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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
 _____________________________________________________
FORM 10-Q
 _____________________________________________________ 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2020
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
https://cdn.kscope.io/bc0ab99e21bfceecdd88e3c0edf39daf-snd-20200930_g1.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)
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 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 ý No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes ý No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. 
Large accelerated filer  ☐
Accelerated Filer  ý
Non-accelerated filer  ☐
Smaller reporting company
Emerging Growth Company
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).   Yes  No ý
Number of shares of common stock outstanding, par value $0.001 per share, as of November 2, 2020: 43,517,901




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, as amended, 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.
“Former Credit Agreement”, “Former Credit
Facility”
The $45 million 3-year senior secured revolving credit facility (the “Former Credit Facility”) under a revolving credit agreement, dated December 8, 2016, with Jefferies Finance LLC, as administrative and collateral agent (as amended, the “Former Credit Agreement”). The Former Credit Facility was paid in full and terminated with proceeds from the Oakdale Equipment Financing.
“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
September 30, 2020December 31, 2019
(unaudited)
 (in thousands, except share amounts)
Assets  
Current assets:  
Cash and cash equivalents$10,994 $2,639 
Accounts receivable, net66,029 58,925 
Unbilled receivables9,256 4,765 
Inventories23,568 21,415 
Prepaid expenses and other current assets1,534 4,433 
Total current assets111,381 92,177 
Property, plant and equipment, net281,142 230,461 
Operating lease right-of-use assets32,198 28,178 
Intangible assets, net8,451 9,046 
Other assets3,417 3,541 
Total assets$436,589 $363,403 
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable$3,338 $3,961 
Accrued expenses and other liabilities7,735 8,578 
Deferred revenue, current8,192 7,654 
Income taxes payable6,510 542 
Long-term debt, net, current6,423 6,175 
Operating lease liabilities, current8,783 13,108 
Total current liabilities40,981 40,018 
Deferred revenue, net4,789 1,670 
Long-term debt, net23,899 28,240 
Operating lease liabilities, long-term24,536 15,469 
Deferred tax liabilities, long-term, net35,523 24,408 
Asset retirement obligation14,805 6,142 
Contingent consideration570 1,900 
Other non-current liabilities759  
Total liabilities145,862 117,847 
Commitments and contingencies (Note 15)
Stockholders’ equity
Common stock, $0.001 par value, 350,000,000 shares authorized; 42,842,751 issued and 41,281,583 outstanding at September 30, 2020; 40,975,408 issued and 40,234,451 outstanding at December 31, 201942 40 
Treasury stock, at cost, 1,561,168 and 740,957 shares at September 30, 2020 and December 31, 2019, respectively(4,025)(2,979)
Additional paid-in capital170,282 165,223 
Retained earnings124,152 83,313 
Accumulated other comprehensive income (loss)276 (41)
Total stockholders’ equity290,727 245,556 
Total liabilities and stockholders’ equity$436,589 $363,403 

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


SMART SAND, INC.
CONDENSED CONSOLIDATED INCOME STATEMENTS
(UNAUDITED) 
 Three Months Ended September 30,Nine Months Ended September 30,
 2020201920202019
 (in thousands, except per share amounts)
Revenues$23,409 $65,690 $97,003 $185,406 
Cost of goods sold18,227 38,555 71,221 122,228 
Gross profit5,182 27,135 25,782 63,178 
Operating expenses:
Salaries, benefits and payroll taxes2,058 2,958 7,115 8,466 
Depreciation and amortization440 623 1,354 1,954 
Selling, general and administrative3,933 2,693 10,393 8,283 
Change in the estimated fair value of contingent consideration (1,215)(1,020)(2,757)
Impairment loss 7,628  7,628 
Total operating expenses6,431 12,687 17,842 23,574 
Operating (loss) income(1,249)14,448 7,940 39,604 
Other income (expenses):
Gain on bargain purchase39,889  39,889  
Interest expense, net(497)(968)(1,576)(2,943)
Other income80 15 162 89 
Total other income (expenses), net39,472 (953)38,475 (2,854)
Income before income tax expense38,223 13,495 46,415 36,750 
Income tax expense1,941 2,569 5,576 7,515 
Net income$36,282 $10,926 $40,839 $29,235 
Net income per common share:
Basic$0.91 $0.27 $1.02 $0.73 
Diluted$0.91 $0.27 $1.02 $0.73 
Weighted-average number of common shares:
Basic39,973 40,233 39,903 40,102 
Diluted39,973 40,240 39,903 40,163 
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

4


SMART SAND, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
(in thousands)
Net income$36,282 $10,926 $40,839 $29,235 
Other comprehensive income:
Foreign currency translation adjustment96 (46)317 190 
Comprehensive income$36,378 $10,880 $41,156 $29,425 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5


SMART SAND, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(UNAUDITED) 
Nine months ended September 30, 2020
 Common StockTreasury StockAdditional Paid-in Capital Accumulated Other Comprehensive LossTotal Stockholders’ Equity
 Outstanding
Shares
Par ValueSharesAmountRetained
Earnings
 (in thousands, except share amounts)
Balance at December 31, 201940,234,451 $40 740,957 $(2,979)$165,223 $83,313 $(41)$245,556 
Foreign currency translation adjustment— — — — — — (163)(163)
Vesting of restricted stock139,947 — — — — — — — 
Stock-based compensation— — — — 1,025 — — 1,025 
Employee stock purchase plan compensation— — — — 14 — — 14 
Employee stock purchase plan issuance21,486 — — — 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, 202039,607,116 40 1,529,725 (3,993)166,308 83,229 (204)245,380 
Foreign currency translation adjustment— — — — — — 384 384 
Vesting of restricted stock177,628 — — — — — — — 
Stock-based compensation— — — — 943 — — 943 
Employee stock purchase plan compensation— — — — 12 — — 12 
Employee stock purchase plan issuance — — —  — —  
Restricted stock buy back(30,673)— 30,673 (31)— — — (31)
Shares repurchased— — — — — — — — 
Net income— — — — — 4,641 — 4,641 
Balance at June 30, 202039,754,071 $40 1,560,398 $(4,024)$167,263 $87,870 $180 $251,329 
Foreign currency translation adjustment— — — — — — 96 96 
Acquisition stock issuance1,503,759 2 — — 2,059 — — 2,061 
Vesting of restricted stock6,375 — — — — — — — 
Stock-based compensation— — — — 941 — — 941 
Employee stock purchase plan compensation— — — — 3 — — 3 
Employee stock purchase plan issuance18,148 — — — 16 — — 16 
Restricted stock buy back(770)— 770 (1)— — — (1)
Net income— — — — — 36,282 — 36,282 
Balance at September 30, 202041,281,583 $42 1,561,168 $(4,025)$170,282 $124,152 $276 $290,727 

6


SMART SAND, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (continued)
(UNAUDITED) 
Nine months ended September 30, 2019
 Common StockTreasury StockAdditional Paid-in Capital Accumulated Other Comprehensive LossTotal Stockholders’ Equity
 Outstanding
Shares
Par ValueSharesAmountRetained
Earnings
 (in thousands, except share amounts)
Balance at December 31, 201839,974,478 $40 699,035 $(2,839)$162,195 $48,864 $(313)$207,947 
Foreign currency translation adjustment— — — — — — 145 145 
Vesting of restricted stock30,729 — — — — — — — 
Stock-based compensation— — — — 790 — — 790 
Employee stock purchase plan compensation— — — — 9 — — 9 
Employee stock purchase plan issuance20,954 — — — 40 — — 40 
Restricted stock buy back(5,714)— 5,714 (23)— — — (23)
Net income— — — — — 4,033 — 4,033 
Balance at March 31, 201940,020,447 40 704,749 (2,862)163,034 52,897 (168)212,941 
Foreign currency translation adjustment— — — — — — 91 91 
Vesting of restricted stock224,653 — — — — — — — 
Stock-based compensation— — — — 754 — — 754 
Employee stock purchase plan compensation— — — — 9 — — 9 
Employee stock purchase plan issuance — — —  — —  
Restricted stock buy back(35,691)— 35,691 (116)— — — (116)
Net income— — — — — 14,276 — 14,276 
Balance at June 30, 201940,209,409 40 740,440 (2,978)163,797 67,173 (77)227,955 
Foreign currency translation adjustment— — — — — — (46)(46)
Vesting of restricted stock4,500 — — — — — — — 
Stock-based compensation— — — — 652 — — 652 
Employee stock purchase plan compensation— — — — 12 — — 12 
Employee stock purchase plan issuance20,121 — — — 38 — — 38 
Restricted stock buy back(180)— 180  — — —  
Net income— — — — — 10,926 — 10,926 
Balance at September 30, 201940,233,850 $40 740,620 $(2,978)$164,499 $78,099 $(123)$239,537 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
7


SMART SAND, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended September 30,
 20202019
 (in thousands)
Operating activities:  
Net income $40,839 $29,235 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, depletion and accretion of asset retirement obligation16,092 19,309 
Impairment loss 7,628 
Amortization of intangible assets596 1,199 
Asset retirement obligation settlement (2,348)
Loss (gain) on disposal of assets299 (41)
Amortization of deferred financing cost79 172 
Accretion of debt discount138 517 
Deferred income taxes 238 6,787 
Stock-based compensation, net2,909 2,196 
Employee stock purchase plan compensation29 30 
Change in contingent consideration fair value(1,020)(2,757)
Gain on bargain purchase, net of cash acquired(39,580) 
Changes in assets and liabilities:
Accounts receivable(7,029)(39,760)
Unbilled receivables(4,491)6,634 
Inventories306 2,649 
Prepaid expenses and other assets3,751 1,035 
Deferred revenue3,912 4,396 
Accounts payable(205)(956)
Accrued and other expenses(607)4,403 
Income taxes payable5,968  
Net cash provided by operating activities22,224 40,328 
Investing activities:
Purchases of property, plant and equipment(7,444)(19,518)
Proceeds from disposal of assets51  
Net cash used in investing activities(7,393)(19,518)
Financing activities:
Proceeds from the issuance of notes payable952 6,120 
Repayments of notes payable(3,527)(1,461)
Payments under equipment financing obligations(87)(79)
Payment of deferred financing and debt issuance costs(20)(1,087)
Proceeds from revolving credit facility6,000 37,750 
Repayment of revolving credit facility(8,500)(59,750)
Payment of contingent consideration(310)(1,610)
Proceeds from equity issuance62 78 
Purchase of treasury stock(1,046)(139)
Net cash used in financing activities(6,476)(20,178)
Net increase in cash and cash equivalents8,355 632 
Cash and cash equivalents at beginning of year2,639 1,466 
Cash and cash equivalents at end of period$10,994 $2,098 
Supplemental disclosure of cash flow information
Non-cash investing activities:
Asset retirement obligation$ $3,301 
Non-cash financing activities:
Capitalized expenditures in accounts payable and accrued expenses$157 $2,138 
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 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, and subsequently expanded its operations in 2014, 2015 and 2018 to the current annual processing capacity of approximately 5.5 million tons.
The Company provides complete logistics solutions through both its integrated Oakdale facility, with on-site rail infrastructure, with access to two 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. SmartSystems operate with proprietary the SmartSystem TrackerTM software program, which allows users to monitor silo-specific information, including location, proppant type, and proppant inventory. The Company is currently developing a new transload technology to complement its existing solutions.
On September 18, 2020, the Company acquired all of the issued and outstanding interests in Eagle Oil and Gas Proppants Holdings LLC, which, together with its subsidiaries, constituted the entirety of the assets and operations of the oil and gas proppants business of Eagle Materials Inc. The primary assets of Eagle Oil and Gas Proppants Holdings LLC and its subsidiaries include two frac sand mines and related processing facilities in Utica, Illinois and New Auburn, Wisconsin, with approximately 3.5 million tons of total combined annual processing capacity, 1.6 million tons of which has access to the BNSF Class I rail line through the Peru, Illinois transload facility. See Note 3 — Business Combination and Note 7 - Debt for additional disclosures regarding this transaction.
Market Update
Generally, the price of frac sand correlates with the level of drilling and completions activity for oil and natural gas in the United States and Canada. 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. The willingness of exploration and production companies to engage in drilling and completing new wells is determined by a number of factors, the most important of which are the prevailing and projected prices of oil and natural gas, the cost to drill, complete and operate a well, the availability and cost of capital and environmental and government regulations, as well as their ability to acquire the sand at the wellsite.
Recently, oil prices declined to all-time lows as a result of decreased demand for oil from the COVID-19 coronavirus pandemic, as well as an increase in global oil supply driven by disagreements with respect to oil pricing between Russia and members of the Organization of the Petroleum Exporting Countries (“OPEC”), particularly Saudi Arabia. The COVID-19 coronavirus pandemic has caused a global decrease in all means of travel, the closure of borders between countries and a general slowing of economic activity worldwide which has decreased the demand for oil. In early March, discussions between Russia and Saudi Arabia deteriorated and the countries ended a three-year supply level agreement, which resulted in each country increasing its oil production. Subsequently, Russia and OPEC agreed to certain production cuts to mitigate the decline in the price of oil, however, such cuts may not be sufficient to stabilize the oil market if the decline in demand due to the COVID-19 coronavirus pandemic continues. Oil and natural gas prices are expected to continue to be depressed as a result of the increase of near-term supply and the decrease in overall demand caused by these events, and the Company cannot predict when prices will improve or stabilize.
9


SMART SAND, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
In response to market conditions, the Company has reduced its total capital expenditure budget, primarily a reduction to SmartSystems manufacturing plans. The Company has also put in place several cost-cutting measures, including headcount reductions at its Oakdale and Saskatoon, Canada operating facilities, salary reductions and suspension of certain variable cash compensation programs for all employees, and reduced compensation for board members. The Company has also taken steps to limit cash outflows in the near-term by negotiating for deferred payments on certain of its operating leases, debt and minimum royalty payments. The Company has put in place multiple initiatives to protect the health and well-being of its workforce and its customers, including work-from-home arrangements for all employees that are able to do so and implementing social distancing requirements as prescribed by the federal, state and local government authorities.
The ultimate disruption caused by these events is uncertain; however they may result in a material adverse impact on the Company’s financial position, results of operations and cash flows. Possible effects may include, but are not limited to, disruption to the Company’s customers and revenue, absenteeism in the Company’s labor workforce, unavailability of products and supplies used in operations, a decline in value of assets held by the Company, including accounts receivable, inventories, property, plant and equipment and intangible assets, and a decrease in liquidity due to lower cash flows from operations being generated, a reduction in the availability to borrow under the ABL Credit Facility and inability to access other sources of liquidity and capital, such as equipment financings or the capital markets.
Management is actively monitoring these global events, but given the rapidly changing nature of these events, 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 the events will not have a material adverse effect on its financial position or results of operations.

NOTE 2 — Summary of Significant Accounting Policies
The information presented below supplements the complete description of our significant accounting policies disclosed in our 2019 Form 10-K, filed with the SEC on February 26, 2020.
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, 2019 was derived from the audited consolidated financial statements as of and for the year ended December 31, 2019. These interim statements should be read in conjunction with the Company’s consolidated financial statements for the year ended December 31, 2019. 
Revision of Previously Issued Financial Statements for Immaterial Misstatements
During the quarter ended June 30, 2020, the Company identified an error in costs of goods sold in the Company’s audited financial statements for the year ended December 31, 2018. The error related to a vendor rebate the Company received during the current period, $1,800 of which related to expenses attributable to fiscal year 2018. As a result of the error, the Company reduced costs of goods sold by $1,800 and increased income tax expense by $387 in its audited financial statements for the year ended December 31, 2018, and increased prepaid expenses and other current assets by $1,800, increased deferred tax liability by $387 and increased retained earnings by $1,413 in its audited financial statements for the year ended December 31, 2019. Additionally, certain 2019 balance sheet items have been reclassified to conform to the current financial statement presentation. These reclassifications have no effect on previously reported net income.
Pursuant to the guidance of Staff Accounting Bulletin (“SAB”) No. 99, “Materiality”, the Company evaluated the materiality of these errors quantitatively and qualitatively and concluded that the errors described above were not material to any of its prior annual or quarterly financial statements or trends of financial results. However, due to reduced activity and the current economic environment, the errors could be considered material to the Company’s current period financial statements. As such, the Company has revised the prior period financial statements in accordance with SAB No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.” The Company expects to similarly revise previously presented historical financial statements for these immaterial errors in future filings,
10


SMART SAND, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
including the annual audited financial statements to be included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.
Use of Estimates
The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Significant estimates used in the preparation of these financial statements include, but are not limited to: the sand reserves and their impact on calculating the depletion expense under the units-of-production method; 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 increased supply of oil and the decreased demand related to the COVID-19 coronavirus pandemic have caused a dramatic decline in oil prices and significant volatility in the oilfield services sector. 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 the events will not have a material adverse effect on its financial position or results of operations.
Recent Accounting Pronouncements
        Not yet adopted
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 its consolidated financial statements, it believes the primary effect will be an allowance recorded against its accounts and unbilled receivables on its balance sheet and related expense on its income statement upon adoption. The Company cannot determine the financial impact on its consolidated financial statements upon adoption as its accounts and unbilled receivables balances are affected by ongoing transactions with customers.
In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes, which intends to simplify the guidance by removing certain exceptions to the general principles and clarifying or amending existing guidance. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. Although the Company is currently evaluating the impact of the adoption of ASU 2019-12, it does not expect it to have a material impact on its consolidated financial statements.
11


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

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 consideration of approximately $2,060. In satisfaction of the purchase price, the Company issued to Eagle 1,504 shares of its common stock. The number of 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 two frac sand mines and related processing facilities in Utica, Illinois and New Auburn, Wisconsin, with approximately 3.5 million tons of total combined annual processing capacity, 1.6 million tons of which 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 issued1,504 
Closing share price on September 18, 2020$1.37 
Total purchase consideration$2,060 

The Company’s preliminary allocation of the purchase price in connection with the acquisition was calculated as follows:
Fair Value
Assets Acquired
Cash$309 
Accounts receivable75 
Inventory2,459 
Prepaid expenses and other current assets123 
Property, plant and equipment60,310 
Right-of-use assets9,603 
Total assets acquired72,879 
Liabilities Assumed
Accounts payable16 
Accrued expenses and other liabilities2,010 
Asset retirement obligations8,424 
Operating lease liabilities9,603 
Deferred income taxes10,877 
Total liabilities assumed30,930 
Estimated fair value of net assets acquired$41,949 
12


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

The estimated aggregate fair value of the net assets acquired was $41,949, which exceeds the total consideration and results in a bargain purchase gain of $39,889 on the acquisition date, which is included in net income for the three and nine months ended September 30, 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.

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 are based on underlying assets and liabilities whose carrying value approximates fair value. The fair value of inventory was determined using market prices the Company expects to receive for the inventory when it is sold. Operating leases are 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 legal obligations. Deferred income taxes represent the temporary differences between future expenses for GAAP purposes and income tax purposes at the Company’s current 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 is 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. The Company’s allocation of the purchase price is preliminary and subject to change. The total purchase consideration is subject to certain working capital adjustments through December 17, 2020. The Company has not yet completed its valuation procedures and believes property, plant and equipment, asset retirement obligations, and deferred income taxes are the primary line items whose value is subject to change.

Total acquisition costs incurred during the three and nine months ended September 30, 2020 were $817 and $875, respectively, which are included in selling, general and administrative expense on the Company’s condensed consolidated income statements.

The following represents pro forma consolidated revenue and income before income tax expense as if Eagle Proppants Holdings had been included in the consolidated results of the Company for the three and nine months ended September 30, 2020 and 2019. These amounts have been calculated after applying the Company’s accounting policies and adjusting the results of Eagle Proppants Holdings to reflect the depreciation and accretion expense that would have been charged assuming the fair value adjustments to property, plant and equipment and asset retirement obligations as well as equipment rent that would have been recorded based on the acquired right-of-use assets.

Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
Revenues$23,442 $78,115 $105,852 $226,942 
Income before income tax expense$34,614 $12,297 $39,700 $33,484 


NOTE 4 — Inventory
Inventory consisted of the following:
 September 30, 2020December 31, 2019
Raw material$784 $527 
Work in progress12,208 14,173 
Finished goods6,710 4,097 
Spare parts3,866 2,618 
Total sand inventory$23,568 $21,415 

13


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

NOTE 5 — Property, Plant and Equipment, net
Net property, plant and equipment consisted of:
September 30, 2020December 31, 2019
Machinery, equipment and tooling$52,077 $19,683 
SmartSystems
22,393 15,811 
Vehicles2,938 2,419 
Furniture and fixtures1,284 1,228 
Plant and building176,731 170,283 
Real estate properties6,458 4,946 
Railroad and sidings27,703 27,701 
Land and land improvements32,956 21,320 
Asset retirement obligation19,904 11,480 
Mineral properties7,442 7,442 
Deferred mining costs2,123 2,004 
Construction in progress8,153 9,208 
360,162 293,525 
Less: accumulated depreciation and depletion79,020 63,064 
Total property, plant and equipment, net$281,142 $230,461 

Depreciation expense was $5,328 and $6,610 for the three months ended September 30, 2020 and 2019, respectively, and $15,856 and $18,648 for the nine months ended September 30, 2020 and 2019, respectively.

NOTE 6 — Accrued and Other Expenses
Accrued and other expenses were comprised of the following:
 September 30, 2020December 31, 2019
Employee related expenses$486 $2,233 
Accrued construction related expenses17 188 
Accrued equipment
20 429 
Accrued professional fees882 750 
Accrued royalties1,926 2,419 
Accrued freight and delivery charges1,255 882 
Accrued real estate tax2,103 806 
Accrued utilities457 10 
Sales tax liability24 424 
Other accrued liabilities565 437 
Total accrued liabilities$7,735 $8,578 

14


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:
 September 30, 2020December 31, 2019
Oakdale Equipment Financing$3,450 $3,431 
Notes payable2,852 2,628 
Finance leases121 116 
Long-term debt, net, current$6,423 $6,175 

Long-term debt, net of current portion consists of the following:
 September 30, 2020December 31, 2019
Oakdale Equipment Financing, net$16,109 $18,074 
ABL Credit Facility 2,500 
Notes payable7,409 7,192 
Finance leases381 474 
Long-term debt, net$23,899 $28,240 

The follow summarizes the maturity of our debt:
Oakdale Equipment Financing, NetABL Credit FacilityNotes PayableFinance leasesTotal
Remainder 2020$767 $ $503 $30 $1,300 
20213,406  3,177 122 6,705 
20223,620  3,196 116 6,932 
20233,847  2,241 234 6,322 
20247,537  1,144  8,681 
Thereafter382