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Published: 2022-11-08 00:00:00 ET
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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, 2022
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
snd-20220930_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 ☒ 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 November 1, 2022: 45,276,607


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
September 30, 2022December 31, 2021
(unaudited)
 (in thousands, except share amounts)
Assets  
Current assets:  
Cash and cash equivalents$10,371 $25,588 
Accounts receivable32,902 17,481 
Unbilled receivables1,292 1,884 
Inventory20,618 15,024 
Prepaid expenses and other current assets7,405 13,886 
Total current assets72,588 73,863 
Property, plant and equipment, net267,210 262,465 
Operating lease right-of-use assets28,418 29,828 
Intangible assets, net6,867 7,461 
Other assets315 402 
Total assets$375,398 $374,019 
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable$11,634 $8,479 
Accrued expenses and other liabilities16,267 14,073 
Current portion of deferred revenue9,905 9,842 
Current portion of long-term debt6,495 7,127 
Current portion of operating lease liabilities10,560 9,029 
Total current liabilities54,861 48,550 
Long-term deferred revenue— 6,428 
Long-term debt16,289 15,353 
Long-term operating lease liabilities19,989 23,690 
Deferred tax liabilities, long-term, net19,650 22,434 
Asset retirement obligation25,006 16,155 
Other non-current liabilities42 249 
Total liabilities135,837 132,859 
Commitments and contingencies (Note 15)
Stockholders’ equity
Common stock, $0.001 par value, 350,000,000 shares authorized; 44,607,002 issued and 42,647,334 outstanding at September 30, 2022; 43,789,814 issued and 42,012,813 outstanding at December 31, 2021
42 42 
Treasury stock, at cost, 1,959,668 and 1,777,001 shares at September 30, 2022 and December 31, 2021, respectively
(4,986)(4,535)
Additional paid-in capital176,992 174,486 
Retained earnings67,263 70,593 
Accumulated other comprehensive income250 574 
Total stockholders’ equity239,561 241,160 
Total liabilities and stockholders’ equity$375,398 $374,019 

 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 September 30,Nine Months Ended September 30,
 2022202120222021
 (in thousands, except per share amounts)
Revenues:
Sand sales revenue$66,663 $31,343 $172,063 $83,291 
Shortfall revenue2,681 2,680 4,596 4,421 
Logistics revenue2,248 456 5,252 3,856 
Total revenue71,592 34,479 181,911 91,568 
Cost of goods sold60,163 36,526 163,492 100,952 
Gross profit11,429 (2,047)18,419 (9,384)
Operating expenses:
Salaries, benefits and payroll taxes3,554 2,490 10,171 7,150 
Depreciation and amortization556 352 1,646 1,490 
Selling, general and administrative3,542 3,867 11,385 10,876 
Bad debt expense— — 1 19,592 
Total operating expenses7,652 6,709 23,203 39,108 
Operating income (loss)3,777 (8,756)(4,784)(48,492)
Other income (expenses):
Interest expense, net(411)(467)(1,244)(1,527)
Other income148 1,792 416 5,457 
Total other income (expenses), net(263)1,325 (828)3,930 
Income (loss) before income tax expense (benefit)3,514 (7,431)(5,612)(44,562)
Income tax expense (benefit)831 (169)(2,282)(6,121)
Net income (loss)$2,683 $(7,262)$(3,330)$(38,441)
Net income (loss) per common share:
Basic$0.06 $(0.17)$(0.08)$(0.92)
Diluted$0.06 $(0.17)$(0.08)$(0.92)
Weighted-average number of common shares:
Basic42,522 41,850 42,265 41,743 
Diluted42,524 41,850 42,265 41,743 
 
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 September 30,Nine Months Ended September 30,
2022202120222021
(in thousands)
Net income (loss)$2,683 $(7,262)$(3,330)$(38,441)
Other comprehensive income (loss):
Foreign currency translation adjustment(266)(239)(324)(70)
Comprehensive income (loss)$2,417 $(7,501)$(3,654)$(38,511)

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, 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 
Foreign currency translation adjustment— — — — — — (74)(74)
Vesting of restricted stock130,003 — — — — — — — 
Stock-based compensation— — — — 802 — — 802 
Employee stock purchase plan compensation— — — — 6 — — 6 
Purchase of treasury stock(39,479)— 39,479 (114)— — — (114)
Net loss— — — — — (90)— (90)
Balance at June 30, 202242,242,852 $42 1,872,880 $(4,776)$176,150 $64,580 $516 $236,512 
Foreign currency translation adjustment— — — — — — (266)(266)
Vesting of restricted stock473,032 — — — — — — — 
Stock-based compensation— — — — 808 — — 808 
Employee stock purchase plan compensation— — — — 7 — — 7 
Employee stock purchase plan issuance18,238 — — — 27 — — 27 
Purchase of treasury stock(86,788)— 86,788 (210)— — — (210)
Net income— — — — — 2,683 — 2,683 
Balance at September 30, 202242,647,334 $42 1,959,668 $(4,986)$176,992 $67,263 $250 $239,561 

6

SMART SAND, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (continued)
(UNAUDITED) 
Nine Months Ended September 30, 2021
 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, 202041,575,129 $42 1,618,265 $(4,134)$171,209 $121,267 $423 $288,807 
Foreign currency translation adjustment— — — — — — 125 125 
Acquisition stock issuance14,430 — — — 20 — — 20 
Vesting of restricted stock158,364 — — — — — — — 
Stock-based compensation— — — — 678 — — 678 
Employee stock purchase plan compensation— — — — 7 — — 7 
Employee stock purchase plan issuance19,483 — — — 17 — — 17 
Purchase of treasury stock(48,077)— 48,077 (140)— — — (140)
Net loss— — — — — (3,912)— (3,912)
Balance at March 31, 202141,719,329 $42 1,666,342 $(4,274)$171,931 $117,355 $548 285,602 
Foreign currency translation adjustment— — — — — — 44 44 
Vesting of restricted stock162,253 — — — — — — — 
Stock-based compensation— — — — 574 — — 574 
Employee stock purchase plan compensation— — — — 7 — — 7 
Purchase of treasury stock(48,793)— 48,793 (148)— — — (148)
Net loss— — — — — (27,267)— (27,267)
Balance at June 30, 202141,832,789 $42 1,715,135 $(4,422)$172,512 $90,088 $592 $258,812 
Foreign currency translation adjustment— — — — — — (239)(239)
Vesting of restricted stock4,875 — — — — — — — 
Stock-based compensation— — — — 879 — — 879 
Employee stock purchase plan compensation— — — — 10 — — 10 
Employee stock purchase plan issuance14,944 — — — 25 — — 25 
Restricted stock buy back(1,670)— 1,670 (5)— — — (5)
Net loss— — — — — (7,262)— (7,262)
Balance at September 30, 202141,850,938 $42 1,716,805 $(4,427)$173,426 $82,826 $353 $252,220 

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,
 20222021
 (in thousands)
Operating activities:  
Net loss$(3,330)$(38,441)
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation, depletion and accretion of asset retirement obligation19,904 18,937 
Amortization of intangible assets596 596 
(Gain) loss on disposal of assets(482)223 
Provision for bad debt1 19,592 
Amortization of deferred financing cost79 79 
Accretion of debt discount140 140 
Deferred income taxes (2,784)(7,543)
Stock-based compensation, net2,436 2,131 
Employee stock purchase plan compensation18 24 
Changes in assets and liabilities:
Accounts receivable(14,238)34,791 
Unbilled receivables(593)(1,113)
Inventory(5,594)3,755 
Prepaid expenses and other assets3,072 (1,886)
Deferred revenue(6,365)6,092 
Accounts payable2,784 1,564 
Accrued and other expenses4,187 (1,397)
Net cash (used in) provided by operating activities(169)37,544 
Investing activities:
Acquisition of Blair facility(6,547)— 
Purchases of property, plant and equipment(9,535)(6,976)
Proceeds from disposal of assets995 78 
Net cash used in investing activities(15,087)(6,898)
Financing activities:
Repayments of notes payable(5,474)(5,168)
Payments under finance leases(88)(92)
Proceeds from revolving credit facility6,000 — 
Payment of contingent consideration— (180)
Employee stock purchase plan issuance52 42 
Purchase of treasury stock(451)(294)
Net cash provided by (used in) financing activities39 (5,692)
Net decrease in cash and cash equivalents(15,217)24,954 
Cash and cash equivalents at beginning of year25,588 11,725 
Cash and cash equivalents at end of period$10,371 $36,679 
Supplemental disclosure of cash flow information
Purchases of property, plant and equipment in accounts payable and accrued expenses$685 $267 
Issuance of acquisition common stock$— $— 
Additions to asset retirement obligations$8,281 $737 
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 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 Products 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.
The Company commenced mining operations at its Oakdale, Wisconsin facility in July 2012. Through multiple expansions at Oakdale and the acquisition of the Utica, Illinois facility in September 2020, the Company has current annual processing capacity of approximately 7.1 million tons. With the acquisition of the Blair, Wisconsin mine and processing facility in March 2022, which is currently idled, we have the ability to expand to approximately 10.0 million tons should the Company decide to bring the Blair facility online.
The Company also has several in-basin rail terminals. The Company acquired rights in 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 provides complete logistics solutions through its mine sites and transload facilities with direct access to four Class I rail lines, and has the ability to access all Class I rail lines within the United States and Canada.
The Company provides proppant storage and management solutions through its SmartSystems products and services under which it offers various solutions that create efficiencies, flexibility, enhanced safety and reliability for customers by providing the capability to unload, store and deliver proppant at the wellsite, as well as the ability to rapidly set up, takedown and transport the entire system. The SmartDepotTM silo system includes passive and active dust suppression technology, along with the capability of a gravity-fed operation. The 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 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. 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.

NOTE 2 — Summary of Significant Accounting Policies
The information presented below supplements the complete description of our significant accounting policies disclosed in our 2021 Form 10-K, filed with the Securities and Exchange Commission (“SEC”) on March 8, 2022.
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, 2021 was derived from the audited consolidated
9

SMART SAND, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
financial statements as of and for the year ended December 31, 2021. These interim statements should be read in conjunction with the Company’s consolidated financial statements for the year ended December 31, 2021.
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 materially 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 the coronavirus (“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 these events on its future financial position and results of operations. Therefore, the Company can give no assurances that these events will not have a material adverse effect on its financial position or results of operations.
Employee Retention Credit
The Company qualified for federal government assistance through employee retention credit provisions of the Consolidated Appropriations Act of 2021. As of September 30, 2022 and December 31, 2021, the Company included $2,710 and, $4,676 respectively, 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
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
10

SMART SAND, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
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 for the nine months ended September 30, 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:
 September 30, 2022December 31, 2021
Raw material$728 $293 
Work in progress5,871 3,082 
Finished goods8,815 7,269 
Spare parts5,204 4,380 
Total inventory$20,618 $15,024 


NOTE 5 — Property, Plant and Equipment, net
Net property, plant and equipment consisted of:
September 30, 2022December 31, 2021
Machinery, equipment and tooling$34,411 $30,813 
SmartSystems
27,654 27,343 
Vehicles3,234 3,066 
Furniture and fixtures1,345 1,325 
Plant and building200,373 199,958 
Real estate properties6,523 6,496 
Railroad and sidings33,622 27,703 
Land and land improvements40,455 35,652 
Asset retirement obligation28,818 20,536 
Mineral properties7,442 7,442 
Deferred mining costs2,455 2,455 
Construction in progress9,708 9,574 
396,040 372,363 
Less: accumulated depreciation and depletion128,830 109,898 
Total property, plant and equipment, net$267,210 $262,465 

Depreciation expense was $6,498 and $6,111 for the three months ended September 30, 2022 and 2021, respectively, and $19,309 and $18,325 for the nine months ended September 30, 2022 and 2021, respectively.
11

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

NOTE 6 — Accrued and Other Expenses
Accrued and other expenses were comprised of the following:
 September 30, 2022December 31, 2021
Employee related expenses$2,493 $806 
Accrued equipment expense
5 58 
Accrued professional fees522 691 
Accrued royalties2,726 2,701 
Accrued freight and delivery charges4,393 2,164 
Accrued real estate tax1,745 1,010 
Accrued utilities1,709 1,264 
Sales tax liability1,118 665 
Income tax payable— 2,332 
Other accrued liabilities1,556 2,382 
Total accrued liabilities$16,267 $14,073 

NOTE 7 — Debt
The current portion of long-term debt consists of the following:
 September 30, 2022December 31, 2021
Oakdale Equipment Financing3,983 3,814 
Finance leases230 117 
Notes payable2,282 3,196 
Current portion of long-term debt$6,495 $7,127 

Long-term debt, net of current portion consists of the following:
 September 30, 2022December 31, 2021
ABL Credit Facility$6,000 $— 
Oakdale Equipment Financing, net8,738 11,608 
Finance leases33 234 
Notes payable1,518 3,511 
Long-term debt$16,289 $15,353 
12

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

The follow summarizes the maturity of our debt:
ABL Credit FacilityOakdale Equipment FinancingNotes PayableFinance LeasesTotal
Remainder of 2022$— $1,160 $666 $33 $1,859 
2023— 4,637 2,009 245 6,891 
20246,000 6,888 807 — 13,695 
2025— 1,724 187 — 1,911 
2026— — 181 — 181 
2027 and thereafter— — 174 — 174 
Total minimum payments6,000 14,409 4,024 278 24,711 
Amount representing interest— (1,281)(224)(15)(1,520)
Amount representing unamortized lender fees— (407)— — (407)
Present value of payments263 
Less: current portion— (3,983)(2,282)(230)(6,495)
Total long-term debt$6,000 $8,738 $1,518 $33 $16,289 

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 September 30, 2022 was $20,000 and is based on the Company’s eligible accounts receivable and inventory, as described in the ABL Credit Agreement. As of September 30, 2022, there was $6,000 outstanding under the ABL Credit Facility, $1,000 letters of credit and $13,000 was available to be drawn. As of September 30, 2022 and December 31, 2021, the Company was in compliance with all financial covenants.
Oakdale Equipment Financing
On December 13, 2019, the Company received net proceeds of $23,000 in an equipment financing arrangement with Nexseer. Substantially all of the Company’s mining and processing equipment at its Oakdale facility are pledged as collateral under the Oakdale Equipment Financing. The Oakdale Equipment Financing bears interest at a fixed rate of 5.79%.
Notes Payable
The Company has entered into various financing arrangements, primarily to finance its manufactured wellsite proppant storage solutions equipment. Upon completion of the equipment manufacturing, title to the subject equipment passes to the financial institutions as collateral. All notes payable bear interest at rates between 4.00% and 7.49%.

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:
13

SMART SAND, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Balance Sheet LocationSeptember 30, 2022December 31, 2021
Right-of-use assets
   OperatingOperating right-of-use assets$28,418 $29,828 
   FinancingProperty, plant and equipment, net161 262 
Total right-of use assets$28,579 $30,090 
Lease liabilities
   OperatingOperating lease liabilities, current and long-term portions$30,549 $32,719 
   FinancingLong-term debt, current and long-term portions263 351 
Total lease liabilities$30,812 $33,070 

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, 2022 and 2021 was as follows:
Three Months Ended September 30,Nine Months Ended September 30,
2022202120222021
Finance lease cost
   Amortization of right-of-use assets$30 $35 $96 $105 
   Interest on lease liabilities5 7 16 22 
Operating lease cost3,174 2,610 9,054 8,375 
Short-term lease cost101 86 547 120 
Total lease cost$3,310 $2,738 $9,713 $8,622 
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 nine months ended September 30, 2022 and 2021 is as follows:
Nine Months Ended September 30,
20222021
Cash paid for amounts included in the measurement of lease liabilities
   Operating cash flows used for finance leases$16 $22 
   Operating cash flows used for operating leases$9,810 $7,680 
   Financing cash flows used for finance leases$88 $92 
Right-of-use assets obtained in exchange for new operating lease liabilities$6,301 $4,401 
Weighted average remaining lease term - finance leases1.1 years1.9 years
Weighted average discount rate - finance leases6.87 %6.60 %
Weighted average remaining lease term - operating leases3.0 years3.8 years
Weighted average discount rate - operating leases5.81 %5.81 %

Maturities of the Company’s lease liabilities as of September 30, 2022 are as follows:
Operating LeasesFinance LeasesTotal
Remainder of 2022$2,540 $33 $2,573 
202312,348 245 12,593 
20249,299 — 9,299 
20254,422 — 4,422 
20263,191 — 3,191 
Thereafter1,806 — 1,806 
Total cash lease payments33,606 278 33,884 
Less: amounts representing interest(3,057)(15)(3,072)
Total lease liabilities$30,549 $263 $30,812 

NOTE 9 — Asset Retirement Obligation
The Company had a post-closure reclamation and site restoration obligation of $25,006 as of September 30, 2022. The following is a reconciliation of the total reclamation liability for asset retirement obligations.
Balance at December 31, 2021$16,155 
Additions and revisions of prior estimates8,282 
Accretion expense569 
Balance at September 30, 2022$25,006 
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 September 30,Nine Months Ended September 30,
2022202120222021
RevenuePercentage of Total RevenueRevenuePercentage of Total RevenueRevenuePercentage of Total RevenueRevenuePercentage of Total Revenue
Sand sales revenue$66,663 93 %$31,343 91 %$172,063 94 %$83,291 91 %
Shortfall revenue2,681 4 %2,680 8 %4,596 3 %4,421 5 %
Logistics revenue2,248 3 %456 1 %5,252 3 %3,856 4 %
Total revenue$71,592 100 %$34,479 100 %$181,911 100 %$91,568 100 %

The Company recorded $16,270 of deferred revenue on the consolidated balance sheet as of December 31, 2021, of which $8,819 has been recognized in the nine months ended September 30, 2022. Of the remaining amount, the Company expects to recognize $938 through December 31, 2022 and the remainder through 2023.


NOTE 11 — Earnings Per Share

Basic net income per share of common stock is computed by dividing net income attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the period, excluding the dilutive effects of restricted stock. Diluted net income per share of common stock is computed by dividing the net income attributable to common stockholders by the sum of the weighted-average number of shares of common stock outstanding during the period plus the potential dilutive effects of 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 2,625 for the three months ended September 30, 2022. Other periods presented below are in periods with a net loss and there was 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.
Three Months Ended September 30,Nine Months Ended September 30,
2022202120222021
Weighted average common shares outstanding42,522 41,850 42,265 41,743 
Assumed conversion of restricted stock2 — — — 
Diluted weighted average common stock outstanding42,524 41,850 42,265 41,743 


NOTE 12 — Stock-Based Compensation
Equity Incentive Plan
In November 2016, in connection with its initial public offering, the Company adopted the 2016 Omnibus Incentive Plan (“2016 Plan”) which provides for the issuance of Awards (as defined in the 2016 Plan) of up to a maximum of 3,911 shares of the Company’s common stock to employees, non-employee members of the Company’s board of directors and consultants of the Company. On April 3, 2020, the Company’s board of directors adopted an amendment to the 2016 Plan to increase the
16

SMART SAND, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
available shares of common stock authorized for issuance by an additional 2,088 shares. On July 27, 2021, the Company’s board of directors authorized 231 shares currently held in treasury stock for issuance under the 2016 Plan. On April 22, 2022, the board of directors adopted an amendment to the 2016 Plan to increase the number of shares of common stock authorized for issuance by an additional 3,900 shares.
During the nine months ended September 30, 2022 and 2021, 879 and 1,982 shares of restricted stock were issued under the 2016 Plan, respectively. The grant date fair value per share of all the outstanding restricted stock was $1.78 - $4.34. The shares vest over one to four years from their respective grant dates. For equity awards issued under the 2016 Plan, the grant date fair value was either the actual market price of the Company’s shares or an adjusted price using a Monte Carlo simulation for awards subject to the Company’s performance as compared to a defined peer group. The Company recognized, in operating expenses and cost of goods sold on the condensed consolidated statement of operations, $808 and $879 of compensation expense for the restricted stock during the three months ended September 30, 2022 and 2021, respectively. The Company recognized, in operating expenses and cost of goods sold on the condensed consolidated statement of operations, $2,436 and $2,131 of compensation expense for the restricted stock during the nine months ended September 30, 2022 and 2021, respectively. There is no impact to the cash flows of the Company related to stock-based compensation expense. At September 30, 2022, the Company had unrecognized compensation expense of $6,580 related to granted but unvested stock awards, which is to be recognized as follows:
Remainder of 2022$748 
20232,753 
20241,915 
20251,002 
2026162 
 Total$6,580 
 
The following table summarizes restricted stock activity under the Plans from December 31, 2021 through September 30, 2022:
 Number of
Shares		Weighted
Average
Unvested, December 31, 20213,151 $3.06 
Granted879 $3.56 
Vested(783)$3.74 
Forfeited(587)$2.68 
Unvested, September 30, 20222,660 $3.11 

Employee Stock Purchase Plan
Shares of the Company’s common stock may be purchased by eligible employees under the Company’s 2016 Employee Stock Purchase Plan in six-month intervals at a purchase price equal to at least 85% of the lesser of the fair market value of the Company’s common stock on either the first day or the last day of each six-month offering period. Employee purchases may not exceed 20% of their gross compensation during an offering period.

NOTE 13 — Income Taxes
The Company calculates its interim income tax provision by estimating the annual expected effective tax rate and applying that rate to its ordinary year-to-date earnings or loss. In addition, the effect of changes in enacted tax laws, rates or tax status is recognized in the interim period in which the change occurs.
For the three months ended September 30, 2022 and 2021, the effective tax rate was approximately 23.6% and 2.3%, respectively, based on the annual effective tax rate net of discrete federal and state taxes. For the nine months ended September
17

SMART SAND, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
30, 2022 and 2021, the effective tax rate was approximately 40.7% and 13.7%, respectively, based on the annual effective tax rate net of discrete federal and state taxes. For the three and nine months ended September 30, 2022 and 2021, 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 as of September 30, 2022, related to its depletion deduction methodology, and a corresponding increase to the income tax expense on its condensed consolidated statement of operations. There was $2,163 liability for uncertain tax positions as of December 31, 2021 and there was no material change for the nine months ended September 30, 2022.
As of September 30, 2022, 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 deferred tax liabilities, long-term, net on its consolidated balance sheet, and a corresponding increase to the income tax expense on its condensed consolidated statement of operations. At December 31, 2021, the Company recorded a partial valuation allowance against the gross deferred tax assets on its consolidated balance sheet in the amount of $1,574 and a corresponding increase to the income tax expense on its consolidated statements of operations and there was no material change for the three and nine months ended September 30, 2022.
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 14 — Concentrations
As of September 30, 2022 three customers accounted for 67% of the Company’s total accounts receivable. As of December 31, 2021, 59% of the Company’s total accounts receivable balance was with two customers.
During the three months ended September 30, 2022, 62% of the Company’s revenues were earned from four customers. During the three months ended September 30, 2021, 50% of the Company’s revenues were earned from three customers. During the nine months ended September 30, 2022, 65% of the Company’s revenues were earned from four customers. During the nine months ended September 30, 2021, 68% of the Company’s revenues were earned from four customers.
As of September 30, 2022, one vendor accounted for 10% of the Company’s accounts payable. As of December 31, 2021, one vendor accounted for 19% of the Company’s accounts payable.
During the three months ended September 30, 2022, two suppliers accounted for 37% of the Company’s cost of goods sold. During the three months ended September 30, 2021, one supplier accounted for 23% of the Company’s cost of goods sold. During the nine months ended September 30, 2022, two suppliers accounted for 33% of the Company’s cost of goods sold. During the nine months ended September 30, 2021, one supplier accounted for 22% 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 15 — 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.
18

SMART SAND, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
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, 2022 was $17,651.
19

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, 2021 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, 2021. 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 and our SmartSystemsTM wellsite storage capabilities. In late 2021, we created our Industrial Products 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 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
20

SMART SAND, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)
storage silos and SmartPathTM transloader, 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 facility with 1.1 million tons of annual processing capacity in July 2012. We currently have 7.1 million tons of annual capacity at our Oakdale and Utica facilities with the ability to expand annual processing capacity to approximately 10.0 million tons of sand should we bring our recently acquired Blair facility online.
We directly control two 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. We operate this terminal under a long-term agreement with Canadian Pacific Railway to service the Van Hook terminal directly along with the other key oil and natural gas exploration and production basins of North America. 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. These terminals allow us to offer more efficient and sustainable delivery options to our customers. We have long-standing relationships with third party terminal operators that allow us access to all oil and natural gas exploration production basins of North America.
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.

Recent Acquisitions

On March 4, 2022, we 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 we acquired all of the issued and outstanding limited liability company interest of Blair from HCR for aggregate cash consideration of approximately $6.5 million, subject to customary working capital adjustments.
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.

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.
21

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

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. Through the first nine months of 2022, supply and demand fundamentals have continued to improve and frac sand prices continued recovering from previous historic lows. The ongoing conflict in the 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, the western basins of Colorado, Wyoming, 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. We began our diversification into the IPS business in late 2021 and we expect to see continued growth throughout North America.


22

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


GAAP Results of Operations

Three Months Ended September 30, 2022 Compared to Three Months Ended September 30, 2021
The following table summarizes our revenue and expenses for the periods indicated.
 Three Months Ended September 30,Change
 20222021DollarsPercentage
 
Revenues:
Sand sales revenue$66,663 $31,343 $35,320 113 %
Shortfall revenue2,681 2,680 1 — %
Logistics revenue2,248 456 1,792 393 %
Total revenue71,592 34,479 37,113 108 %
Cost of goods sold60,163 36,526 23,637 65 %
Gross profit11,429 (2,047)13,476 658 %
Operating expenses:
Salaries, benefits and payroll taxes3,554 2,490 1,064 43 %
Depreciation and amortization556 352 204 58 %
Selling, general and administrative3,542 3,867 (325)(8)%
Total operating expenses7,652 6,709 943 14 %
Operating income (loss)3,777 (8,756)12,533 143 %
Other income (expenses):
Interest expense, net(411)(467)56 12 %
Other income148 1,792 (1,644)(92)%
Total other income (expenses), net(263)1,325 (1,588)(120)%
Income (loss) before income tax expense (benefit)3,514 (7,431)10,945 147 %
Income tax expense (benefit)831 (169)1,000 592 %
Net income (loss)$2,683 $(7,262)$9,945 137 %
Revenues
Revenues were $71.6 million for the three months ended September 30, 2022, during which time we sold approximately 1,110,000 tons of sand. Revenues for the three months ended September 30, 2021 were $34.5 million, during which time we sold approximately 790,000 tons of sand. The key factors contributing to the increase in revenues for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021 were as follows:
•Sand sales revenue increased from $31.3 million for the three months ended September 30, 2021 to $66.7 million or 113% for the three months ended September 30, 2022 as a result of an increase in total volumes sold of approximately 41% and higher average sale prices of our sand. Higher demand relative to supply for oil and natural gas has led to increased prices in oil and natural gas which we believe has led to increased demand for frac sand resulting in higher sand prices.
•Logistics revenue, which includes freight for certain mine gate sand sales, logistics services, and SmartSystems rentals, were approximately $2.2 million for the three months ended September 30, 2022 compared to $0.5 million for the three months ended September 30, 2021. The increase in logistics revenue was due to a higher utilization of our SmartSystems fleet.
23

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

Cost of Goods Sold
Cost of goods sold was $60.2 million and $36.5 million for the three months ended September 30, 2022 and 2021, 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 volumes, along with higher labor and utilities costs.
Gross Profit
Gross profit was $11.4 million for the three months ended September 30, 2022, compared to $(2.0) million for the three months ended September 30, 2021. The increase in profitability for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021 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 $7.7 million and $6.7 million for the three months ended September 30, 2022 and 2021, respectively. Salaries, benefits and payroll taxes increased to $3.6 million for the three months ended September 30, 2022 as compared to $2.5 million for the three months ended September 30, 2021, due primarily to accrued bonuses as management has reinstated a formal employee bonus plan based on company performance for 2022 and increased headcount to support higher sales volumes and our IPS business. Depreciation and amortization increased to $0.6 million for the three months ended September 30, 2022 from $0.4 million for the three months ended September 30, 2021, due to additional assets placed in service. Selling, general and administrative expenses were $3.5 million for the three months ended September 30, 2022 compared to $3.9 million for the three months ended September 30, 2021.
Other Income
In 2021 we qualified for federal government assistance through employee retention credit provisions of the Consolidated Appropriations Act of 2021. During the three months ended September 30, 2021, we recorded $1.7 million in employee retention credits. We did not record any employee retention credits for the three months ended September 30, 2022.
Interest Expense, net
We incurred $0.4 million and $0.5 million of net interest expense for the three months ended September 30, 2022 and 2021, respectively.
Income Tax Expense (Benefit)
For the three months ended September 30, 2022 and 2021, our effective tax rate was approximately 23.6% and 2.3%, 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 September 30, 2022, we have recorded a liability for uncertain tax positions included in deferred tax liabilities, long-term, net on our balance sheet, related to our depletion deduction methodology. As of September 30, 2022, 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 Income (Loss)
Net income was $2.7 million for the three months ended September 30, 2022 as compared to net loss of $(7.3) million for the three months ended September 30, 2021. The improvement in net income in the current period relative to the prior period is primarily due to increased total volumes sold at higher average sales prices as increased demand has caused a positive shift in sand prices, partially offset by an increase in operating expenses.
24

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


Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021
The following table summarizes our revenue and expenses for the periods indicated.
 
Nine Months Ended September 30,
Change
 20222021DollarsPercentage
 (in thousands)
Revenues:
Sand sales revenue$172,063 $83,291 88,772 107 %
Shortfall revenue4,596 4,421 175 4 %
Logistics revenue5,252 3,856 1,396 36 %
Total revenue181,911 91,568 90,343 99 %
Cost of goods sold163,492 100,952 62,540 62 %
Gross profit18,419 (9,384)27,803 296 %
Operating expenses:
Salaries, benefits and payroll taxes10,171 7,150 3,021 42 %
Depreciation and amortization1,646 1,490 156 10 %
Selling, general and administrative11,385 10,876 509 5 %
Bad debt expense1 19,592 (19,591)(100)%
Total operating expenses23,203 39,108 (15,905)(41)%
Operating income (loss)(4,784)(48,492)43,708 90 %
Other income (expenses):
Interest expense, net(1,244)(1,527)283 19 %
Other income416 5,457 (5,041)(92)%
Total other income (expenses), net(828)3,930 (4,758)(121)%
Loss before income tax benefit(5,612)(44,562)38,950 87 %
Income tax benefit(2,282)(6,121)3,839 63 %
Net income (loss)$(3,330)$(38,441)$35,111 91 %
Revenues
Revenues were $181.9 million for the nine months ended September 30, 2022, during which time we sold approximately 3,158,000 tons of sand. Revenues for the nine months ended September 30, 2021 were $91.6 million, during which time we sold approximately 2,317,000 tons of sand. The key factors contributing to the increase in revenues for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021 were as follows:
•Sand sales revenue increased from $83.3 million for the nine months ended September 30, 2021 to $172.1 million for the nine months ended September 30, 2022 as a result of an approximately 36% increase in total volumes sold. In addition to an increase in our sales volumes, the 107% increase in our revenue 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 $5.3 million for the nine months ended September 30, 2022 compared to $3.9 million for the nine months ended September 30, 2021. The increase in logistics revenue was due to higher utilization of our SmartSystems fleet.
25

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

Cost of Goods Sold
Cost of goods sold was $163.5 million and $101.0 million for the nine months ended September 30, 2022 and September 30, 2021, 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 volumes, along with higher labor costs and utilities costs.
Gross Profit
Gross profit was $18.4 million and $(9.4) million for the nine months ended September 30, 2022 and September 30, 2021, respectively. The improvement in the gross profit for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021 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 $23.2 million and $39.1 million for the nine months ended September 30, 2022 and September 30, 2021, respectively. Salaries, benefits and payroll taxes increased to $10.2 million for the nine months ended September 30, 2022 as compared to $7.2 million for the nine months ended September 30, 2021, due primarily to accrued bonuses as management has reinstated a formal employee bonus plan based on company performance for 2022 and increased staffing to support our IPS business. Depreciation and amortization increased slightly from $1.5 million for the nine months ended September 30, 2021 to $1.6 million for the nine months ended September 30, 2022. Selling, general and administrative expenses increased to $11.4 million for the nine months ended September 30, 2022 compared to $10.9 million for the nine months ended September 30, 2021, primarily driven by increased travel costs post-COVID-19, increased royalty expense due to higher total volumes sold and development costs related to our Waynesburg terminal. In the second quarter of 2021, we recorded a $19.6 million non-cash charge related to the write-off of accounts receivable related to our legal settlement with U.S. Well Services, LLC. As part of the settlement we received $35 million in cash.
Interest Expense, net
We incurred $1.2 million and $1.5 million of net interest expense for the nine months ended September 30, 2022 and September 30, 2021, respectively. We continue to reduce debt levels and decrease interest expense through scheduled amortizing payments.
Income Tax Benefit
For the nine months ended September 30, 2022 and September 30, 2021, our effective tax rate was approximately 40.7% and 13.7%, 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 September 30, 2022, we have recorded a liability for uncertain tax positions included on our balance sheet, related to our depletion deduction methodology. As of September 30, 2022, 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 $(3.3) million for the nine months ended September 30, 2022 as compared to net loss of $(38.4) million for the nine months ended September 30, 2021. The decrease in net loss is attributable to an increase in total volumes sold and higher average sale prices of our sand in addition to non-cash bad debt expense recorded against the residual balance of accounts receivable that were previously the subject of litigation in the prior year.

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
26

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

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

Contribution Margin
We use contribution margin, which we define as total revenues less 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 contribution margin to gross profit.
 Three Months Ended September 30,Nine Months Ended September 30,
 2022202120222021
(in thousands, except per ton amounts)
Revenue$71,592 $34,479 $181,911 $91,568 
Cost of goods sold60,163 36,526 163,492 100,952 
      Gross profit (loss)11,429 (2,047)18,419 (9,384)
Depreciation, depletion, and accretion of asset retirement obligations6,340 6,145 18,854 18,009 
      Contribution margin$17,769 $4,098 $37,273 $8,625 
      Contribution margin per ton $16.01 $5.19 $11.80 $3.72 
Total tons sold1,110 790 3,158 2,317 
Contribution margin was $17.8 million and $4.1 million, or $16.01 and $5.19 per ton sold, for the three months ended September 30, 2022 and 2021, respectively. For the nine months ended contribution margin was $37.3 million and $8.6 million, or $11.80 and $3.72 per ton sold, for the nine months ended September 30, 2022 and 2021, 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
27

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

compensation; (iv) acquisition and development costs; (v) non-recurring cash charges related to restructuring, retention and other similar actions; (vi) earn-out, contingent consideration obligations and other acquisition and development costs; and (vii) non-cash charges and unusual or non-recurring charges. Adjusted EBITDA is used as a supplemental financial measure by management and by external users of our financial statements, such as investors and commercial banks, to assess:
•the financial performance of our assets without regard to the impact of financing methods, capital structure or historical cost basis of our assets;
•the viability of capital expenditure projects and the overall rates of return on alternative investment opportunities;
•our ability to incur and service debt and fund capital expenditures;
•our operating performance as compared to those of other companies in our industry without regard to the impact of financing methods or capital structure; and
•our debt covenant compliance, as Adjusted EBITDA is a key component of critical covenants to the ABL Credit Facility.
We believe that our presentation of EBITDA and Adjusted EBITDA will provide useful information to investors in assessing our financial condition and results of operations. Net income is the GAAP measure most directly comparable to EBITDA and Adjusted EBITDA. EBITDA and Adjusted EBITDA should not be considered alternatives to net income presented in accordance with GAAP. Because EBITDA and Adjusted EBITDA may be defined differently by other companies in our industry, our definitions of EBITDA and Adjusted EBITDA may not be comparable to similarly titled measures of other companies, thereby diminishing their utility. The following table presents a reconciliation of EBITDA and Adjusted EBITDA to net loss for each of the periods indicated.
 Three Months Ended September 30,Nine Months Ended September 30,
 2022202120222021
 (in thousands)
Net income (loss)$2,683 $(7,262)$(3,330)$(38,441)
Depreciation, depletion and amortization6,705 6,165 19,931 18,941 
Income tax expense (benefit)831 (169)(2,282)(6,121)
Interest expense431 484 1,282 1,554 
Franchise taxes77 42 268 237 
EBITDA$10,727 $(740)$15,869 $(23,830)
(Gain) loss on sale of fixed assets (466)281 (482)223 
Equity compensation713 784 2,023 2,050 
Employee retention credit— (1,674)— (5,026)
Acquisition and development costs 97 — 434 17 
Cash charges related to restructuring and retention of employees31 8 137 9 
Accretion of asset retirement obligations189 332 569 558 
Adjusted EBITDA$11,291 $(1,009)$18,550 $(25,999)
Adjusted EBITDA was $11.3 million for the three months ended September 30, 2022 compared to $(1.0) million for the three months ended September 30, 2021. Adjusted EBITDA was $18.6 million for the nine months ended September 30, 2022 compared to $(26.0) million for the nine months ended September 30, 2021. 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.

28

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


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 a reconciliation of free cash flows to net cash provided by operating activities.
 Three Months Ended September 30,Nine Months Ended September 30,
 2022202120222021
(in thousands, except per ton amounts)
Net cash (used in) provided by operating activities$10,780 $1,064 $(169)$37,544 
Acquisition of Blair facility— — (6,547)— 
Purchases of property, plant and equipment(4,398)(1,933)(9,535)(6,976)
Free cash flow$6,382 $(869)$(16,251)$30,568 
Free cash flow was $6.4 million for the three months ended September 30, 2022 compared to $(0.9) million for the three months ended September 30, 2021. The increase in free cash flow was primarily attributable to cash collections from customers on positive results of operations and measured spending during the quarter. Free cash flow was $(16.3) million for the nine months ended September 30, 2022 compared to $30.6 million for the nine months ended September 30, 2021. The decrease in free cash flow was primarily attributable to purchase of Blair for $6.5 million, increase in accounts receivable, repayment of tax refund IRS mistakenly provided in prior period of $2.3 million, and increase in unbilled receivables in the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021. We expect that the investments made in the current period will be cash-generating assets in the future.

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 September 30, 2022, cash on hand was $10.4 million and we had $13.0 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 2022 capital expenditures, including amounts relating to the acquisition of the Blair facility, to be between $20.0 million and $25.0 million, which we anticipate will primarily support efficiency projects at Oakdale and Utica and capital related to the Waynesburg terminal. We expect to fund these capital expenditures with cash from operations, equipment financing options available to us or borrowings under the ABL Credit Facility or other financing sources, such as equipment finance providers. For the nine months ended September 30, 2022, we spent approximately $9.5 million on capital expenditures and $6.5 million on the acquisition of the Blair facility.
29

SMART SAND, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)
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 September 30, 2022 was $12.7 million. Minimum cash payments on this facility for the remainder of 2022 are anticipated to be $1.2 million. Our various notes payable are primarily secured by our manufactured SmartSystems equipment. Total debt under these notes payable as of September 30, 2022 was $3.8 million. Minimum cash payments on these notes payable for the remainder of 2022 are anticipated to be $0.7 million. There was $6.0 million outstanding on our ABL Credit Facility as of September 30, 2022.
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 September 30, 2022 were $30.5 million. Minimum cash payments on operating leases for the remainder of 2022 are anticipated to be $2.5 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 15 years.

Off-Balance Sheet Arrangements
We had outstanding performance bonds of $17.7 million and $8.6 million at September 30, 2022 and December 31, 2021, respectively. The increase in performance bonds is due primarily to the acquisition of the Blair facility and the assumption of performance bonds related to its potential future reclamation obligations.

Contractual Obligations
As of September 30, 2022, we had contractual obligations for the ABL Credit Facility, Oakdale Equipment Financing, notes payable, operating and finance leases, minimum payments for the rights to mine land, capital expenditures, asset retirement obligations, and other commitments to municipalities for maintenance.

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

Seasonality
Our business is affected to some extent by seasonal fluctuations in weather that impact the production levels for a portion of our wet sand processing capacity. While our dry plants are able to process finished product volumes evenly throughout the year, our excavation and our wet sand processing activities have historically been limited 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
30

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

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 nine months ended September 30, 2022, revenue from EQT Production Corporation, Halliburton Energy Services, Encino Energy, and Liberty Oilfield Services accounted for 22.5%, 16.1%, 13.4%, and 13.0%, respectively, of total revenue. For the nine months ended September 30, 2021, EQT Production Corporation, Halliburton Energy Services, Liberty Oilfield Services, and Enerplus Resources Corporation accounted for 26.1%, 18.2%, 13.0%, and 10.6%, respectively, of total revenue.

Critical Accounting Policies and Estimates 
There have been no material changes in our critical accounting policies and procedures during the nine months ended September 30, 2022.
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 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. 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. We continue to actively monitor the global impact of current events, but we are currently unable to estimate the impact of these events on our future financial position and results of operations 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 September 30, 2022 was $6.0 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 nine months ended September 30, 2022 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, 2021, filed with the SEC on March 8, 2022.

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 September 30, 2022 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 and nine months ended September 30, 2022.

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, 2021.

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the quarter ended September 30, 2022, no shares were sold by the Company without registration under the Securities Act of 1933, as amended.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES
None.

ITEM 4.  MINE SAFETY DISCLOSURES
We are committed to maintaining a culture that prioritizes mine safety. We believe that our commitment to safety, the environment and the communities in which we operate is critical to the success of our business. Our sand mining operations are subject to mining safety regulation. The U.S. Mining Safety and Health Administration (“MSHA”) is the primary regulatory organization governing frac sand mining and processing. Accordingly, MSHA regulates quarries, surface mines, underground mines and the industrial mineral processing facilities associated with and located at quarries and mines. The mission of MSHA is to administer the provisions of the Federal Mine Safety and Health Act of 1977 and to enforce compliance with mandatory miner safety and health standards. As part of MSHA’s oversight, representatives perform at least two unannounced inspections annually for each above-ground facility.
We are also subject to regulations by the U.S. Occupational Safety and Health Administration, 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.
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.
33

ITEM 6.  EXHIBITS
3.1
3.2
10.1*
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.

34

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.
   
November 8, 2022By:/s/ Charles E. Young
  Charles E. Young, Chief Executive Officer
  (Principal Executive Officer)
 
 Smart Sand, Inc.
   
November 8, 2022By:/s/ Lee E. Beckelman
  Lee E. Beckelman, Chief Financial Officer
  (Principal Financial Officer)

35