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Smart Sand, Inc. - Quarter Report: 2023 March (Form 10-Q)


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 March 31, 2023
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
Picture1.jpg
SMART SAND, INC.
(Exact name of registrant as specified in its charter) 
Delaware45-2809926
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification Number)
28420 Hardy Toll Road, Suite 130
Spring, Texas 77373
(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 classTrading Symbol(s)Name of each exchange on which registered
Common Stock, par value $0.001 per shareSNDNasdaq 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 ☒ 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 ☒ 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  ☒
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 ☒
Number of shares of common stock outstanding, par value $0.001 per share, as of May 2, 2023: 41,327,298


TABLE OF CONTENTS
  PAGE
 
   
 
 
 
 
 
  
  
  
  
 
1

Certain Definitions
The following definitions apply throughout this quarterly report unless the context requires otherwise:
“We”, “Us”, “Company”, “Smart Sand” or “Our”Smart Sand, Inc., a company organized under the laws of Delaware, and its subsidiaries.
“shares”, “stock”The common stock of Smart Sand, Inc., nominal value $0.001 per share.
“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, as amended from time to time (as amended, the “ABL Credit Agreement”); and (ii) a Guarantee and Collateral Agreement, dated December 13, 2019, between the Company and Jefferies Finance LLC, as agent, as amended from time to time (as amended, 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.
“Exchange Act”The Securities Exchange Act of 1934, as amended.
“Securities Act”The Securities Act of 1933, as amended.
“FASB”, “ASU”, “ASC”, “GAAP”Financial Accounting Standards Board, Accounting Standards Update, Accounting Standards Codification, Accounting Principles Generally Accepted in the United States, respectively.

2

PART I – FINANCIAL INFORMATION
ITEM 1.  FINANCIAL STATEMENTS
SMART SAND, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 2023December 31, 2022
(unaudited)
 (in thousands, except share amounts)
Assets  
Current assets:  
Cash and cash equivalents$7,604 $5,510 
Accounts receivable35,978 35,746 
Unbilled receivables1,284 79 
Inventory20,084 20,185 
Prepaid expenses and other current assets7,089 6,593 
Total current assets72,039 68,113 
Property, plant and equipment, net255,799 258,843 
Operating lease right-of-use assets24,691 26,075 
Intangible assets, net6,471 6,669 
Other assets267 303 
Total assets$359,267 $360,003 
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable$15,844 $14,435 
Accrued expenses and other liabilities13,788 13,430 
Current portion of deferred revenue5,901 6,959 
Current portion of long-term debt10,350 6,183 
Current portion of operating lease liabilities10,975 10,910 
Total current liabilities56,858 51,917 
Long-term debt15,533 9,807 
Long-term operating lease liabilities16,069 17,642 
Long-term deferred tax liabilities, net19,907 18,238 
Asset retirement obligations19,088 18,888 
Other non-current liabilities40 40 
Total liabilities127,495 116,532 
Commitments and contingencies (Note 13)
Stockholders’ equity
Common stock, $0.001 par value, 350,000,000 shares authorized; 45,125,627 issued and 37,937,360 outstanding at March 31, 2023; 45,099,067 issued and 43,088,106 outstanding at December 31, 2022
38 43 
Treasury stock, at cost, 7,188,267 and 2,010,961 shares at March 31, 2023 and December 31, 2022, respectively
(13,923)(5,075)
Additional paid-in capital179,205 178,386 
Retained earnings66,291 69,890 
Accumulated other comprehensive income161 227 
Total stockholders’ equity231,772 243,471 
Total liabilities and stockholders’ equity$359,267 $360,003 

 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3

SMART SAND, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED) 
 Three Months Ended March 31,
 20232022
 (in thousands, except per share amounts)
Revenues:
Sand sales revenue$78,098 $38,289 
Shortfall revenue1,915 1,915 
Logistics revenue2,337 1,401 
Total revenue82,350 41,605 
Cost of goods sold70,713 43,586 
Gross profit11,637 (1,981)
Operating expenses:
Salaries, benefits and payroll taxes5,145 3,392 
Depreciation and amortization592 527 
Selling, general and administrative5,619 4,048 
Net loss on disposal of fixed assets1,889 — 
Total operating expenses13,245 7,967 
Operating income (loss)(1,608)(9,948)
Other income (expenses):
Interest expense, net(441)(427)
Other income48 212 
Total other income (expenses), net(393)(215)
Loss before income tax expense (benefit)(2,001)(10,163)
Income tax expense (benefit)1,598 (4,240)
Net loss$(3,599)$(5,923)
Net loss per common share:
Basic$(0.09)$(0.14)
Diluted$(0.09)$(0.14)
Weighted-average number of common shares:
Basic41,272 42,087 
Diluted41,272 42,087 
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

4

SMART SAND, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
Three Months Ended March 31,
20232022
(in thousands)
Net loss$(3,599)$(5,923)
Other comprehensive (loss) income:
Foreign currency translation adjustment(66)16 
Comprehensive loss$(3,665)$(5,907)

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) 
Three Months Ended March 31, 2023
 Common StockTreasury StockAdditional Paid-in Capital Accumulated Other Comprehensive (Loss) IncomeTotal Stockholders’ Equity
 Outstanding
Shares		Par ValueSharesAmountRetained
Earnings
 (in thousands, except share amounts)
Balance at December 31, 202243,088,106 $43 2,010,961 $(5,075)$178,386 $69,890 $227 $243,471 
Foreign currency translation adjustment— — — — — — (66)(66)
Vesting of restricted stock4,750 — — — — — — — 
Stock-based compensation— — — — 779 — — 779 
Employee stock purchase plan compensation— — — — 7 — — 7 
Employee stock purchase plan issuance21,810 — — — 33 — — 33 
Purchase of treasury stock(5,177,306)(5)5,177,306 (8,848)— — — (8,853)
Net loss— — — — — (3,599)— (3,599)
Balance at March 31, 202337,937,360 $38 7,188,267 $(13,923)$179,205 $66,291 $161 $231,772 

6

SMART SAND, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (continued)
(UNAUDITED) 
Three Months Ended March 31, 2022
 Common StockTreasury StockAdditional Paid-in Capital Accumulated Other Comprehensive (Loss) IncomeTotal Stockholders’ Equity
 Outstanding
Shares		Par ValueSharesAmountRetained
Earnings
 (in thousands, except share amounts)
Balance at December 31, 202142,012,813 $42 1,777,001 $(4,535)$174,486 $70,593 $574 $241,160 
Foreign currency translation adjustment— — — — — — 16 16 
Vesting of restricted stock179,630 — — — — — — — 
Stock-based compensation— — — — 826 — — 826 
Employee stock purchase plan compensation— — — — 5 — — 5 
Employee stock purchase plan issuance16,285 — — — 25 — — 25 
Purchase of treasury stock(56,400)— 56,400 (127)— — — (127)
Net loss— — — — — (5,923)— (5,923)
Balance at March 31, 202242,152,328 $42 1,833,401 $(4,662)$175,342 $64,670 $590 235,982 

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)
Three Months Ended March 31,
 20232022
 (in thousands)
Operating activities:  
Net loss$(3,599)$(5,923)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation, depletion and accretion of asset retirement obligations6,553 6,568 
Amortization of intangible assets199 199 
Net loss on disposal of fixed assets1,889 — 
Amortization of deferred financing cost26 26 
Accretion of debt discount47 47 
Deferred income taxes 1,669 (4,175)
Stock-based compensation, net779 826 
Employee stock purchase plan compensation7 5 
Changes in assets and liabilities:
Accounts receivable(74)(5,411)
Unbilled receivables(1,363)(3,399)
Inventory101 1,441 
Prepaid expenses and other assets(676)3,835 
Deferred revenue(1,058)(1,173)
Accounts payable1,165 (193)
Accrued and other expenses(560)(1,335)
Net cash provided by (used in) operating activities5,105 (8,662)
Investing activities:
Acquisition of Blair facility— (6,547)
Purchases of property, plant and equipment(4,018)(3,768)
Proceeds from disposal of assets1 — 
Net cash used in investing activities(4,017)(10,315)
Financing activities:
Repayments of notes payable(1,513)(1,776)
Payments under finance leases(86)(35)
Proceeds from revolving credit facility14,000 — 
Repayment of revolving credit facility(7,000)— 
Employee stock purchase plan issuance33 25 
Purchase of treasury stock(4,428)(127)
Net cash provided by (used in) financing activities1,006 (1,913)
Net decrease in cash and cash equivalents2,094 (20,890)
Cash and cash equivalents at beginning of year5,510 25,588 
Cash and cash equivalents at end of period$7,604 $4,698 
Supplemental disclosure of cash flow information
Purchases of property, plant and equipment in accounts payable and accrued expenses$1,975 $157 
Treasury stock purchased with debt$4,425 $— 
Additions to asset retirement obligations$— $8,281 
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
The Company was incorporated in July 2011 and is headquartered in Spring, Texas. The Company primarily operates as a fully integrated frac and industrial sand supply and services company. The Company offers complete mine to wellsite proppant supply and logistics solutions to our frac sand customers. These operations include the excavation, processing and sale of sand, or proppant, for use in hydraulic fracturing operations for the oil and natural gas industry. The Company also offers proppant logistics and wellsite storage solutions through its SmartSystemsTM products and services. In late 2021, the Company created its Industrial Product Solutions (“IPS”) business in order to diversify its customer base and markets it serves by offering sand to customers for industrial uses, such as glass, foundry, building products, filtration, geothermal, renewables, ceramics, turf & landscape, retail, and recreation.
Sand Mines and Processing Facilities
The Company’s integrated Oakdale facility, with on-site rail infrastructure and wet and dry sand processing facilities, has access to two Class I rail lines which enable the Company to process and cost effectively deliver products to its customers. The Company completed construction of the first phase of its mine and processing facility near Oakdale, Wisconsin and commenced operations in July 2012, and subsequently expanded its operations in 2014, 2015 and 2018. Currently, the annual processing capacity at the Company’s Oakdale facility is approximately 5.5 million tons.
In September 2020, the Company acquired two frac sand mines and related processing facilities in Utica, Illinois and New Auburn, Wisconsin. The Utica facility has an annual processing capacity of 1.6 million tons and access to the Burlington Northern Santa Fe Class I rail line through the Peru, Illinois transload facility. The Company began operating the Utica, Illinois mine and Peru, Illinois transload facility in October 2020. The Company has no plans to operate the New Auburn Facility for the foreseeable future.
On March 4, 2022, the Company entered into a Membership Interest Purchase Agreement (the “Purchase Agreement”) with Hi-Crush Inc., a Delaware corporation (“HCR”), and Hi-Crush Blair LLC, a Delaware limited liability company and wholly-owned subsidiary of HCR (“Blair”), pursuant to which the Company acquired all of the issued and outstanding limited liability company interests of Blair from HCR for aggregate cash consideration of approximately $6,450, subject to customary purchase price adjustments as set forth in the Purchase Agreement (the “Transaction”).
The primary assets of Blair consist of an idle frac sand mine and related processing facility located in Blair, Wisconsin. The Blair facility has approximately 2.9 million tons of total annual processing capacity and contains an onsite, unit train capable rail terminal with access to the Class 1 Canadian National Railway. The Company expects to commence operations at the Blair facility in the second quarter of 2023.
With the Blair acquisition, the Company has direct access to four Class I rail lines and the ability to access all Class 1 rail lines within the United States and Canada.
Transload & Logistics Solutions
The Company also offers proppant logistics solutions to its customers through, among other things, its in-basin transloading terminals and its SmartSystemsTM wellsite proppant storage and management capabilities.
The Company also has several in-basin rail terminals. The Company acquired rights in March 2018 to operate a unit train capable transloading terminal in Van Hook, North Dakota to service the Bakken Formation in the Williston Basin. In 2020, the Company, as part of its acquisition of the Utica, Illinois facility, obtained rights to use a rail terminal located in El Reno, Oklahoma. In September 2021, the Company acquired the rights to construct and operate another transloading terminal in Waynesburg, Pennsylvania to service the Appalachian Basin, including the Marcellus and Utica Formations, which became operational in January 2022.
The Company’s SmartSystems offer various proppant storage 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 includes passive and active dust suppression technology, along with the capability of gravity-fed operation. The self-contained SmartPathTM transloader is a mobile sand transloading system designed to work with bottom dump trailers and features a drive over conveyor, surge bin, and
9

SMART SAND, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
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. A proprietary software program, the SmartSystem TrackerTM, allows customers to monitor silo-specific information, including location, proppant type and proppant inventory.

NOTE 2 — Summary of Significant Accounting Policies
The information presented below supplements the complete description of our significant accounting policies disclosed in our 2022 Form 10-K, filed with the Securities and Exchange Commission (“SEC”) on February 28, 2023.
Basis of Presentation and Consolidation
The accompanying unaudited quarterly condensed consolidated financial statements (“interim statements”) of the Company are presented in accordance with the rules and regulations of the SEC for quarterly reports on Form 10-Q and therefore do not include all the information and notes required by GAAP. In the opinion of management, all adjustments and disclosures necessary for a fair presentation of these interim statements have been included. All adjustments are of a normal recurring nature. The results reported in these interim statements are not necessarily indicative of the results that may be reported for the entire year. The consolidated balance sheet as of December 31, 2022 was derived from the audited consolidated financial statements as of and for the year ended December 31, 2022. These interim statements should be read in conjunction with the Company’s consolidated financial statements for the year ended December 31, 2022.
Revision of Previously Issued Financial Statements for Immaterial Misstatements
During the quarter ended March 31, 2023, the Company identified a misclassification in the operating expenses section of the statement of operations in the audited financial statements for the year ended December 31, 2022. The misclassification was an overstatement of salaries, benefits and payroll taxes and an understatement of selling, general and administrative in the amount of $1,462. For the three and twelve months ended December 31, 2022, the Company has decreased salaries, benefits and payroll taxes and increased selling, general and administrative line items by $1,462. There was no effect to the amounts reported in the first, second or third quarter financial statements of 2022. Pursuant to the guidance of Staff Accounting Bulletin (“SAB”) No. 99, “Materiality”, the Company evaluated the materiality of this misclassification quantitatively and qualitatively and concluded that it was not material to any of its prior annual or quarterly financial statements or trends of financial results. The Company has reclassified the prior year financial statement presentation to conform to the current financial statement presentation. These reclassifications have no effect on previously reported net income.
Use of Estimates
The preparation of interim statements 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: impairment considerations of assets, including intangible assets, fixed assets, and inventory; estimated cost of future asset retirement obligations; fair value of acquired assets and assume liabilities; recoverability of deferred tax assets; inventory reserve; and the 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 decreases in demand related to COVID-19 pandemic in 2020 and 2021 and the ongoing conflict in Ukraine have caused dramatic swings in oil and natural gas prices and significant volatility in the oilfield service sector. Additionally, future economic performance is uncertain due to current high inflation and other economic concerns. The Company is currently unable to estimate the impact of current or future 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. As of March 31, 2023 and December 31, 2022, the Company included $1,180 and $1,180, respectively, in prepaid expenses and other current assets on its consolidated balance sheets related to receivables for
10

SMART SAND, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
the employee retention credits. The calculation of the credit was 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
There are no recent accounting pronouncements that materially affect the financial statements of the Company.

NOTE 3 — Acquisition
Asset Acquisition - Blair Facility
On March 4, 2022, the Company entered into a Membership Interest Purchase Agreement (the “Purchase Agreement”) with Hi-Crush Inc., a Delaware corporation (“HCR”), and Hi-Crush Blair LLC, a Delaware limited liability company and wholly-owned subsidiary of HCR (“Blair”), pursuant to which the Company acquired all of the issued and outstanding limited liability company interest of Blair from HCR for aggregate cash consideration of $6,450, subject to customary purchase price adjustments as set forth in the Purchase Agreement (the “Transaction”).
The primary assets of Blair consist of an idle frac sand mine and related processing facility located in Blair, Wisconsin. The Blair facility, once operational, will have approximately 2.9 million tons of total annual processing capacity and contains an onsite, unit train capable rail terminal with access to the Class 1 Canadian National Railway.
The Company accounted for this transaction as an asset acquisition based on an evaluation of the guidance in ASC 805. The Company determined that there was not a substantive process in place that generates outputs that can be sold to a customer, and therefore the acquisition did not meet the definition of a business. The Company recognized identifiable assets acquired on a relative fair value basis. All assets acquired are allocated to property, plant and equipment, net on the balance sheet as of March 31, 2022. As of March 31 2022, the Company also recorded an increase to its asset retirement obligations and a corresponding increase in purchases of property plant and equipment in the amount of $8,281 and subsequently revised the estimate to $1,988 based on its mine plan as of December 31, 2022.
The table below presents the calculation of the total purchase consideration:
Base price consideration$6,450 
Net working capital adjustments and capitalized costs97 
Total purchase consideration$6,547 

NOTE 4 — Inventory
Inventory consisted of the following:
 March 31, 2023December 31, 2022
Raw material$394 $844 
Work in progress2,902 6,240 
Finished goods10,683 7,534 
Spare parts6,105 5,567 
Total inventory$20,084 $20,185 

11

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

NOTE 5 — Property, Plant and Equipment, net
Net property, plant and equipment consisted of:
March 31, 2023December 31, 2022
Machinery, equipment and tooling$37,419 $36,483 
SmartSystems
29,641 28,376 
Vehicles3,928 3,835 
Furniture and fixtures1,428 1,421 
Plant and building200,076 200,480 
Real estate properties6,174 6,155 
Railroad and sidings33,698 33,698 
Land and land improvements40,484 40,433 
Asset retirement obligations22,583 22,583 
Mineral properties7,442 7,442 
Deferred mining costs2,470 2,470 
Construction in progress9,975 10,421 
395,318 393,797 
Less: accumulated depreciation and depletion139,519 134,954 
Total property, plant and equipment, net$255,799 $258,843 
Depreciation expense was $6,342 and $6,362 for the three months ended March 31, 2023 and 2022, respectively.

NOTE 6 — Accrued and Other Expenses
Accrued and other expenses were comprised of the following:
 March 31, 2023December 31, 2022
Employee related expenses$2,162 $1,172 
Accrued equipment expense
— 597 
Accrued professional fees469 295 
Accrued royalties2,839 3,470 
Accrued freight and delivery charges3,581 4,117 
Accrued real estate tax1,588 1,008 
Accrued utilities1,108 1,604 
Sales tax liability1,148 829 
Income tax payable247 — 
Other accrued liabilities646 338 
Total accrued liabilities$13,788 $13,430 
12

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

NOTE 7 — Debt
The current portion of long-term debt consists of the following:
 March 31, 2023December 31, 2022
Oakdale Equipment Financing4,100 4,041 
Finance leases355 360 
Notes payable5,895 1,782 
Current portion of long-term debt$10,350 $6,183 

Long-term debt, net of current portion consists of the following:
 March 31, 2023December 31, 2022
ABL Credit Facility$7,000 $— 
Oakdale Equipment Financing, net6,751 7,753 
Finance leases576 460 
Notes payable1,206 1,594 
Long-term debt$15,533 $9,807 

The follow summarizes the maturity of our debt:
ABL Credit FacilityOakdale Equipment FinancingNotes PayableFinance LeasesTotal
Remainder of 2023$— $3,479 $5,926 $392 $9,797 
20247,000 6,888 918 224 15,030 
2025— 1,724 309 224 2,257 
2026— — 302 209 511 
2027— — 174 30 204 
2028 and thereafter— — — 7 7 
Total minimum payments7,000 12,091 7,629 1,086 27,806 
Amount representing interest— (925)(528)(155)(1,608)
Amount representing unamortized lender fees— (315)— — (315)
Present value of payments931 
Less: current portion— (4,100)(5,895)(355)(10,350)
Total long-term debt$7,000 $6,751 $1,206 $576 $15,533 

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 March 31, 2023 was $20,000 and is based on the Company’s eligible accounts receivable and inventory, as described in the ABL Credit Agreement. As of March 31, 2023, there was $7,000 outstanding under the ABL Credit Facility, $1,000 letters of credit and $12,000 was available to be drawn. As of March 31, 2023 and December 31, 2022, the Company was in compliance with all financial covenants.
13

SMART SAND, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
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. These notes payable bear interest at rates between 4.00% and 10.00%.
On February 28, 2023, the Company purchased 5,176 shares of the Company’s common stock from Clearlake Capital Partners II (Master), L.P., an affiliate of Clearlake Capital Group (“Clearlake”), for $8,850, of which $4,425 was paid in cash and the remainder was financed through an unsecured promissory note, bearing interest of 10%, issued to Clearlake. The promissory note will mature on December 15, 2023. This purchase represented all of the common stock previously owned by Clearlake and approximately 11.3% of the number of outstanding shares of the Company’s common stock as of immediately prior to the purchase. At the time of purchase, Clearlake was a related party to the Company, and José Feliciano, the Co-Founder and Managing Partner of Clearlake, remains on our board of directors.

NOTE 8 — Leases
Lessee
The operating and financing components of the Company’s right-of-use assets and lease liabilities on the consolidated balance sheets were as follows:
Balance Sheet LocationMarch 31, 2023December 31, 2022
Right-of-use assets
   OperatingOperating right-of-use assets$24,691 $26,075 
   FinancingProperty, plant and equipment, net588 699 
Total right-of use assets$25,279 $26,774 
Lease liabilities
   OperatingOperating lease liabilities, current and long-term portions$27,044 $28,552 
   FinancingLong-term debt, current and long-term portions931 820 
Total lease liabilities$27,975 $29,372 

Operating lease costs are recorded as a single expense on the statement of operations 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 statement of operations for the three months ended March 31, 2023 and 2022 was as follows:
Three Months Ended March 31,
20232022
Finance lease cost
   Amortization of right-of-use assets$94 $35 
   Interest on lease liabilities16 6 
Operating lease cost3,195 2,807 
Short-term lease cost9 324 
Total lease cost$3,314 $3,172 
14

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 months ended March 31, 2023 and 2022 is as follows:
Three Months Ended March 31,
20232022
Cash paid for amounts included in the measurement of lease liabilities
   Operating cash flows used for finance leases$16 $6 
   Operating cash flows used for operating leases$3,316 $3,202 
   Financing cash flows used for finance leases$86 $35 
Right-of-use assets obtained in exchange for new operating lease liabilities$1,413 $1,995 
Weighted average remaining lease term - finance leases3.0 years1.4 years
Weighted average discount rate - finance leases8.98 %6.60 %
Weighted average remaining lease term - operating leases2.9 years3.4 years
Weighted average discount rate - operating leases5.83 %5.81 %

Maturities of the Company’s lease liabilities as of March 31, 2023 are as follows:
Operating LeasesFinance LeasesTotal
Remainder of 2023$9,299 $392 $9,691 
20249,949 224 10,173 
20254,843 224 5,067 
20263,332 209 3,541 
20271,432 30 1,462 
Thereafter626 7 633 
Total cash lease payments29,481 1,086 30,567 
Less: amounts representing interest(2,437)(155)(2,592)
Total lease liabilities$27,044 $931 $27,975 

NOTE 9 — Asset Retirement Obligations
The Company had a post-closure reclamation and site restoration obligation of $19,088 as of March 31, 2023. The following is a reconciliation of the total reclamation liability for asset retirement obligations.
Balance at December 31, 2022$18,888 
Accretion expense200 
Balance at March 31, 2023$19,088 
15

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 March 31,
20232022
RevenuePercentage of Total RevenueRevenuePercentage of Total Revenue
Sand sales revenue$78,098 95 %$38,289 92 %
Shortfall revenue1,915 2 %1,915 5 %
Logistics revenue2,337 3 %1,401 3 %
Total revenue$82,350 100 %$41,605 100 %
The Company recorded $6,727 of deferred revenue on the consolidated balance sheet as of December 31, 2022, of which $4,200 has been recognized in the three months ended March 31, 2023 and the remaining amount is expected to be recognized during the remainder of 2023. As of March 31, 2023, the Company had $370,775 in unsatisfied performance obligations related to contracts with customers. The Company expects to perform these obligations and recognize revenue of $227,053, $71,386, and $72,336 and in the remainder of 2023, 2024 and 2025, respectively.

NOTE 11 — 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 March 31, 2023 and 2022, the effective tax rate was approximately (79.9)% and 41.7%, respectively, based on the annual effective tax rate net of discrete federal and state taxes. For the three months ended March 31, 2023 and 2022, 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 for uncertain tax positions included in its consolidated balance sheet of $2,240 as of December 31, 2022. There was no material change for the three months ended March 31, 2023.
The Company determined that it is more likely than not that it will not be able to fully realize the benefits of certain existing deductible temporary differences and has recorded a partial valuation allowance against the gross deferred tax assets, which is included in the long-term deferred tax liabilities, net on its consolidated balance sheets. At December 31, 2022, the Company recorded a partial valuation allowance against the gross deferred tax assets on its consolidated balance sheet in the amount of $1,588. There was no material change for the three months ended March 31, 2023.
The Company’s federal income tax returns subsequent to 2017 remain open to audit by taxing authorities. The Company has not been informed that its tax returns are the subject of any audit or investigation by taxing authorities.

NOTE 12 — Concentrations
As of March 31, 2023, three customers accounted for 61% of the Company’s total accounts receivable. As of December 31, 2022, 65% of the Company’s total accounts receivable balance was with four customers.
During the three months ended March 31, 2023, 57% of the Company’s revenues were earned from three customers. During the three months ended March 31, 2022, 52% of the Company’s revenues were earned from three customers.
16

SMART SAND, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
As of March 31, 2023, three vendors accounted for 40% of the Company’s accounts payable. As of December 31, 2022, one vendor accounted for 17% of the Company’s accounts payable.
During the three months ended March 31, 2023, two suppliers accounted for 35% of the Company’s cost of goods sold. During the three months ended March 31, 2022, one supplier accounted for 14% of the Company’s cost of goods sold.
The Company’s primary product is Northern White 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 these geographic areas of our mines, the oil and natural gas producing basins they serve, or the transportation routes between them.

NOTE 13 — Commitments and Contingencies
Litigation
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.
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 March 31, 2023 was $17,627.
17

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, 2022 contained in our Annual Report on Form 10-K. We use contribution margin, EBITDA, Adjusted EBITDA and free cash flow herein as non-GAAP measures of our financial performance. For further discussion of contribution margin, EBITDA, Adjusted EBITDA and free cash flow, see the section entitled “Non-GAAP Financial Measures.” We define various terms to simplify the presentation of information in this Quarterly Report on Form 10-Q (this “Report”). All share amounts are presented in thousands.

Forward-Looking Statements
This discussion contains forward-looking statements that are based on the beliefs of our management, as well as assumptions made by, and information currently available to our management. Actual results could differ materially from those discussed in or implied by forward-looking statements as a result of various factors, including those discussed herein and in the section entitled “Risk Factors” in our Form 10-K for the year ended December 31, 2022. Our estimates and forward-looking statements are primarily based on our current expectations and estimates of future events and trends, which affect or may affect our business and operations. Although we believe that these estimates and forward-looking statements are based upon reasonable assumptions, they are subject to several risks and uncertainties and are made in light of information currently available to us. Important factors, in addition to the factors described in this Report, may adversely affect our results as indicated in forward-looking statements. You should read this Report and the documents that we have filed as exhibits hereto completely and with the understanding that our actual future results may be materially different from what we expect. The words “may,” “will,” “should,” “could,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “intend,” “potential,” “might,” “would,” “continue” or the negative of these terms or other comparable terminology and similar words are intended to identify estimates and forward-looking statements. Estimates and forward-looking statements speak only as of the date they were made, and, except to the extent required by law, we undertake no obligation to update, to revise or to review any estimate and/or forward-looking statement because of new information, future events or other factors. Estimates and forward-looking statements involve risks and uncertainties and are not guarantees of future performance. As a result of the risks and uncertainties described above, the estimates and forward-looking statements discussed in this Report might not occur and our future results, level of activity, performance or achievements may differ materially from those expressed in these forward-looking statements due to, including, but not limited to, the factors mentioned above, and the differences may be material and adverse. Because of these uncertainties, you should not place undue reliance on these forward-looking statements.

Overview 

The Company
We are a fully integrated frac and industrial sand supply and services company. We offer complete mine to wellsite proppant supply and logistics solutions to our frac sand customers. We produce low-cost, high quality Northern White sand, which is a premium sand used as proppant used to enhance hydrocarbon recovery rates in the hydraulic fracturing of oil and natural gas wells and for a variety of industrial applications. We also offer proppant logistics solutions to our customers through our in-basin transloading terminals, a network of third party in-basin transloading terminals and our SmartSystemsTM wellsite proppant storage services. In late 2021, we created our Industrial Product Solutions (“IPS”) business in order to diversify our customer base and markets we serve by offering sand for industrial uses. We market our products and services to oil and natural gas exploration and production companies, oilfield service companies and industrial products distributors and manufacturers. We sell our sand through long-term contracts or spot sales in the open market. We 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,
18

SMART SAND, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)
access to all Class I rail lines, and the industry experience of our senior management team make us as a highly attractive provider of sand and logistics services.
We incorporated in Delaware in July 2011 and began operations at our Oakdale, Wisconsin facility with 1.1 million tons of annual processing capacity in July 2012. After several expansions, our current annual processing capacity at our Oakdale facility is 5.5 million tons, which has access to both the Canadian Pacific and Union Pacific rail networks. In 2020, we acquired our Utica, Illinois mine and processing facility, which has an annual processing capacity of 1.6 million tons and access to the Burlington Northern Santa Fe rail network.
In March 2022, we acquired our Blair, Wisconsin facility, which included an idled sand mine and processing facility having approximately 2.9 million tons of total annual processing capacity and contains an onsite, unit train capable rail terminal with access to the Class 1 Canadian National Railway. We expect to commence operations at the Blair facility in the second quarter of 2023.
We sell frac sand through several in-basin rail terminals. We directly control three in-basin transloading facilities and have access to third party transloading terminals in all operating basins. We operate a unit train capable transloading terminal in Van Hook, North Dakota to service the Bakken Formation in the Williston Basin, which has been providing Northern White Sand in-basin to our customers since the Van Hook terminal became operational in April 2018. In 2020, as part of our acquisition of the Utica, Illinois mining facility, we obtained rights to use a rail terminal located in El Reno, Oklahoma. In January 2022, we began operations at an additional unit train capable transloading terminal in Waynesburg, Pennsylvania to service the Appalachian Basin, including the Marcellus and Utica Formations.
We also offer to our customers portable wellsite 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. We believe that our SmartSystems reduce trucking and related fuel consumption for our customers, helping them meet their goals to reduce their carbon footprint in their daily operations.
In late 2021, we started our IPS business whereby we offer our sand to customers for various industrial purposes, such as glass, foundry, building products, filtration, geothermal, renewables, ceramics, turf & landscape, retail, and recreation. While we are still in the early stages of this business, we believe that as it grows, it will provide us with the ability to diversify our sales into more stable, consumer-driven products to help mitigate price volatility in the oil and gas industry.


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.
During most of 2020, demand for frac sand declined significantly as a result of decreased demand for oil and natural gas as a result of the ongoing effects of the coronavirus (“COVID-19”) pandemic, which caused a global decrease in all means of travel, the closure of borders between countries and a general slowing of economic activity worldwide. Activity in the oil and gas industry began to rebound in the fourth quarter of 2020 and through 2021 as the global distribution of COVID-19 vaccines ramped up and travel restrictions lessened. However, the prices of frac sand remained depressed during 2021 as supply remained out of balance with demand even though market activity was improving. Beginning in the first quarter of 2022 and
19

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

continuing through the first quarter of 2023, supply and demand fundamentals have shifted, which has led to pricing improvements in frac sand.
The ongoing conflict in Ukraine has contributed to dramatic swings in oil and natural gas prices and significant volatility in the oilfield service sector. Additionally, current high inflation and other economic factors could lead to a global economic recession that could have a negative impact on global oil and natural gas demand, which may lead to continued volatility in the oil field service sector. We cannot predict if positive pricing trends will continue or if sand prices will increase, decrease or stabilize.
Northern White 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 believe 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 sand. In particular, we believe that Northern White sand has logistical advantages in the Appalachian basin, Bakken basin, and in Canada. 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. As the amount of sand per well continues to increase, we believe the delivery of sand to the operating basins by rail in bulk shipments to terminals in close proximity to drilling activity provides more sustainable and efficient delivery of sand to meet a customer’s long term proppant needs. Finally, we believe that the adoption of our SmartSystems in the marketplace, which has a smaller footprint on customer sites than other sand storage solutions, will allow us to sell more sand when packaged with our last mile solutions. We believe the combination of our high quality Northern White sand delivered in bulk to in basin terminals and ultimately delivered to the wellsite through our SmartSystems wellsite proppant storage solutions provides our customers efficient and sustainable sand supply to the wellsite that will reduce trucking and related fuel consumption for our customers, helping them to meet their goals to reduce their carbon footprint in their daily operations.
Demand in the IPS business is relatively stable as customers are spread over a wide range of industries including glass, foundry, building products, filtration, geothermal, renewables, ceramics, turf & landscape, retail, recreation and more. The IPS business is primarily influenced by macroeconomic drivers such as consumer demand and population growth. While we are still in the early stages of this business, we believe that as it grows, it will provide us with the ability to diversify our sales into more stable, consumer-driven products to help mitigate price volatility in the oil and gas industry.
20

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


GAAP Results of Operations

Three Months Ended March 31, 2023 Compared to Three Months Ended March 31, 2022
The following table summarizes our revenue and expenses for the periods indicated.
 
Three Months Ended March 31,
Change
 20232022DollarsPercentage
 (in thousands)
Revenues:
Sand sales revenue$78,098 $38,289 $39,809 104 %
Shortfall revenue1,915 1,915 — — %
Logistics revenue2,337 1,401 936 67 %
Total revenue82,350 41,605 40,745 98 %
Cost of goods sold70,713 43,586 27,127 62 %
Gross profit11,637 (1,981)13,618 687 %
Operating expenses:
Salaries, benefits and payroll taxes5,145 3,392 1,753 52 %
Depreciation and amortization592 527 65 12 %
Selling, general and administrative5,619 4,048 1,571 39 %
Net loss on disposal of fixed assets1,889 — 1,889 Not meaningful
Total operating expenses13,245 7,967 5,278 66 %
Operating income (loss)(1,608)(9,948)8,340 84 %
Other income (expenses):
Interest expense, net(441)(427)(14)3 %
Other income48 212 (164)(77)%
Total other income (expenses), net(393)(215)(178)83 %
Loss before income tax benefit(2,001)(10,163)8,162 80 %
Income tax expense (benefit)1,598 (4,240)5,838 138 %
Net loss$(3,599)$(5,923)$2,324 39 %
Revenues
Revenues were $82.4 million for the three months ended March 31, 2023, during which time we sold approximately 1,195,000 tons of sand. Revenues for the three months ended March 31, 2022 were $41.6 million, during which time we sold approximately 852,000 tons of sand. The key factors contributing to the increase in revenues for the three months ended March 31, 2023 as compared to the three months ended March 31, 2022 were as follows:
•Sand sales revenue increased from $38.3 million for the three months ended March 31, 2022 to $78.1 million for the three months ended March 31, 2023 as a result of an approximately 40% increase in total volumes sold. In addition to an increase in our sales volumes, the 104% increase in our revenue year-over-year is also attributable to higher average sale prices of our sand. Sand prices have increased due to a shift in supply and demand, which we believe is driven by increased prices in oil and natural gas leading to increased completion activity of new oil and natural gas wells.
•Logistics revenue, which includes freight for certain mine gate sand sales, logistics services, and SmartSystems rentals, was approximately $2.3 million for the three months ended March 31, 2023 compared to $1.4 million for the
21

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

three months ended March 31, 2022. The increase in logistics revenue was due to higher utilization of our SmartSystems fleet.
Cost of Goods Sold
Cost of goods sold was $70.7 million and $43.6 million for the three months ended March 31, 2023 and March 31, 2022, respectively. The increase was primarily due to higher volumes sold in the current period and the related increase in production costs and freight costs that accompany higher sales volumes, along with higher labor costs and utilities costs.
Gross Profit
Gross profit was $11.6 million and $(2.0) million for the three months ended March 31, 2023 and March 31, 2022, respectively. The increase in the gross profit for the three months ended March 31, 2023 as compared to the three months ended March 31, 2022 was primarily due to higher sales volumes and higher average sale prices of our sand relative to the cost to produce and deliver products to our customers.
Operating Expenses
Operating expenses were $13.2 million and $8.0 million for the three months ended March 31, 2023 and March 31, 2022, respectively. Salaries, benefits and payroll taxes increased to $5.1 million for the three months ended March 31, 2023 as compared to $3.4 million for the three months ended March 31, 2022, due primarily to increased staffing to support our business. Selling, general and administrative expenses increased to $5.6 million for the three months ended March 31, 2023 compared to $4.0 million for the three months ended March 31, 2022, primarily driven by $1.9 million of net loss on disposal of fixed assets as we reconfigured one of our wet plants to increase the efficiency of its operations and upgraded some of our mining equipment.
Interest Expense, net
We incurred $0.4 million of net interest expense for each of the three months ended March 31, 2023 and March 31, 2022.
Income Tax Benefit
For the three months ended March 31, 2023 and March 31, 2022, our effective tax rate was approximately (79.9)% and 41.7%, respectively, based on the annual effective tax rate net of discrete federal and state taxes. The computation of the effective tax rate includes modifications from the statutory rate such as income tax credits, tax depletion deduction, carrybacks, and state apportionment changes, among other items.
As of March 31, 2023, we have recorded a liability for uncertain tax positions included on our balance sheet, related to our depletion deduction methodology. As of March 31, 2023, we determined that it is more likely than not that we will not be able to fully realize the benefits of certain existing deductible temporary differences and have recorded a partial valuation allowance against the gross deferred tax assets, which is included in liabilities, long-term, net on our balance sheet, and a corresponding increase to the income tax expense on our condensed consolidated statement of operations.
Net Loss
Net loss was $(3.6) million for the three months ended March 31, 2023 as compared to net loss of $(5.9) million for the three months ended March 31, 2022. The decrease in net loss is primarily attributable to an increase in total volumes sold and higher average sale prices of our sand, partially offset by $1.9 million of net loss on disposal of fixed assets as we reconfigured one of our wet plants to increase the efficiency of its operations and upgraded some of our mining equipment 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
22

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

EBITDA and net cash provided by operating activities is the GAAP measure most directly comparable to free cash flow. Our non-GAAP financial measures should not be considered as alternatives to the most directly comparable GAAP financial measures. Each of these non-GAAP financial measures has important limitations as analytical tools because they exclude some but not all items that affect the most directly comparable GAAP financial measures. You should not consider contribution margin, EBITDA, Adjusted EBITDA or free cash flow in isolation or as substitutes for an analysis of our results as reported under GAAP. Because contribution margin, EBITDA, Adjusted EBITDA and free cash flow may be defined differently by other companies in our industry, our definitions of these non-GAAP financial measures may not be comparable to similarly titled measures of other companies, thereby diminishing their utility.

Contribution Margin
We use contribution margin, which we define as total revenues less cost of goods sold excluding depreciation, depletion and accretion of asset retirement obligations, to measure our financial and operating performance. Contribution margin excludes other operating expenses and income, including costs not directly associated with the operations of our business such as accounting, human resources, information technology, legal, sales and other administrative activities. 
We believe that reporting contribution margin and contribution margin per ton sold provides useful performance metrics to management and external users of our financial statements, such as investors and commercial banks, because these metrics provide an operating and financial measure of our ability, as a combined business, to generate margin in excess of our operating cost base.
Gross profit is the GAAP measure most directly comparable to contribution margin. Contribution margin should not be considered an alternative to gross profit presented in accordance with GAAP. Since contribution margin may be defined differently by other companies in our industry, our definition of contribution margin may not be comparable to similarly titled measures of other companies, thereby diminishing its utility. The following table presents a reconciliation of gross profit to contribution margin.
 Three Months Ended March 31,
 20232022
(in thousands, except per ton amounts)
Revenue$82,350 $41,605 
Cost of goods sold70,713 43,586 
      Gross profit (loss)11,637 (1,981)
Depreciation, depletion, and accretion of asset retirement obligations6,159 6,231 
      Contribution margin$17,796 $4,250 
      Contribution margin per ton $14.89 $4.99 
Total tons sold1,195 852 
Contribution margin was $17.8 million and $4.3 million, or $14.89 and $4.99 per ton sold, for the three months ended March 31, 2023 and 2022, respectively. The increase in overall contribution margin and contribution margin per ton was due primarily to higher sales volumes and higher average sale prices relative to the cost to produce and deliver products to our customers, along with increased IPS sales and higher utilization of our SmartSystems fleet 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:
23

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

•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.
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 net loss to EBITDA and Adjusted EBITDA for each of the periods indicated.
 Three Months Ended March 31,
 20232022
 (in thousands)
Net loss$(3,599)$(5,923)
Depreciation, depletion and amortization6,551 6,568 
Income tax expense (benefit)1,598 (4,240)
Interest expense442 434 
Franchise taxes336 60 
EBITDA$5,328 $(3,101)
Net loss on disposal of fixed assets 1,889 — 
Equity compensation736 674 
Acquisition and development costs 271 337 
Accretion of asset retirement obligations200 190 
Adjusted EBITDA$8,424 $(1,900)
Adjusted EBITDA was $8.4 million for the three months ended March 31, 2023 compared to $(1.9) million for the three months ended March 31, 2022. The increase in Adjusted EBITDA was primarily due to higher sales volumes, and higher average sale prices of our sand relative to the cost to produce and deliver products to our customers.


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.
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
24

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

a reconciliation of net cash provided by (used in) operating activities to free cash flows.
 Three Months Ended March 31,
 20232022
(in thousands, except per ton amounts)
Net cash provided by (used in) operating activities$5,105 $(8,662)
Acquisition of Blair facility— (6,547)
Purchases of property, plant and equipment(4,018)(3,768)
Free cash flow$1,087 $(18,977)
Free cash flow was $1.1 million for the three months ended March 31, 2023 compared to $(19.0) million for the three months ended March 31, 2022. The increase in free cash flow was primarily attributable to positive cash flows from operating activities in the current period as the market for our products improved and reduced purchases of property, plant and equipment, as well as the acquisition of the Blair facility in the prior year.

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 March 31, 2023, cash on hand was $7.6 million and we had $12.0 million in undrawn availability on our ABL Credit Facility.
Based on our balance sheet, cash flows, current market conditions, and information available to us at this time, we believe that we have sufficient liquidity and other available capital resources, to meet our cash needs for the next twelve months.

Material Cash Requirements
Capital Requirements
We expect full year 2023 capital expenditures, to be between $20.0 million and $25.0 million, which we anticipate will primarily support efficiency projects at our Oakdale and Utica facilities and the anticipated commencement of operations at our Blair facility. We expect to fund these capital expenditures with cash from operations, equipment financing options available to us or borrowings under the ABL Credit Facility.
Indebtedness
Our debt facilities include the Oakdale Equipment Financing, various notes payable and our ABL Credit Facility. Our Oakdale Equipment Financing is secured by substantially all of the assets at our Oakdale facility. The balance on this facility as of March 31, 2023 was $10.9 million. Minimum cash payments on this facility for the remainder of 2023 are anticipated to be $3.5 million. Our various notes payable are primarily secured by our manufactured SmartSystems equipment and our note payable with Clearlake is unsecured. Total debt under these notes payable as of March 31, 2023 was $7.1 million. Minimum cash payments on these notes payable for the remainder of 2023 are anticipated to be $5.9 million. There was $7.0 million outstanding on our ABL Credit Facility as of March 31, 2023.
Operating Leases
We use leases primarily to procure certain office space, railcars and heavy equipment as part of our operations. The majority of our lease payments are fixed and determinable. Our operating lease liabilities as of March 31, 2023 were $27.0 million. Minimum cash payments on operating leases for the remainder of 2023 are anticipated to be $9.3 million.
Mineral Rights Property
The Company is obligated under certain contracts for minimum payments for the right to use land for extractive activities. The annual minimum payments under these contracts are approximately $2.5 million per year in the aggregate for the next 14 years.
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SMART SAND, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)

Off-Balance Sheet Arrangements
We had outstanding performance bonds of $17.6 million at March 31, 2023.

Contractual Obligations
As of March 31, 2023, we had contractual obligations for the ABL Credit Facility, Oakdale Equipment Financing, notes payable, operating and finance leases, royalties and similar 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 during 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 three months ended March 31, 2023, revenue from EQT Production Corporation, Encino Energy, and Liberty Oilfield Services accounted for 32.5%, 13.3% and 10.8%, respectively, of total revenue. For the three months ended March 31, 2022, EQT Production Corporation, Halliburton Energy Services, and Olympus accounted for 24.4%, 17.2%, and 10.00%, respectively, of total revenue.

Critical Accounting Policies and Estimates 
There have been no material changes in our critical accounting policies and procedures during the three months ended March 31, 2023.
Use of Estimates
The preparation of interim statements 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: impairment considerations of assets, including intangible assets, fixed assets, and inventory; estimated cost of
26

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

future asset retirement obligations; fair values of acquired assets and assumed liabilities; recoverability of deferred tax assets; inventory reserve; and the 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. Future economic performance is uncertain due to current high inflation and other economic concerns. We continue to actively monitor the global impact of current events, but we are unable to estimate the impact of future events on our financial position and results of operations or give any assurances that these events will not have a material adverse effect on our financial position or results of operations.
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ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
The majority of our debt is financed under fixed interest rates. Borrowings under the ABL Credit Facility bear interest at a rate per annum equal to an applicable margin, plus, at our option, either a LIBOR rate or an alternate base rate (“ABR”). The applicable margin is 2.00% for LIBOR loans and 1.00% for ABR loans. The outstanding balance under our ABL Credit Facility as of March 31, 2023 was $7.0 million. We do not believe this represents a material interest rate risk.
We have considered other changes in our exposure to market risks during the three months ended March 31, 2023 and have determined that there have been no additional 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, 2022, filed with the SEC on February 28, 2023.

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 March 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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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 months ended March 31, 2023.

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, 2022.

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the three months ended March 31, 2023, no shares were sold by the Company without registration under the Securities Act of 1933, as amended.
Purchases of Equity Securities by the Issuer
In February 2023, we repurchased 5.18 million shares of our common stock from Clearlake Capital Partners II (Master), L.P., an affiliate of Clearlake Capital Group (“Clearlake”), for approximately $8.85 million, of which $4.42 million was paid in cash and the remainder was financed through an unsecured promissory note issued to Clearlake. The promissory note will mature on December 15, 2023. The following table presents specified information about our repurchase of shares of our common stock during the three months ended March 31, 2023:
Total number of shares purchasedAverage price paid per shareTotal number of shares purchased as part of publicly announced plans or programsMaximum number of shares that may yet be purchased under plans or programs
January 1, 2023 through January 31, 2023
— — — — 
February 1, 2023 through February 28, 2023
5,175,688
$1.71 — — 
March 1, 2023 through March 31, 2023
— — — — 
Total
5,175,688
$1.71 — — 

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, 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.
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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.
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ITEM 6.  EXHIBITS
3.1
3.2
10.1
10.2
31.1*
31.2*
32.1*†
32.2*†
95.1*
101.INSExtracted 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 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.

31

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.
   
May 9, 2023By:/s/ Lee E. Beckelman
  Lee E. Beckelman, Chief Financial Officer
  (Principal Financial Officer)
 
 Smart Sand, Inc.
   
May 9, 2023By:/s/ Christopher M. Green
  Christopher M. Green, Vice President of Accounting
  (Principal Accounting Officer)

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