Smart Sand Inc

(IN THOUSANDS, EXCEPT PER SHARE DATA)

NOTE 1 —Organization and Nature of Business

The Company was incorporated in July 2011 and is headquartered in Yardley, Pennsylvania. 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 in the oil and natural gas industry. These operations include the excavation, processing and sale of sand, or proppant, for hydraulic fracturing operations as well as proppant logistics and wellsite storage solutions through its SmartSystems TMproducts and services. The Company also provides sand to customers for industrial uses through its Industrial Product Solutions (“IPS”), 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, Wisconsin facility, with on-site rail infrastructure and wet and dry sand processing facilities, has access to two Class I rail lines, the Canadian Pacific Railway through its onsite rail terminal and the Union Pacific Railway through its nearby Byron, Wisconsin facility. The Company commenced operations at its mine and processing facility near Oakdale, Wisconsin in July 2012, and subsequently expanded its operations in 2014, 2015 and 2018. The annual processing capacity at the Oakdale facility is approximately 5.5 million tons.

In September 2020, the Company acquiredtwo frac sand mines and related processing facilities in Ottawa, Illinois and New Auburn, Wisconsin. The annual processing capacity at the Ottawa, Illinois facility is approximately 1.6 million tons and it has access to the Class I Burlington Northern Santa Fe railway through the Company’s nearby Peru, Illinois transload facility. The Company began operating the Ottawa, Illinois mine and Peru, Illinois transload facility in October 2020. The Company currently has no plans to operate the New Auburn facility for the foreseeable future.

In March 2022, the Company acquired a frac sand mine and processing facility in Blair, Wisconsin. The annual processing capacity at the Blair facility is approximately 2.9 million tons and contains an onsite, unit train capable rail terminal with access to the Class 1 Canadian National Railway. The Company commenced operations at the Blair facility in April 2023.

Transload & Logistics Solutions

The Company also offers proppant logistics solutions to its customers through, among other things, its network of in-basin transloading terminals and its SmartSystems TM wellsite proppant storage and management capabilities. 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. The Company’s network of terminals and rail line access enables it to provide cost-effective delivery options to its customers.

The Company 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 Ottawa, 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 a transloading terminal in Waynesburg, Pennsylvania to service the Appalachian Basin, including the Marcellus and Utica Formations, which became operational in January 2022 and was further expanded in the fourth quarter of 2023. In December 2023 and January 2024, the Company acquired rights to use transloading terminals in Minerva, Ohio and Dennison, Ohio, respectively, which service the Appalachian Basin. The Minerva terminal became operational in the second quarter of 2024 and the Dennison terminal became operational in the third quarter of 2024.

The Company’s SmartSystems offer 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 having the ability to rapidly set up, takedown and transport the entire system. The SmartDepot TM silo includes passive and active dust suppression technology, along with the capability of gravity-fed operation. The 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. The Company has developed the Smartbelt TM a belt system to pair with its SmartPath, which allows for feeding sand directly into the hopper at the wellsite. 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 Tracker TM, 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 2023 Form 10-K, filed with the Securities and Exchange Commission (“SEC”) on March 11, 2024.

Revision of Previously Issued Financial Statements

The Company has reclassified some prior year line items on its condensed consolidated statements of operations to conform to the current financial statement presentation. These reclassifications have no effect on previously reported total revenue or net income. The Company changed the names and types of revenue and cost of goods sold that are reported on each line item on its statements of operations. Sand revenue and cost of goods sold now includes sand sales, shortfall, railcar rental, and transportation. SmartSystems revenue and cost of goods sold is primarily the rental of our patented SmartSystems equipment and related services provided to customers. There has been no change in the manner in which we recognize revenue or costs.

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, 2023 was derived from the audited consolidated financial statements as of and for the year ended December 31, 2023. These interim statements should be read in conjunction with the Company’s consolidated financial statements for the year ended December 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 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; 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. Additionally, global events such as the ongoing conflict in Ukraine and the recent conflict in the Middle East may affect oil and natural gas prices and significant volatility in the oilfield service sector. The Company is currently unable to estimate the effect 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 September 30, 2024 and December 31, 2023, the Company included $522 in prepaid expenses and other current assets on its consolidated balance sheets related to receivables for 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

In November 2023, the FASB issued ASU 2023-07, Segment Reporting, which updates various reportable disclosure requirements, primarily through incremental disclosures of segment expenses in both annual and interim reporting. The Update is effective for the Company as of the annual reporting period beginning January 1, 2024 and interim periods beginning January

1, 2025. While the Company is still in the process of evaluating the effects of ASU 2023-07 and its related updates on the consolidated financial statements, at the time of adoption, it believes the primary effect will be updated note disclosures.

In December 2023, the FASB issued ASU 2023-09, Income Taxes, which updates various disclosures including enhancing the income tax rate reconciliation and income taxes paid disclosures by requiring greater disaggregation of information. The other amendments in this Update are intended to improve the effectiveness and comparability of disclosures. The Update is effective for the Company for the annual reporting period beginning January 1, 2025 and for interim periods beginning January 1, 2026. While the Company is still in the process of evaluating the effects of ASU 2023-07 and its related updates on the consolidated financial statements, at the time of adoption, it believes the primary effect will be updated note disclosures.

NOTE 3 —Inventory

Inventory consisted of the following:

NOTE 4 —Property, Plant and Equipment, net

Net property, plant and equipment consisted of:

Depreciation expense was $6,946 and $6,776 for the three months ended September 30, 2024 and 2023, respectively, and $20,924 and $19,661 for the nine months ended September 30, 2024 and 2023, respectively.

During the three months ended September 30, 2024, the Company relocated its manufacturing facility from Saskatoon, Canada to Oakdale, Wisconsin in the United States and recorded a net loss of $1,063 on the disposal of fixed assets related to this relocation.

NOTE 5 —Accrued and Other Expenses

Accrued and other expenses were comprised of the following:

NOTE 6 —Debt

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

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

The follow summarizes the maturity of our debt:

FCB ABL Credit Facility

On September 3, 2024, the Company entered into a $30,000 five-year senior secured asset-based credit facility with First-Citizens Bank & Trust Company. The FCB ABL Credit Facility provides for non-amortizing revolving loans in an aggregate principal amount of up to $30,000, subject to a borrowing base comprised of eligible inventory and accounts receivable. Additionally, obligations under the FCB ABL Credit Facility are guaranteed by certain of our wholly-owned domestic subsidiaries and secured by a first-priority security interest in certain non-real estate assets. Borrowings under the FCB ABL Credit Facility bear interest at a rate equal to the secured overnight financing rate (“SOFR”) plus a margin of 2.75%.

The ABL Credit Facility contains a number of covenants that, among other things, restrict our ability to incur liens or other indebtedness, make certain restricted payments, merge or consolidate and dispose of assets. In addition, the FCB ABL Credit Facility requires us in certain limited circumstances to maintain a minimum fixed charge coverage ratio of 1.1 to 1.0. The FCB ABL Credit Facility also contains certain affirmative covenants and events of default customary for facilities of this type. The Company was compliant with all requirements of this facility.

The available borrowing amount under the FCB ABL Credit Facility as of September 30, 2024 was $30,000 and is based on the Company’s eligible accounts receivable and inventory. The Company hadno borrowings outstanding and $30,000 available to be drawn under this facility as of September 30, 2024. The combined weighted average interest rate for all variable debt for the nine months ended September 30, 2024 was 8.04%.

Former 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. This facility was terminated on September 3, 2024.

VFI Equipment Financing

On June 28, 2024, the Company entered into an equipment financing arrangement with VFI with a principal amount of $10,000. The VFI Equipment Financing is legally comprised of a Master Lease Agreement and one lease schedule. The VFI Equipment Financing is considered a lease under article 2A of the Uniform Commercial Code but is considered a financing arrangement for accounting and financial reporting purposes, and not a lease. The collateral under the VFI Equipment Financing includes the majority of the Company’s SmartSystems equipment. The VFI Equipment Financing bears interest at a fixed rate of 8.56%. The Company used the net proceeds to repay in full and terminate the Oakdale Equipment Financing, and the remainder was added to working capital. The VFI Equipment Financing matures on May 8, 2028. The Company has the right to reacquire the underlying equipment on the lease schedule upon maturity for one dollar.

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 were pledged as collateral under the Oakdale Equipment Financing. The Oakdale Equipment Financing bore interest at a fixed rate of 5.79%. This facility was paid in full and terminated on June 28, 2024.

Notes Payable

The Company has entered into various financing arrangements, primarily to finance heavy equipment. As of September 30, 2024, these notes payable bear interest at rates between 3.99% and 8.49%.

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 10.00%, issued to Clearlake. This purchase represented all of the common stock previously owned by Clearlake and approximately 11.3% 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, was on our board of directors. The promissory note was repaid in May 2023 and Mr. Feliciano resigned from our board of directors as of December 31, 2023.

NOTE 7 —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:

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 and nine months ended September 30, 2024 and 2023 was as follows:

Other information related to the Company’s leasing activity for the nine months ended September 30, 2024 and 2023 is as follows:

Maturities of the Company’s lease liabilities as of September 30, 2024 are as follows:

NOTE 8 —Asset Retirement Obligations

The Company had a post-closure reclamation and site restoration obligation of $20,670 as of September 30, 2024. The following is a reconciliation of the total reclamation liability for asset retirement obligations.

NOTE 9 —Revenue

Disaggregation of Revenue

The following table presents the Company’s revenues disaggregated by type and percentage of total revenues for the periods indicated.

The Company recorded $1,154 of deferred revenue on the consolidated balance sheet as of December 31, 2023, all of which has been recognized in the nine months ended September 30, 2024. As of September 30, 2024, the Company had $106,508 in unsatisfied performance obligations related to contracts with customers. The Company expects to perform these obligations and recognize revenue of $24,191 and $82,317 in the remainder of 2024 and 2025, respectively.

NOTE 10 —Earnings Per Share

Basic net income (loss) per share of common stock is computed by dividing net income attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the period, excluding the dilutive effects of restricted stock. Diluted net income (loss) per share of common stock is computed by dividing the net income attributable to common stockholders by the sum of the weighted-average number of shares of common stock outstanding during the period plus the potential dilutive effects of shares of restricted stock outstanding during the period calculated in accordance with the treasury stock method, although shares of restricted stock are excluded if their effect is anti-dilutive. The number of shares underlying equity-based awards that were excluded from the calculation of diluted earnings per share as their effect would be anti-dilutive was 1,158 and 1,915 for the three months ended September 30, 2024 and 2023, respectively. The number of shares underlying equity-based awards that were excluded from the calculation of diluted earnings per share as their effect would be anti-dilutive was 1,158 and 1,922 for the nine months ended September 30, 2024 and 2023, respectively. In periods with a net loss, there is no difference between basic and diluted net loss per share of common stock. The following table reconciles the weighted-average common shares outstanding used in the calculation of basic net (loss) income per share to the weighted average common shares outstanding used in the calculation of diluted net income per share.

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 September 30, 2024 and 2023, the effective tax rate was approximately 98.1% and (38.8)%, respectively, based on the annual effective tax rate net of discrete federal and state taxes. For the nine months ended September 30, 2024 and 2023, the effective tax rate was approximately 74.7% and (60.8)%, respectively, based on the annual effective tax rate net of discrete federal and state taxes. For the three and nine months ended September 30, 2024 and 2023, 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, 2023. There was no material change for the nine months ended September 30, 2024.

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, 2023, the Company recorded a partial valuation allowance against the gross deferred tax assets on its consolidated balance sheet in the amount of $874. There was no material change for the three and nine months ended September 30, 2024.

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 September 30, 2024, four customers accounted for 71% of the Company’s total accounts receivable. As of December 31, 2023, four customers accounted for 70% of the Company’s total accounts receivable.

During the three months ended September 30, 2024,67% of the Company’s revenues were earned from four customers. During the three months ended September 30, 2023,40% of the Company’s revenues were earned from two customers. During the nine months ended September 30, 2024,54% of the Company’s revenues were earned from three customers. During the nine months ended September 30, 2023,41% of the Company’s revenues were earned from two customers.

As of September 30, 2024, two vendors accounted for 26% of the Company’s accounts payable. As of December 31, 2023, one vendor accounted for 11% of the Company’s accounts payable.

During the three months ended September 30, 2024, two vendors accounted for 33% of the Company’s cost of goods sold. During the three months ended September 30, 2023, one vendor accounted for 21% of the Company’s cost of goods sold. During the nine months ended September 30, 2024, two vendors accounted for 36% of the Company’s cost of goods sold. During the nine months ended September 30, 2023, two vendors accounted for 33% 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 the 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

In addition to the matters described below, the Company 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.

Cory Berg, et al. v. Hi-Crush Blair LLC, LLC et al., Case No. 2019-cv-65, Trempealeau County, Wisconsin

Leland Drangstveit, et al. v. Hi-Crush Blair, LLC, et al., Case No. 2019-cv-66, Trempealeau County, Wisconsin

On April 22, 2019 and September 29, 2021, Cory Berg, et al. and Leland Drangstveit, et al., respectively (collectively, the “Plaintiffs”), filed complaints and an amended complaint in separate actions against Blair, certain of its subcontractors and its and their respective insurance companies in the Circuit Court of the State of Wisconsin in and for Trempealeau County (Case Nos. 19-CV-65 and 19-CV-66, respectively). The Plaintiffs allege that Blair and its subcontractors were negligent and created a nuisance by, among other things, generating excessive noise, light and dust. The Plaintiffs are seeking unspecified monetary damages and other relief. The insurance companies included as defendants have asserted counterclaims seeking declarations as to their rights and liabilities under their respective applicable commercial general liability insurance policies. HCR has agreed under the Purchase Agreement to indemnify the Company for any actions or omissions of HCR or its affiliates (including Blair) that occurred prior to the closing of the Company’s acquisition of Blair. In late August, several of the defendants, including Blair, agreed to settlement terms with the Plaintiffs, and the parties expect to finalize settlement paperwork in the fourth quarter, which will result in a dismissal with prejudice of all claims against Blair.

Bonds

The Company has performance bonds with various public and private entities regarding reclamation, permitting and maintenance of public roadways. Total aggregate principal amount of performance bonds outstanding as of September 30, 2024 was $19,727.

NOTE 14 —Subsequent Events

On October 3, 2024, the Board of Directors of the Company declared a special dividend of $0.10 per share of common stock, which was paid on October 28, 2024 to stockholders of record at the close of business on October 15, 2024.

On October 3, 2024, the Board of Directors of the Company also approved aneighteen month share repurchase program under which the Company may purchase up to $10.0 million of its ordinary shares (the “Repurchase Program”). Pursuant to the Repurchase Program, the Company may repurchase its ordinary shares from time to time, in amounts, at prices and at such times as it deems appropriate, subject to market conditions and other considerations. The Company may make repurchases in the open market, privately negotiated transactions, accelerated repurchase programs or structured share repurchase programs. The Repurchase Program will be conducted in compliance with applicable legal requirements and shall be subject to market conditions and other factors. The Repurchase Program does not obligate the Company to acquire any particular amount of ordinary shares and the Repurchase Program may be modified or suspended at any time at the Company’s discretion.