology, and a corresponding increase to the income tax expense on our condensed consolidated income statements for the three months ended June 30, 2021.

    Net (Loss) Income

Net loss was $(27.3) million for the three months ended June 30, 2021 as compared to net income of $4.6 million for the three months ended June 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 combined with lower average sale prices per ton of our sand and $14.0 million less shortfall revenue in the current period.

Six Months Ended June 30, 2021 Compared to Six Months Ended June 30, 2020

The following table summarizes our revenue and expenses for the periods indicated.

			Six Months Ended June 30,												Change
			2021						2020						Dollars						Percentage
			(in thousands)
Revenues:
Sand sales revenue			51,948						38,362						13,586						35		%
Shortfall revenue			1,741						15,307						(13,566)						(89)		%
Logistics revenue			3,400						19,925						(16,525)						(83)		%
Total revenue			57,089						73,594						(16,505)						(22)		%
Cost of goods sold			64,426						52,995						11,431						22		%
Gross profit			(7,337)						20,599						(27,936)						(136)		%
Operating expenses:
Salaries, benefits and payroll taxes			4,660						5,057						(397)						(8)		%
Depreciation and amortization			1,138						914						224						25		%
Selling, general and administrative			7,009						6,460						549						8		%
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			32,399						11,411						20,988						184		%
Operating income			(39,736)						9,188						(48,924)						(532)		%
Other income (expenses):
Interest expense, net			(1,060)						(1,079)						19						(2)		%
Other income			3,665						82						3,583						4,370		%
Total other expenses, net			2,605						(997)						3,602						(361)		%
(Loss) income before income tax (benefit) expense			(37,131)						8,191						(45,322)						(553)		%
Income tax (benefit) expense			(5,952)						3,635						(9,587)						(264)		%
Net (loss) income			$	(31,179)					$	4,556					$	(35,735)					(784)		%

    Revenues

Revenues were $57.1 million for the six months ended June 30, 2021, during which time we sold approximately 1,527,000 tons of sand. Revenues for the six months ended June 30, 2020 were $73.6 million, during which time we sold approximately 964,000 tons of sand. The key factors contributing to the decrease in revenues for the six months ended June 30, 2021 as compared to the six months ended June 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 $38.4 million for the six months ended June 30, 2020 to $51.9 million for the six months ended June 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 second quarter of 2020 were negatively impacted by depressed oil prices driven by the oversupply caused by decreased demand due to the COVID-19 coronavirus pandemic.

•We had $1.7 million of contractual shortfall revenue for the six months ended June 30, 2021 compared to $15.3 million of contractual shortfall revenue for the six months ended June 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 $3.4 million for the six months ended June 30, 2021 compared to $19.9 million for the six months ended June 30, 2020. The decrease in logistics revenue was due to the shift of sales to more in-basin shipments, which includes transportation and any other handling services, rather than mine gate shipments.

    Cost of Goods Sold

Cost of goods sold was $64.4 million and $53.0 million for the six months ended June 30, 2021 and June 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 the second quarter of 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 six months of 2021 to support increased sales activity, though the Company remains focused on other cost-saving measures.

    Gross Profit

Gross profit was $(7.3) million and $20.6 million for the six months ended June 30, 2021 and June 30, 2020, respectively. The decline in profitability for the six months ended June 30, 2021 as compared to the six months ended June 30, 2020 was primarily due to decreased shortfall revenue and lower average sales price of our sand.

    Operating Expenses

Operating expenses were $32.4 million and $11.4 million for the six months ended June 30, 2021 and June 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 were reduced to $4.7 million for the three months ended June 30, 2021 as compared to $5.1 million for the six months ended June 30, 2020. Depreciation and amortization increased from $0.9 million for the six months ended June 30, 2020 to $1.1 million for the six months ended June 30, 2021, primarily as a result of the addition of the Illinois operating facilities acquired in September 2020. Selling, general and administrative expenses were $7.0 million for the six months ended June 30, 2021 compared to $6.5 million for the six months ended June 30, 2020. The six months ended June 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 six months ended June 30, 2021, the Company recorded $3.4 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. We expect to continue to qualify for the employee retention credit for approximately $1.7 million for each of the remaining quarters of 2021.

Interest Expense

We incurred $1.1 million of net interest expense for each of the six months ended June 30, 2021 and June 30, 2020, respectively.

27

---

SMART SAND, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(UNAUDITED)

    Income Tax (Benefit) Expense

For the six months ended June 30, 2021 and June 30, 2020, our effective tax rate was approximately 16.0% and 44.4%, respectively, based on the annual effective tax rate net of discrete federal and state taxes. The computation of the effective tax rate includes modifications from the statutory rate such as income tax credits, tax depletion deduction, carrybacks, and state apportionment changes, among other items. We recorded a liability of $2.7 million for uncertain tax positions included in deferred tax liabilities, long-term, net on our balance sheet as of June 30, 2021, related to our depletion deduction methodology, and a corresponding increase to the income tax expense on our condensed consolidated income statements for the six months ended June 30, 2021.

    Net (Loss) Income

Net loss was $(31.2) million for the six months ended June 30, 2021 as compared to the net income of $4.6 million for the six months ended June 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 combined with lower average sale prices per ton of our sand and substantially lower shortfall revenue in the current period.

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 costs 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 June 30,												Six Months Ended June 30,
			2021						2020						2021						2020
			(in thousands, except per ton amounts)
Revenue			$	29,639					$	26,106					$	57,089					$	73,594
Cost of goods sold			31,999						11,906						64,426						52,995
Gross profit			(2,360)						14,200						(7,337)						20,599
Depreciation, depletion, and accretion of asset retirement obligations			5,851						5,065						11,864						10,174
Contribution margin			$	3,491					$	19,265					$	4,527					$	30,773
Contribution margin per ton			$	4.55					$	92.62					$	2.96					$	31.92
Total tons sold			767						208						1,527						964

Contribution margin was $3.5 million and $19.3 million, or $4.55 and $92.62 per ton sold, for the three months ended June 30, 2021 and 2020, respectively. The decrease in contribution margin and contribution margin per ton was due primarily to $14.0 million higher shortfall revenue in the prior period and lower average sale prices of our sand recognized in the current period.

Contribution margin was $4.5 million and $30.8 million, or $2.96 and $31.92 per ton sold, for the six months ended June 30, 2021 and 2020, respectively. The decrease in overall contribution margin and contribution margin per ton was due primarily to $13.6 million higher shortfall revenue in the prior period and lower average sale prices of our sand recognized 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 June 30,												Six Months Ended June 30,
			2021						2020						2021						2020
			(in thousands)
Net (loss) income			$	(27,267)					$	4,640					$	(31,179)					$	4,556
Depreciation, depletion and amortization			6,317						5,450						12,777						10,937
Income tax (benefit) expense			1,552						3,470						(5,952)						3,635
Interest expense			515						619						1,070						1,099
Franchise taxes			97						94						195						150
EBITDA			$	(18,786)					$	14,273					$	(23,089)					$	20,377
Loss on sale of fixed assets			(60)						275						(58)						275
Equity compensation (1)			581						842						1,266						1,768
Employee retention credit (2)			(3,352)						—						(3,352)						—
Acquisition and development costs (3)			(5)						144						18						(678)
Cash charges related to restructuring and retention of employees			—						—						—						82
Accretion of asset retirement obligations			111						76						225						151
Adjusted EBITDA			$	(21,511)					$	15,610					$	(24,990)					$	21,975

(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 six months ended June 30, 2021.

(3)The three and six months ended June 30, 2021 includes acquisition and development costs of $(5) and $18. The three and six months ended June 30, 2020 includes $0 and $1,020 fair value adjustment of contingent consideration.

____________________

Adjusted EBITDA was $(21.5) million for the three months ended June 30, 2021 compared to $15.6 million for the three months ended June 30, 2020. The decrease in Adjusted EBITDA for the three months ended June 30, 2021, as compared to the corresponding period in the prior year, was primarily due to non-cash bad debt expense of $19.6 million in the current period related to collecting less than the amount recorded as a receivable from the settlement of litigation, $14.0 million less shortfall revenue in the current period and lower average sale prices of our sand recognized despite having higher overall volumes in the current period.

Adjusted EBITDA was $(25.0) million for the six months ended June 30, 2021 compared to $22.0 million for the six months ended June 30, 2020. The decrease in Adjusted EBITDA for the six months ended June 30, 2021, as compared to the corresponding period in the prior year, 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, $13.6 million less shortfall revenue in the current period and lower average sale prices of our sand recognized 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, thereby diminishing its utility. The following table presents a reconciliation of contribution margin to gross profit.

			Three Months Ended June 30,												Six Months Ended June 30,
			2021						2020						2021						2020
			(in thousands, except per ton amounts)
Net cash provided by operating activities			$	32,566					$	13,781					$	36,480					$	25,842
Purchases of property, plant and equipment			(2,830)						(2,238)						(5,043)						(6,423)
Free cash flow			$	29,736					$	11,543					$	31,437					$	19,419

Free cash flow was $29.7 million for the three months ended June 30, 2021 compared to $11.5 million for the three months ended June 30, 2020. The increase in free cash flow was primarily attributable to cash collections from 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 three months ended June 30, 2021 compared to the three months ended June 30, 2020.

Free cash flow was $31.4 million for the six months ended June 30, 2021 compared to $19.4 million for the six months ended June 30, 2020. The increase in free cash flow was primarily attributable to cash collections from 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 six months ended June 30, 2021 compared to the six months ended June 30, 2020. Capital expenditures for the six months ended June 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 June 30, 2021, cash on hand was $39.3 million and we had $12.9 million in undrawn availability on our ABL Credit Facility and $5.0 million in undrawn availability on the Acquisition Liquidity Support 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 and other capital projects.

31

---

SMART SAND, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(UNAUDITED)

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 June 30, 2021 compared to December 31, 2020.

			June 30, 2021						December 31, 2020
			(in thousands)
Total current assets			$	81,666					$	112,086
Total current liabilities			34,585						37,263
Working capital			$	47,081					$	74,823

Our working capital was $47.1 million at June 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 the quarter 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 Six Months Ended June 30, 2021 and June 30, 2020:

			Six Months Ended June 30,
			2021						2020
			(in thousands)
Net cash provided by operating activities			$	36,480					$	25,842
Net cash used in investing activities			$	(5,041)					$	(6,423)
Net cash (used in) provided by financing activities			$	(3,886)					$	(5,415)

    Net Cash Provided by Operating Activities

Net cash provided by operating activities was $36.5 million for the six months ended June 30, 2021, which included net loss of $(31.2) million, net non-cash items of $28.1 million, the $35.0 million cash payment received under the Settlement Agreement, and a decrease of $4.6 million in other operating assets and liabilities.

Net cash provided by operating activities was $25.8 million for the six months ended June 30, 2020, which included net loss of $4.6 million, non-cash expenses of $13.5 million, and $7.8 million in changes in operating assets and liabilities.

    Net Cash Used in Investing Activities

Net cash used in investing activities was $5.0 million for the six months ended June 30, 2021, which was primarily for manufacturing of our SmartSystems equipment.

Net cash used in investing activities was $6.4 million for the six months ended June 30, 2020, which was primarily for manufacturing of our SmartSystems equipment.

    Net Cash (Used in) Provided By Financing Activities

Net cash used in financing activities was $3.9 million for the six months ended June 30, 2021, which consisted primarily of $3.4 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.

32

---

SMART SAND, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(UNAUDITED)

Net cash used in financing activities was $5.4 million for the six months ended June 30, 2020, which consisted primarily of $2.5 million of net repayments on our ABL Credit Facility, $1.6 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.

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			$	—					$	2,319					$	1,888					$	75					$	4,282
2022			—						4,638						3,551						137						$	8,326
2023			—						4,638						2,405						245						$	7,288
2024			—						6,888						807						—						$	7,695
2025			—						1,724						187						—						$	1,911
2026 and thereafter			—						—						355						—						355
Total minimum payments			—						20,207						9,193						457						29,857

ABL Credit Facility

In December 2019, we entered into a $20.0 million five-year senior secured asset-based credit facility with Jefferies Finance LLC. The available borrowing amount under the ABL Credit Facility as of June 30, 2021 was $14.1 million and is based on our eligible accounts receivable and inventory. As of June 30, 2021, the Company was in compliance with all covenants under the ABL Credit Facility and there were no amounts outstanding under the ABL Credit Facility, $1.2 million letters of credit and $12.9 million was available to be drawn. There were no borrowings during the three and six months ended June 30, 2021.

Oakdale Equipment Financing

In December 2019, we entered into a $23.0 million equipment financing arrangement with Nexseer, secured by substantially all of the assets at our Oakdale facility. The Oakdale Equipment Financing amortizes over 5 years and bears interest at 5.79%.

Notes Payable

We have entered into various financing arrangements secured primarily by our manufactured SmartSystems equipment. Title to the equipment is held by the financial institutions as collateral, though the equipment is included in the Company’s property plant and equipment. In June 2020, we 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 our 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 $5.0 million during the twelve month period ending September 18, 2021. There have been no borrowings on this facility.

33

---

SMART SAND, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(UNAUDITED)

Capital Requirements

We expect full year 2021 capital expenditures to be between $10 million and $12 million, which we anticipate will primarily support incremental growth in our SmartSystems products and services and maintenance and efficiency improvements at our mining facilities. These expenditures exclude any potential acquisitions. We expect to fund these capital expenditures with cash from operations, equipment financing options available to us or borrowings under the ABL Credit Facility or Acquisition Liquidity Support Facility. For the six months ended June 30, 2021, we spent approximately $5.0 million on capital expenditures.

Off-Balance Sheet Arrangements

We had outstanding performance bonds of $9.5 million and $10.0 million at June 30, 2021 and December 31, 2020, respectively.

Contractual Obligations

As of June 30, 2021, we had contractual obligations for the ABL Credit Facility, Oakdale Equipment Financing, notes payable, Acquisition Liquidity Support Facility, operating and finance leases, minimum payments for the rights to mine land, capital expenditures, asset retirement obligations, and other commitments to municipalities for maintenance.

Environmental Matters

We are subject to various federal, state and local laws and regulations governing, among other things, hazardous materials, air and water emissions, environmental contamination and reclamation and the protection of the environment and natural resources. We have made, and expect to make in the future, expenditures to comply with such laws and regulations, but cannot predict the full amount of such future expenditures.

Seasonality

Our business is affected to some extent by seasonal fluctuations in weather that impact the production levels for a portion of our wet sand processing capacity. While our dry plants are able to process finished product volumes evenly throughout the year, our excavation and our wet sand processing activities have historically been limited to primarily non-winter months. As a consequence, we have experienced lower cash operating costs in the first and fourth quarter of each calendar year, and higher cash operating costs in the second and third quarter of each calendar year when we overproduced to meet demand in the winter months.  These higher cash operating costs were capitalized into inventory and expensed when these tons are sold, which can lead to us having higher overall cost of production in the first and fourth quarters of each calendar year as we expense inventory costs that were previously capitalized. We have indoor wet processing facilities at each of our plant locations, which allow us to produce wet sand inventory year-round to support a portion of our dry sand processing capacity, which may reduce certain of the effects of this seasonality. We may also sell frac sand for use in oil and natural gas producing basins where severe weather conditions may curtail drilling activities and, as a result, our sales volumes to those areas may be reduced during such severe weather periods.

Customer Concentration

For the six months ended June 30, 2021, revenue from Rice Energy (a subsidiary of EQT Corporation), Halliburton Energy Services, and Enerplus accounted for 30.9%, 21.8%, and 13.0%, respectively, of total revenue. For the six months ended June 30, 2020, sales to Rice Energy (a subsidiary of EQT Corporation), U.S. Well Services, Liberty, and Calfrac accounted for 26.6%, 23.3%, 18.2%, and 11.8%, respectively, of total revenue.

34

---

SMART SAND, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(UNAUDITED)

Critical Accounting Policies and Estimates 

There have been no material changes in our critical accounting policies and procedures during the six months ended June 30, 2021.

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 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: existing sand reserves and their impact on calculating the depletion expense under the units-of-production method; depreciation and amortization associated with property, plant and equipment and definite-lived intangible assets; impairment considerations of assets (including impairment of identified intangible assets and other long-lived assets); estimated cost of future asset retirement obligations; fair values of acquired assets and assumed liabilities; stock-based compensation; recoverability of deferred tax assets; inventory reserve; 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. The COVID-19 pandemic caused a significant amount of volatility in the oilfield services sector during 2020 and frac sand prices in particular have remained depressed, despite recent increases in oil prices. We continue to actively monitor the global impact of current events, but we are currently unable to estimate the impact of these events on our future financial position and results of operations.

35

---

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We have considered changes in our exposure to market risks during the six months ended June 30, 2021 and have determined that there have been no material changes to our exposure to market risks from those described in our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on March 3, 2021.

ITEM 4.  CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Report. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of such date, our disclosure controls and procedures were effective.

Changes in Internal Control Over Financial Reporting

There have been no changes in internal control over financial reporting for the quarter ended June 30, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

36

---

PART II – OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

From time to time we may be involved in litigation relating to claims arising out of our operations in the normal course of business. The disclosure called for by Part II, Item 1 regarding our legal proceedings is incorporated by reference herein from Part I, Item 1. Note 15 - Commitments and Contingencies - Litigation of the notes to the condensed consolidated financial statements in this Form 10-Q for the three and six months ended June 30, 2021.

ITEM 1A.  RISK FACTORS

There have been no material changes to the risk factors described in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2020.

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

During the three months ended June 30, 2021, no shares were sold by the Company without registration under the Securities Act of 1933, as amended.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.  MINE SAFETY DISCLOSURES

We are committed to maintaining a culture that prioritizes mine safety. We believe that our commitment to safety, the environment and the communities in which we operate is critical to the success of our business. Our sand mining operations are subject to mining safety regulation. The U.S. Mining Safety and Health Administration (“MSHA”) is the primary regulatory organization governing frac sand mining and processing. Accordingly, MSHA regulates quarries, surface mines, underground mines and the industrial mineral processing facilities associated with and located at quarries and mines. The mission of MSHA is to administer the provisions of the Federal Mine Safety and Health Act of 1977 and to enforce compliance with mandatory miner safety and health standards. As part of MSHA’s oversight, representatives perform at least two unannounced inspections annually for each above-ground facility.

We are also subject to regulations by the U.S. Occupational Safety and Health Administration (“OSHA”) which has promulgated rules for workplace exposure to respirable silica for several other industries. Respirable silica is a known health hazard for workers exposed over long periods. MSHA is expected to adopt similar rules as part of its “Long Term Items” for rulemaking. Airborne respirable silica is associated with work areas at our site and is monitored closely through routine testing and MSHA inspection. If the workplace exposure limit is lowered significantly, we may be required to incur certain capital expenditures for equipment to reduce this exposure. We also adhere to NISA’s respiratory protection program, and ensures that workers are provided with fitted respirators and ongoing radiological monitoring.

Our operations are subject to the Federal Mine Safety and Health Act of 1977, as amended by the Mine Improvement and New Emergency Response Act of 2006, which imposes stringent health and safety standards on numerous aspects of mineral extraction and processing operations, including the training of personnel, operating procedures, operating equipment, and other matters. Our failure to comply with such standards, or changes in such standards or the interpretation or enforcement thereof, could have a material adverse effect on our business and financial condition or otherwise impose significant restrictions on our ability to conduct mineral extraction and processing operations. Following passage of The Mine Improvement and New Emergency Response Act of 2006, MSHA significantly increased the numbers of citations and orders charged against mining operations.  The dollar penalties assessed for citations issued has also increased in recent years.  Information concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K (17 CFR 229.104) is included in Exhibit 95.1 to this Report.

ITEM 5.  OTHER INFORMATION

None.

37

---

ITEM 6.  EXHIBITS

3.1						Second Amended and Restated Certificate of Incorporation of Smart Sand, Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on November 15, 2016)
3.2						Second Amended and Restated Bylaws of Smart Sand, Inc. (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed with the SEC on November 15, 2016)
10.1						Settlement Agreement and Release, dated June 28, 2021, by and among Smart Sand, Inc., U.S. Well Services, LLC and U.S. Well Services, Inc. (incorporation by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on June 29, 2021
31.1*						Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*						Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*†						Certification Pursuant to 18 U.S.C. adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2*†						Certification Pursuant to 18 U.S.C. adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
95.1*						Mine Safety Disclosure Exhibit
101.INS						Extracted XBRL Instance Document - the instance document does not appear in the Interactive Data File as XBRL tags are embedded in the Inline XBRL document.
101.SCH*						XBRL Taxonomy Extension Schema
101.CAL*						XBRL Taxonomy Extension Calculation Linkbase
101.DEF*						XBRL Taxonomy Extension Definition Linkbase
101.LAB*						XBRL Taxonomy Extension Label Linkbase
101.PRE*						XBRL Taxonomy Extension Presentation Linkbase
104*						Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

*			Filed Herewith.
†			This certification is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act.

38

---

Signatures

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. 

			Smart Sand, Inc.
August 4, 2021			By:			/s/ Charles E. Young
						Charles E. Young, Chief Executive Officer
						(Principal Executive Officer)

 

			Smart Sand, Inc.
August 4, 2021			By:			/s/ Lee E. Beckelman
						Lee E. Beckelman, Chief Financial Officer
						(Principal Financial Officer)

39