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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, 2021
OR

☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from ___ to ___
Commission file number 001-37936
SMART SAND, INC.
(Exact name of registrant as specified in its charter)

Delaware | 45-2809926
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number)
1725 Hughes Landing Blvd, Suite 800 |
The Woodlands, Texas 77380 | (281) 231-2660
(Address of principal executive offices) | (Registrant’s telephone number)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class |  | Trading Symbol(s) |  | Name of each exchange on which registered
Common Stock, par value $0.001 per share |  | SND |  | Nasdaq Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐ | Accelerated filer ☐ | Non-accelerated Filer ý | Smaller reporting company ☒ | Emerging Growth Company ☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ý
Number of shares of common stock outstanding, par value $0.001 per share, as of November 2, 2021: 45,265,601

TABLE OF CONTENTS

|  | PAGE
PART I | FINANCIAL INFORMATION |
ITEM 1. | Financial Statements | 3
| Condensed Consolidated Balance Sheets as of September 30, 2021 (Unaudited) and December 31, 2020 | 3
| Condensed Consolidated Income Statements for the Three and Nine Months Ended September 30, 2021 and 2020 (Unaudited) | 4
| Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2021 and 2020 (Unaudited) | 5
| Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Three and Nine Months Ended September 30, 2021 and 2020 (Unaudited) | 6
| Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2021 and 2020 (Unaudited) | 8
| Notes to the Condensed Consolidated Financial Statements (Unaudited) | 9
ITEM 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 21
ITEM 3. | Quantitative and Qualitative Disclosures about Market Risk | 36
ITEM 4. | Controls and Procedures | 36
PART II | OTHER INFORMATION | 37
ITEM 1. | Legal Proceedings | 37
ITEM 1A. | Risk Factors | 37
ITEM 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 37
ITEM 3. | Defaults upon Senior Securities | 37
ITEM 4. | Mine Safety Disclosures | 37
ITEM 5. | Other Information | 38
ITEM 6. | Exhibits | 39
SIGNATURES | 40

1

Certain Definitions
The following definitions apply throughout this quarterly report unless the context requires otherwise:

“We”, “Us”, “Company”, “Smart Sand” or “Our” |  | Smart Sand, Inc., a company organized under the laws of Delaware, and its subsidiaries.
“shares”, “stock” |  | The common stock of Smart Sand, Inc., nominal value $0.001 per share.
“ABL Credit Facility”, “ABL Credit Agreement”, “ABL Security Agreement” |  | The five-year senior secured asset-based lending credit facility (the “ABL Credit Facility”) pursuant to: (i) an ABL Credit Agreement, dated December 13, 2019, between the Company and Jefferies Finance LLC (the “ABL Credit Agreement”); and (ii) a Guarantee and Collateral Agreement, dated December 13, 2019, between the Company and Jefferies Finance LLC, as agent (the “Security Agreement”).
“Oakdale Equipment Financing”, “MLA” |  | The five-year Master Lease Agreement, dated December 13, 2019, between Nexseer Capital (“Nexseer”) and related lease schedules in connection therewith (collectively, the “MLA”). The MLA is structured as a sale-leaseback of substantially all of the equipment at the Company’s mining and processing facility located near Oakdale, Wisconsin. The Oakdale Equipment Financing is considered a lease under article 2A of the Uniform Commercial Code but is considered a financing arrangement (and not a lease) for accounting or financial reporting purposes.
“Loan Agreement”, “Acquisition Liquidity Support Facility” |  | In connection with the Company’s acquisition of Eagle Oil and Gas Proppants Holdings LLC from Eagle Materials Inc., which acquisition was completed on September 18, 2020, the Company, as borrower, entered into a Loan and Security Agreement, dated September 18, 2020 (the “Loan Agreement”), with Eagle Materials Inc., as lender, secured by certain property rights and assets of the acquired business, whereby the Company may draw loans in an aggregate amount up to $5.0 million during the twelve-month period ending September 19, 2021. (the “Acquisition Liquidity Support Facility”). This facility was terminated on September 20, 2021.
“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, 2021 |  | December 31, 2020
| (unaudited) |
| (in thousands, except share amounts)
Assets |  |  |
Current assets: |  |  |
Cash and cash equivalents | $ | 36,678 |  |  | $ | 11,725 |
Accounts receivable | 15,589 |  |  | 69,720 |
Unbilled receivables | 986 |  |  | 127 |
Inventory | 15,381 |  |  | 19,136 |
Prepaid expenses and other current assets | 14,032 |  |  | 11,378 |
Total current assets | 82,666 |  |  | 112,086 |
Property, plant and equipment, net | 263,119 |  |  | 274,676 |
Operating lease right-of-use assets | 29,478 |  |  | 32,099 |
Intangible assets, net | 7,659 |  |  | 8,253 |
Other assets | 446 |  |  | 563 |
Total assets | $ | 383,368 |  |  | $ | 427,677 |
Liabilities and Stockholders’ Equity |  |  |
Current liabilities: |  |  |
Accounts payable | $ | 4,825 |  |  | $ | 3,268 |
Accrued expenses and other liabilities | 11,244 |  |  | 13,142 |
Deferred revenue, current | 9,234 |  |  | 6,875 |
Long-term debt, net, current | 7,281 |  |  | 6,901 |
Operating lease liabilities, current | 7,405 |  |  | 7,077 |
Total current liabilities | 39,989 |  |  | 37,263 |
Deferred revenue, net | 7,215 |  |  | 3,482 |
Long-term debt, net | 16,974 |  |  | 22,445 |
Operating lease liabilities, long-term | 24,733 |  |  | 27,020 |
Deferred tax liabilities, long-term, net | 25,438 |  |  | 32,981 |
Asset retirement obligation | 16,291 |  |  | 14,996 |
Contingent consideration | — |  |  | 180 |
Other non-current liabilities | 508 |  |  | 503 |
Total liabilities | 131,148 |  |  | 138,870 |
Commitments and contingencies (Note 15) |  |  |
Stockholders’ equity |  |  |
Common stock, $0.001 par value, 350,000,000 shares authorized; 43,567,743 issued and 41,850,938 outstanding at September 30, 2021; 43,193,394 issued and 41,575,129 outstanding at December 31, 2020 | 42 |  |  | 42 |
Treasury stock, at cost, 1,716,805 and 1,618,265 shares at September 30, 2021 and December 31, 2020, respectively | (4,427) |  |  | (4,134) |
Additional paid-in capital | 173,426 |  |  | 171,209 |
Retained earnings | 82,826 |  |  | 121,267 |
Accumulated other comprehensive income | 353 |  |  | 423 |
Total stockholders’ equity | 252,220 |  |  | 288,807 |
Total liabilities and stockholders’ equity | $ | 383,368 |  |  | $ | 427,677 |

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

SMART SAND, INC.
CONDENSED CONSOLIDATED INCOME STATEMENTS
(UNAUDITED)

| Three Months Ended September 30, |  | Nine Months Ended September 30,
| 2021 |  | 2020 |  | 2021 |  | 2020
| (in thousands, except per share amounts)
Revenues: |  |  |  |  |  |  |
Sand sales revenue | $ | 31,343 |  |  | $ | 12,445 |  |  | $ | 83,291 |  |  | $ | 50,809 |
Shortfall revenue | 2,680 |  |  | 6,842 |  |  | 4,421 |  |  | 22,148 |
Logistics revenue | 456 |  |  | 4,122 |  |  | 3,856 |  |  | 24,046 |
Total revenue | 34,479 |  |  | 23,409 |  |  | 91,568 |  |  | 97,003 |
Cost of goods sold | 36,526 |  |  | 18,227 |  |  | 100,952 |  |  | 71,221 |
Gross profit | (2,047) |  |  | 5,182 |  |  | (9,384) |  |  | 25,782 |
Operating expenses: |  |  |  |  |  |  |
Salaries, benefits and payroll taxes | 2,490 |  |  | 2,058 |  |  | 7,150 |  |  | 7,115 |
Depreciation and amortization | 352 |  |  | 440 |  |  | 1,490 |  |  | 1,354 |
Selling, general and administrative | 3,867 |  |  | 3,933 |  |  | 10,876 |  |  | 10,393 |
Bad debt expense | — |  |  | — |  |  | 19,592 |  |  | — |
Change in the estimated fair value of contingent consideration | — |  |  | — |  |  | — |  |  | (1,020) |
Total operating expenses | 6,709 |  |  | 6,431 |  |  | 39,108 |  |  | 17,842 |
Operating (loss) income | (8,756) |  |  | (1,249) |  |  | (48,492) |  |  | 7,940 |
Other income (expenses): |  |  |  |  |  |  |
Gain on bargain purchase | — |  |  | 39,889 |  |  | — |  |  | 39,889 |
Interest expense, net | (467) |  |  | (497) |  |  | (1,527) |  |  | (1,576) |
Other income | 1,792 |  |  | 80 |  |  | 5,457 |  |  | 162 |
Total other (expenses) income, net | 1,325 |  |  | 39,472 |  |  | 3,930 |  |  | 38,475 |
(Loss) income before income tax (benefit) expense | (7,431) |  |  | 38,223 |  |  | (44,562) |  |  | 46,415 |
Income tax (benefit) expense | (169) |  |  | 1,941 |  |  | (6,121) |  |  | 5,576 |
Net (loss) income | $ | (7,262) |  |  | $ | 36,282 |  |  | $ | (38,441) |  |  | $ | 40,839 |
Net (loss) income per common share: |  |  |  |  |  |  |
Basic | $ | (0.17) |  |  | $ | 0.91 |  |  | $ | (0.92) |  |  | $ | 1.02 |
Diluted | $ | (0.17) |  |  | $ | 0.91 |  |  | $ | (0.92) |  |  | $ | 1.02 |
Weighted-average number of common shares: |  |  |  |  |  |  |
Basic | 41,850 |  |  | 39,973 |  |  | 41,743 |  |  | 39,903 |
Diluted | 41,850 |  |  | 39,973 |  |  | 41,743 |  |  | 39,903 |

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4

SMART SAND, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)

| Three Months Ended September 30, |  | Nine Months Ended September 30,
| 2021 |  | 2020 |  | 2021 |  | 2020
| (in thousands)
Net (loss) income | $ | (7,262) |  |  | $ | 36,282 |  |  | $ | (38,441) |  |  | $ | 40,839 |
Other comprehensive income: |  |  |  |  |  |  |
Foreign currency translation adjustment | (239) |  |  | 96 |  |  | (70) |  |  | 317 |
Comprehensive (loss) income | $ | (7,501) |  |  | $ | 36,378 |  |  | $ | (38,511) |  |  | $ | 41,156 |

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, 2021

| Common Stock |  | Treasury Stock |  | Additional Paid-in Capital |  |  |  | Accumulated Other Comprehensive Income |  | Total Stockholders’ Equity
| Outstanding Shares |  | Par Value |  | Shares |  | Amount |  |  | Retained Earnings |  |
| (in thousands, except share amounts)
Balance at December 31, 2020 | 41,575,129 |  |  | $ | 42 |  |  | 1,618,265 |  |  | $ | (4,134) |  |  | $ | 171,209 |  |  | $ | 121,267 |  |  | $ | 423 |  |  | $ | 288,807 |
Foreign currency translation adjustment | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 125 |  |  | 125 |
Acquisition stock issuance | 14,430 |  |  | — |  |  | — |  |  | — |  |  | 20 |  |  | — |  |  | — |  |  | 20 |
Vesting of restricted stock | 158,364 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Stock-based compensation | — |  |  | — |  |  | — |  |  | — |  |  | 678 |  |  | — |  |  | — |  |  | 678 |
Employee stock purchase plan compensation | — |  |  | — |  |  | — |  |  | — |  |  | 7 |  |  | — |  |  | — |  |  | 7 |
Employee stock purchase plan issuance | 19,483 |  |  | — |  |  | — |  |  | — |  |  | 17 |  |  | — |  |  | — |  |  | 17 |
Restricted stock buy back | (48,077) |  |  | — |  |  | 48,077 |  |  | (140) |  |  | — |  |  | — |  |  | — |  |  | (140) |
Net loss | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | (3,912) |  |  | — |  |  | (3,912) |
Balance at March 31, 2021 | 41,719,329 |  |  | $ | 42 |  |  | 1,666,342 |  |  | $ | (4,274) |  |  | $ | 171,931 |  |  | $ | 117,355 |  |  | $ | 548 |  |  | $ | 285,602 |
Foreign currency translation adjustment | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 44 |  |  | 44 |
Vesting of restricted stock | 162,253 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Stock-based compensation | — |  |  | — |  |  | — |  |  | — |  |  | 574 |  |  | — |  |  | — |  |  | 574 |
Employee stock purchase plan compensation | — |  |  | — |  |  | — |  |  | — |  |  | 7 |  |  | — |  |  | — |  |  | 7 |
Restricted stock buy back | (48,793) |  |  | — |  |  | 48,793 |  |  | (148) |  |  | — |  |  | — |  |  | — |  |  | (148) |
Net loss | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | (27,267) |  |  | — |  |  | (27,267) |
Balance at June 30, 2021 | 41,832,789 |  |  | $ | 42 |  |  | 1,715,135 |  |  | $ | (4,422) |  |  | $ | 172,512 |  |  | $ | 90,088 |  |  | $ | 592 |  |  | $ | 258,812 |
Foreign currency translation adjustment | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | (239) |  |  | (239) |
Vesting of restricted stock | 4,875 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Stock-based compensation | — |  |  | — |  |  | — |  |  | — |  |  | 879 |  |  | — |  |  | — |  |  | 879 |
Employee stock purchase plan compensation | — |  |  | — |  |  | — |  |  | — |  |  | 10 |  |  | — |  |  | — |  |  | 10 |
Employee stock purchase plan issuance | 14,944 |  |  | — |  |  | — |  |  | — |  |  | 25 |  |  | — |  |  | — |  |  | 25 |
Restricted stock buy back | (1,670) |  |  | — |  |  | 1,670 |  |  | (5) |  |  | — |  |  | — |  |  | — |  |  | (5) |
Net loss | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | (7,262) |  |  | — |  |  | (7,262) |
Balance at September 30, 2021 | 41,850,938 |  |  | $ | 42 |  |  | 1,716,805 |  |  | $ | (4,427) |  |  | $ | 173,426 |  |  | $ | 82,826 |  |  | $ | 353 |  |  | $ | 252,220 |

6

SMART SAND, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (continued)
(UNAUDITED)
Nine months ended September 30, 2020

| Common Stock |  | Treasury Stock |  | Additional Paid-in Capital |  |  |  | Accumulated Other Comprehensive (Loss) Income |  | Total Stockholders’ Equity
| Outstanding Shares |  | Par Value |  | Shares |  | Amount |  |  | Retained Earnings |  |
| (in thousands, except share amounts)
Balance at December 31, 2019 | 40,234,451 |  |  | $ | 40 |  |  | 740,957 |  |  | $ | (2,979) |  |  | $ | 165,223 |  |  | $ | 83,313 |  |  | $ | (41) |  |  | $ | 245,556 |
Foreign currency translation adjustment | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | (163) |  |  | (163) |
Vesting of restricted stock | 139,947 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Stock-based compensation | — |  |  | — |  |  | — |  |  | — |  |  | 1,025 |  |  | — |  |  | — |  |  | 1,025 |
Employee stock purchase plan compensation | — |  |  | — |  |  | — |  |  | — |  |  | 14 |  |  | — |  |  | — |  |  | 14 |
Employee stock purchase plan issuance | 21,486 |  |  | — |  |  | — |  |  | — |  |  | 46 |  |  | — |  |  | — |  |  | 46 |
Restricted stock buy back | (10,468) |  |  | — |  |  | 10,468 |  |  | (14) |  |  | — |  |  | — |  |  | — |  |  | (14) |
Shares repurchased | (778,300) |  |  | — |  |  | 778,300 |  |  | (1,000) |  |  | — |  |  | — |  |  | — |  |  | (1,000) |
Net loss | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | (84) |  |  | — |  |  | (84) |
Balance at March 31, 2020 | 39,607,116 |  |  | $ | 40 |  |  | 1,529,725 |  |  | $ | (3,993) |  |  | $ | 166,308 |  |  | $ | 83,229 |  |  | $ | (204) |  |  | 245,380 |
Foreign currency translation adjustment | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 384 |  |  | 384 |
Vesting of restricted stock | 177,628 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Stock-based compensation | — |  |  | — |  |  | — |  |  | — |  |  | 943 |  |  | — |  |  | — |  |  | 943 |
Employee stock purchase plan compensation | — |  |  | — |  |  | — |  |  | — |  |  | 12 |  |  | — |  |  | — |  |  | 12 |
Employee stock purchase plan issuance | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Restricted stock buy back | (30,673) |  |  | — |  |  | 30,673 |  |  | (31) |  |  | — |  |  | — |  |  | — |  |  | (31) |
Net income | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 4,641 |  |  | — |  |  | 4,641 |
Balance at June 30, 2020 | 39,754,071 |  |  | $ | 40 |  |  | 1,560,398 |  |  | $ | (4,024) |  |  | $ | 167,263 |  |  | $ | 87,870 |  |  | $ | 180 |  |  | $ | 251,329 |
Foreign currency translation adjustment | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 96 |  |  | 96 |
Acquisition stock issuance | 1,503,759 |  |  | 2 |  |  | — |  |  | — |  |  | 2,059 |  |  | — |  |  | — |  |  | 2,061 |
Vesting of restricted stock | 6,375 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Stock-based compensation | — |  |  | — |  |  | — |  |  | — |  |  | 941 |  |  | — |  |  | — |  |  | 941 |
Employee stock purchase plan compensation | — |  |  | — |  |  | — |  |  | — |  |  | 3 |  |  | — |  |  | — |  |  | 3 |
Employee stock purchase plan issuance | 18,148 |  |  | — |  |  | — |  |  | — |  |  | 16 |  |  | — |  |  | — |  |  | 16 |
Restricted stock buy back | (770) |  |  | — |  |  | 770 |  |  | (1) |  |  | — |  |  | — |  |  | — |  |  | (1) |
Net income | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 36,282 |  |  | — |  |  | 36,282 |
Balance at September 30, 2020 | 41,281,583 |  |  | $ | 42 |  |  | 1,561,168 |  |  | $ | (4,025) |  |  | $ | 170,282 |  |  | $ | 124,152 |  |  | $ | 276 |  |  | $ | 290,727 |

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,
| 2021 |  | 2020
| (in thousands)
Operating activities: |  |  |
Net (loss) income | $ | (38,441) |  |  | $ | 40,839 |
Adjustments to reconcile net (loss) income to net cash provided by operating activities: |  |  |
Depreciation, depletion and accretion of asset retirement obligation | 18,937 |  |  | 16,092 |
Amortization of intangible assets | 596 |  |  | 596 |
Loss on disposal of assets | 223 |  |  | 299 |
Provision for bad debt | 19,592 |  |  | — |
Amortization of deferred financing cost | 79 |  |  | 79 |
Accretion of debt discount | 140 |  |  | 138 |
Deferred income taxes | (7,543) |  |  | 238 |
Stock-based compensation, net | 2,131 |  |  | 2,909 |
Employee stock purchase plan compensation | 24 |  |  | 29 |
Change in contingent consideration fair value | — |  |  | (1,020) |
Gain on bargain purchase, net of cash acquired | — |  |  | (39,580) |
Changes in assets and liabilities: |  |  |
Accounts receivable | 34,791 |  |  | (7,029) |
Unbilled receivables | (1,113) |  |  | (4,491) |
Inventory | 3,755 |  |  | 306 |
Prepaid expenses and other assets | (1,886) |  |  | 3,751 |
Deferred revenue | 6,092 |  |  | 3,912 |
Accounts payable | 1,564 |  |  | (205) |
Accrued and other expenses | (1,397) |  |  | (607) |
Income taxes payable | — |  |  | 5,968 |
Net cash provided by operating activities | 37,544 |  |  | 22,224 |
Investing activities: |  |  |
Purchases of property, plant and equipment | (6,976) |  |  | (7,444) |
Proceeds from disposal of assets | 78 |  |  | 51 |
Net cash used in investing activities | (6,898) |  |  | (7,393) |
Financing activities: |  |  |
Proceeds from the issuance of notes payable | — |  |  | 952 |
Repayments of notes payable | (5,168) |  |  | (3,527) |
Payments under equipment financing obligations | (92) |  |  | (87) |
Payment of deferred financing and debt issuance costs | — |  |  | (20) |
Proceeds from revolving credit facility | — |  |  | 6,000 |
Repayment of revolving credit facility | — |  |  | (8,500) |
Payment of contingent consideration | (180) |  |  | (310) |
Proceeds from equity issuance | 42 |  |  | 62 |
Purchase of treasury stock | (294) |  |  | (1,046) |
Net cash used in financing activities | (5,692) |  |  | (6,476) |
Net increase in cash and cash equivalents | 24,954 |  |  | 8,355 |
Cash and cash equivalents at beginning of year | 11,725 |  |  | 2,639 |
Cash and cash equivalents at end of period | $ | 36,679 |  |  | $ | 10,994 |
Supplemental disclosure of cash flow information |  |  |
Capitalized expenditures in accounts payable and accrued expenses | $ | 267 |  |  | $ | 157 |

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
8

SMART SAND, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
NOTE 1 — Organization and Nature of Business & Market Update
Organization and Nature of Business
The Company was incorporated in July 2011 and is headquartered in The Woodlands, Texas. The Company is a fully integrated frac sand supply and services company, offering complete mine to wellsite proppant supply, logistics and storage solutions. The Company is engaged in the excavation, processing and sale of sand, or proppant, for use in hydraulic fracturing operations for the oil and natural gas industry and offers proppant logistics and wellsite storage solutions through its SmartSystems TM products and services.
The Company commenced mining operations at its Oakdale, Wisconsin facility in July 2012. Through multiple expansions at Oakdale and the acquisition in September 2020 of the Utica, Illinois mine and processing facilities, the Company has current annual processing capacity of approximately 7.1 million tons.
The Company provides complete logistics solutions through its frac sand facilities with access to three Class I rail lines and its in-basin unit train capable transloading terminal in Van Hook, North Dakota to service the Bakken Formation in the Williston Basin. 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. The Company expects this terminal to become operational in the fourth quarter of 2021. These logistics solutions enable the Company to cost-effectively deliver products to its customers anywhere in the United States.
The Company provides proppant storage and management solutions through its SmartSystems products and services under which it offers various solutions that create efficiencies, flexibility, enhanced safety and reliability for customers by providing the capability to unload, store and deliver proppant at the wellsite, as well as the ability to rapidly set up, takedown and transport the entire system. The SmartDepot TM silo system includes passive and active dust suppression technology, along with the capability of a gravity-fed operation. The Company has developed a new transload technology, the self-contained SmartPath TM transloader, to complement its existing solutions. The SmartPath is a mobile sand transloading system designed to work with bottom dump trailers and features a drive over conveyor, surge bin, and dust collection system. Rapid deployment trailers are designed for quick setup, takedown and transportation of the entire SmartSystem, and they detach from the wellsite equipment, which allows for removal from the wellsite during operation.
NOTE 2 — Summary of Significant Accounting Policies
The information presented below supplements the complete description of our significant accounting policies disclosed in our 2020 Form 10-K, filed with the Securities and Exchange Commission (“SEC”) on March 3, 2021.
Basis of Presentation and Consolidation
The accompanying unaudited quarterly condensed consolidated financial statements (“interim statements”) of the Company are presented in accordance with the rules and regulations of the 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, 2020 was derived from the audited consolidated financial statements as of and for the year ended December 31, 2020. These interim statements should be read in conjunction with the Company’s consolidated financial statements for the year ended December 31, 2020.
Use of Estimates
The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Significant estimates used in the preparation of these financial statements include, but are not limited to: the sand reserves and their impact on calculating the depletion expense under the units-of-production method; the depreciation and amortization associated with property, plant and equipment and definite-lived intangible assets, impairment considerations of assets (including impairment of
9

SMART SAND, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
identified intangible assets and other long-lived assets); estimated cost of future asset retirement obligations; fair value of acquired assets and assume liabilities; stock-based compensation; recoverability of deferred tax assets; inventory reserve; collectability of receivables; and certain liabilities.
Actual results could differ materially from management’s best estimates as additional information or actual results become available in the future. The decreased demand related to the coronavirus (“COVID-19”) pandemic caused dramatic swings in oil prices and significant volatility in the oilfield service sector since March 2020. The Company is currently unable to estimate the impact of these events on its future financial position and results of operations. Therefore, the Company can give no assurances that these events will not have a material adverse effect on its financial position or results of operations.
Employee Retention Credit
The Company qualified for federal government assistance through employee retention credit provisions of the Consolidated Appropriations Act of 2021. During the three and nine months ended September 30, 2021, the Company recorded $1,674 and $5,026, respectively, of employee retention credits in other income on its consolidated income statements and included in prepaid expenses and other current assets on the consolidated balance sheet as of September 30, 2021. The calculation of the credit is based on employees continued employment and represents a portion of the wages paid to them. For income tax purposes, the credit will result in decreased expense related to the wages it offsets in the period received.
Recent Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), which modifies how companies recognize expected credit losses on financial instruments and other commitments to extend credit held by an entity at each reporting date. Existing GAAP requires an “incurred loss” methodology whereby companies are prohibited from recording an expected loss until it is probable that the loss has been incurred. ASU 2016-13 requires companies to use a methodology that reflects current expected credit losses (“CECL”) and requires consideration of a broad range of reasonable and supportable information to record and report credit loss estimates, even when the CECL is remote. Companies will be required to record the allowance for credit losses and deduct that amount from the basis of the asset and a related expense will be recognized in selling, general and administrative expenses on the income statement, similar to bad debt expense under existing GAAP. There is much latitude given to entities in determining the methodology for calculating the CECL. The guidance is effective for the Company for financial statement periods beginning after December 15, 2022, although early adoption is permitted. While the Company is still in the process of evaluating the effects of ASU 2016-13 and its related updates on the consolidated financial statements, at the time of adoption, it believes the primary effect, if any will be an allowance recorded against its accounts and unbilled receivables on its balance sheet and related expense on its income statement. The Company cannot determine the financial impact on its consolidated financial statements upon adoption as its accounts and unbilled receivables balances are affected by ongoing transactions with customers.
NOTE 3 — Business Combination
Eagle Proppants Holdings
On September 18, 2020, the Company entered into an Equity Purchase and Sale Agreement (the “Purchase Agreement”) with Eagle Materials Inc., a Delaware corporation (“Eagle”), pursuant to which the Company acquired all of the issued and outstanding interests in Eagle Oil and Gas Proppants Holdings LLC, a Delaware limited liability company and wholly-owned subsidiary of Eagle (“Eagle Proppants Holdings”), from Eagle for aggregate non-cash consideration of approximately $2,080. In satisfaction of the purchase price, the Company issued to Eagle 1,504 shares of its common stock; the Company issued an additional 14 shares of its common stock in January 2021 as settlement of the net working capital adjustment. The number of
10

SMART SAND, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
shares issued was determined by the weighted average trading price of the Company’s common stock over the twenty days preceding the date of the Purchase Agreement.
The primary assets of Eagle Proppants Holdings and its subsidiaries include a frac sand mine and related processing facility in Utica, Illinois and a transload facility in nearby Peru, Illinois. The Utica facility has approximately 1.6 million tons of annual processing capacity and has access to the BNSF rail line through the Peru, Illinois transload facility.
The table below presents the calculation of the total purchase consideration:

Base price consideration |  | $ | 2,000 |
20-day volume weighted average price of Smart Sand stock |  | $ | 1.33 |
Shares issued |  | 1,504 |
Closing share price on September 18, 2020 |  | $ | 1.37 |
Total equity issued |  | $ | 2,060 |
Net working capital adjustment |  | $ | 20 |
Total purchase consideration |  | $ | 2,080 |

The Company’s final allocation of the purchase price in connection with the acquisition was calculated as follows:

|  |  |  | Fair Value
Assets Acquired |  |
| Cash |  | $ | 309 |
| Accounts receivable |  | 75 |
| Inventory |  | 2,459 |
| Prepaid expenses and other current assets |  | 124 |
| Property, plant and equipment |  | 60,310 |
| Right-of-use assets |  | 9,603 |
|  | Total assets acquired |  | 72,880 |
Liabilities Assumed |  |
| Accounts payable |  | 16 |
| Accrued expenses and other liabilities |  | 2,008 |
| Asset retirement obligations |  | 8,424 |
| Operating lease liabilities |  | 9,603 |
| Deferred income taxes |  | 11,149 |
|  | Total liabilities assumed |  | 31,200 |
|  | Estimated fair value of net assets acquired |  | $ | 41,680 |

The estimated aggregate fair value of the net assets acquired was $41,680, which exceeded the total consideration and results in a bargain purchase gain of $39,600 on the acquisition date, which is included in net income for the year ended December 31, 2020. The Company believes that the seller wanted to exit the business relatively quickly and that there were a limited number of potential buyers due to the downturn in the market, which resulted in the bargain purchase gain.
The Company determined the fair values of the acquired assets and assumed liabilities based on the highest and best use of such assets as required by GAAP. Cash, accounts receivable, prepaid expenses and other current assets, accounts payable, accrued expenses and other liabilities were based on underlying assets and liabilities whose carrying value approximates fair value. The Company acquired $2,050 of contractual receivables; however, it does not expect to collect on $1,975 of such contractual receivables as these customers are in bankruptcy proceedings. The fair value of inventory was determined using market prices the Company expected to receive for the inventory when it is sold. Operating leases were considered to be at
11

SMART SAND, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
market rates and the fair values of the associated operating lease liabilities and right-of-use assets were determined using the Company’s lease accounting policies. The fair value of the asset retirement obligations was calculated consistently with the Company’s other asset retirement obligations and includes assumptions about inflation and discount rates over time to represent the estimated future cost of dismantling, restoring and reclaiming the plant and mines in accordance with legal obligations. Deferred income taxes represent the temporary differences between future expenses for GAAP purposes and income tax purposes at the Company’s applicable enacted tax rate. The Company determined the fair values of the property, plant and equipment with the assistance of external valuation specialists. The fair value was based on the highest and best use, as required by GAAP, which was determined to be the orderly liquidation value rather than the value imputed by other valuation methods. Total acquisition costs incurred in the year ended December 31, 2020 were $891. The Company’s allocation of the purchase price was complete as of December 31, 2020.
NOTE 4 — Inventory
Inventory consisted of the following:

| September 30, 2021 |  | December 31, 2020
Raw material | $ | 176 |  |  | $ | 428 |
Work in progress | 5,789 |  |  | 10,465 |
Finished goods | 5,475 |  |  | 4,400 |
Spare parts | 3,941 |  |  | 3,843 |
Total inventory | $ | 15,381 |  |  | $ | 19,136 |

NOTE 5 — Property, Plant and Equipment, net
Net property, plant and equipment consisted of:

| September 30, 2021 |  | December 31, 2020
Machinery, equipment and tooling | $ | 30,456 |  |  | $ | 29,002 |
SmartSystems | 27,159 |  |  | 22,352 |
Vehicles | 3,014 |  |  | 2,893 |
Furniture and fixtures | 1,326 |  |  | 1,302 |
Plant and building | 199,958 |  |  | 199,867 |
Real estate properties | 6,496 |  |  | 6,458 |
Railroad and sidings | 27,703 |  |  | 27,703 |
Land and land improvements | 33,155 |  |  | 33,040 |
Asset retirement obligation | 20,730 |  |  | 19,993 |
Mineral properties | 7,442 |  |  | 7,442 |
Deferred mining costs | 2,455 |  |  | 2,123 |
Construction in progress | 6,894 |  |  | 7,489 |
| 366,788 |  |  | 359,664 |
Less: accumulated depreciation and depletion | 103,669 |  |  | 84,988 |
Total property, plant and equipment, net | $ | 263,119 |  |  | $ | 274,676 |

Depreciation expense was $6,111 and $5,328 for the three months ended September 30, 2021 and 2020, respectively, and $18,325 and $15,856 for the nine months ended September 30, 2021 and 2020, respectively.
12

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, 2021 |  | December 31, 2020
Employee related expenses | $ | 1,168 |  |  | $ | 1,048 |
Accrued equipment | — |  |  | 55 |
Accrued professional fees | 980 |  |  | 1,129 |
Accrued royalties | 2,380 |  |  | 2,624 |
Accrued freight and delivery charges | 1,770 |  |  | 2,901 |
Accrued real estate tax | 2,046 |  |  | 1,637 |
Accrued utilities | 862 |  |  | 748 |
Sales tax liability | 723 |  |  | 1,386 |
Other accrued liabilities | 1,315 |  |  | 1,614 |
Total accrued liabilities | $ | 11,244 |  |  | $ | 13,142 |

NOTE 7 — Debt
The current portion of long-term debt consists of the following:

| September 30, 2021 |  | December 31, 2020
Oakdale Equipment Financing | $ | 3,760 |  |  | $ | 3,600 |
Finance leases | 120 |  |  | 123 |
Notes Payable | 3,401 |  |  | 3,178 |
Long-term debt, net, current | $ | 7,281 |  |  | $ | 6,901 |

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

| September 30, 2021 |  | December 31, 2020
ABL Credit Facility | $ | — |  |  | $ | — |
Oakdale Equipment Financing, net | 12,536 |  |  | 15,236 |
Finance Leases | 263 |  |  | 351 |
Notes Payable | 4,175 |  |  | 6,858 |
Long-term debt, net | $ | 16,974 |  |  | $ | 22,445 |

13

SMART SAND, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
The follow summarizes the maturity of our debt:

| ABL Credit Facility |  | Oakdale Equipment Financing |  | Notes Payable |  | Finance Leases |  | Total
Remainder of 2021 | $ | — |  |  | $ | 1,160 |  |  | $ | 1,056 |  |  | $ | 38 |  |  | $ | 2,254 |
2022 | — |  |  | 4,638 |  |  | 3,387 |  |  | 137 |  |  | 8,162 |
2023 | — |  |  | 4,638 |  |  | 2,371 |  |  | 245 |  |  | 7,254 |
2024 | — |  |  | 6,888 |  |  | 807 |  |  | — |  |  | 7,695 |
2025 | — |  |  | 1,724 |  |  | 187 |  |  | — |  |  | 1,911 |
2026 and thereafter | — |  |  | — |  |  | 355 |  |  | — |  |  | 355 |
Total minimum payments | — |  |  | 19,048 |  |  | 8,163 |  |  | 420 |  |  | 27,631 |
Amount representing interest | — |  |  | (2,158) |  |  | (587) |  |  | (37) |  |  | (2,782) |
Amount representing unamortized lender fees | — |  |  | (594) |  |  |  |  | — |  |  | (594) |
Present value of payments |  |  |  |  |  |  | 383 |  |  |
Less: current portion | — |  |  | (3,760) |  |  | (3,401) |  |  | (120) |  |  | (7,281) |
Total long-term debt, net | $ | — |  |  | $ | 12,536 |  |  | $ | 4,175 |  |  | $ | 263 |  |  | $ | 16,974 |

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, 2021 was $17,764 and is based on the Company’s eligible accounts receivable and inventory, as described in the ABL Credit Agreement. As of September 30, 2021, there were no amounts outstanding under the ABL Credit Facility, $1,232 letters of credit and $16,532 was available to be drawn. As of September 30, 2021 and December 31, 2020, the Company was in compliance with all financial covenants.
Oakdale Equipment Financing
On December 13, 2019, the Company received net proceeds of $23,000 in an equipment financing arrangement with Nexseer. Substantially all of the Company’s mining and processing equipment at its Oakdale facility are pledged as collateral under the Oakdale Equipment Financing. The Oakdale Equipment Financing bears interest at a fixed rate of 5.79%.
Notes Payable
The Company has entered into various financing arrangements, primarily to finance its manufactured wellsite proppant storage solutions equipment. Upon completion of the equipment manufacturing, title to the subject equipment passes to the financial institutions as collateral. In June 2020, the Company executed a note payable to defer certain near-term minimum royalty payments. All notes payable bear interest at rates between 4.00% and 7.49%.
Acquisition Liquidity Support Facility
In connection with the Company’s acquisition of Eagle Proppants Holdings, the Company, as borrower, also entered into a Loan Agreement with Eagle, as lender, secured by certain property rights and assets of the acquired business, whereby the Company may draw loans in an aggregate amount up to $5,000 during the twelve month period ending September 18, 2021. This facility was terminated on September 20, 2021 and there were no borrowings under this facility.
14

SMART SAND, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
NOTE 8 — Leases
Lessee
The operating and financing components of the Company’s right-of-use assets and lease liabilities on the consolidated balance sheet were as follows:

|  | Balance Sheet Location |  | September 30, 2021 |  | December 31, 2020
Right-of-use assets |  |  |  |  |  |
Operating |  | Operating right-of-use assets |  | $ | 29,478 |  |  | $ | 32,099 |
Financing |  | Property, plant and equipment, net |  | 262 |  |  | 373 |
Total right-of use assets |  |  |  | $ | 29,740 |  |  | $ | 32,472 |
Lease liabilities |  |  |  |  |  |
Operating |  | Operating lease liabilities, current and long-term portions |  | $ | 32,138 |  |  | $ | 34,097 |
Financing |  | Long-term debt, current and long-term portions |  | 383 |  |  | 474 |
Total lease liabilities |  |  |  | $ | 32,521 |  |  | $ | 34,571 |

Operating lease costs are recorded as a single expense on the income statement and allocated to the right-of-use assets and the related lease liabilities as depreciation expense and interest expense, respectively. Lease cost recognized in the consolidated income statement for the three and nine months ended September 30, 2021 and 2020 was as follows:

| Three Months Ended September 30, |  | Nine Months Ended September 30,
| 2021 |  | 2020 |  | 2021 |  | 2020
Finance lease cost |  |  |  |  |  |  |
Amortization of right-of-use assets | $ | 35 |  |  | $ | 35 |  |  | $ | 105 |  |  | $ | 104 |
Interest on lease liabilities | 7 |  |  | 9 |  |  | 22 |  |  | 28 |
Operating lease cost | 2,610 |  |  | 2,729 |  |  | 8,375 |  |  | 9,824 |
Short-term lease cost | 86 |  |  | 4 |  |  | 120 |  |  | 238 |
Total lease cost | $ | 2,738 |  |  | $ | 2,777 |  |  | $ | 8,622 |  |  | $ | 10,194 |

15

SMART SAND, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Other information related to the Company’s leasing activity for the three and nine months ended September 30, 2021 and 2020 is as follows:

|  | Nine months ended September 30,
|  | 2021 |  | 2020
Cash paid for amounts included in the measurement of lease liabilities |  |  |  |
Operating cash flows used for finance leases |  | $ | 22 |  |  | $ | 28 |
Operating cash flows used for operating leases |  | $ | 7,680 |  |  | $ | 9,158 |
Financing cash flows used for finance leases |  | $ | 92 |  |  | $ | 85 |
Right-of-use assets obtained in exchange for new operating lease liabilities |  | $ | 4,401 |  |  | $ | 13,936 |
Weighted average remaining lease term - finance leases |  | 1.9 years |  | 2.9 years
Weighted average discount rate - finance leases |  | 6.60 | % |  | 6.60 | %
Weighted average remaining lease term - operating leases |  | 3.8 years |  | 3.7 years
Weighted average discount rate - operating leases |  | 5.81 | % |  | 5.71 | %

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

|  | Operating Leases |  | Finance Leases |  | Total
Remainder of 2021 |  | $ | 1,632 |  |  | $ | 38 |  |  | $ | 1,670 |
2022 |  | 9,857 |  |  | 137 |  |  | 9,994 |
2023 |  | 9,098 |  |  | 245 |  |  | 9,343 |
2024 |  | 7,519 |  |  | — |  |  | 7,519 |
2025 |  | 3,773 |  |  | — |  |  | 3,773 |
Thereafter |  | 4,450 |  |  | — |  |  | 4,450 |
Total cash lease payments |  | 36,329 |  |  | 420 |  |  | 36,749 |
Less: amounts representing interest |  | (4,191) |  |  | (37) |  |  | (4,228) |
Total lease liabilities |  | $ | 32,138 |  |  | $ | 383 |  |  | $ | 32,521 |

NOTE 9 — Asset Retirement Obligation
The Company had a post-closure reclamation and site restoration obligation of $16,291 as of September 30, 2021. The following is a reconciliation of the total reclamation liability for asset retirement obligations.

Balance at December 31, 2020 | $ | 14,996 |
Additions | 737 |
Accretion expense | 558 |
Balance at September 30, 2021 | $ | 16,291 |

16

SMART SAND, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
NOTE 10 — Revenue
Disaggregation of Revenue
The following table presents the Company’s revenues disaggregated by type and percentage of total revenues for the periods indicated.

| Three Months Ended September 30, |  | Nine Months Ended September 30,
| 2021 |  | 2020 |  | 2021 |  | 2020
| Revenue |  | Percentage of Total Revenue |  | Revenue |  | Percentage of Total Revenue |  | Revenue |  | Percentage of Total Revenue |  | Revenue |  | Percentage of Total Revenue
Sand sales revenue | $ | 31,343 |  |  | 91 | % |  | $ | 12,445 |  |  | 53 | % |  | $ | 83,291 |  |  | 91 | % |  | $ | 50,809 |  |  | 52 | %
Shortfall revenue | 2,680 |  |  | 8 | % |  | 6,842 |  |  | 29 | % |  | 4,421 |  |  | 5 | % |  | 22,148 |  |  | 23 | %
Logistics revenue | 456 |  |  | 1 | % |  | 4,122 |  |  | 18 | % |  | 3,856 |  |  | 4 | % |  | 24,046 |  |  | 25 | %
Total revenue | $ | 34,479 |  |  | 100 | % |  | $ | 23,409 |  |  | 100 | % |  | $ | 91,568 |  |  | 100 | % |  | $ | 97,003 |  |  | 100 | %

The Company recorded $10,357 of deferred revenue on the balance sheet on December 31, 2020, of which $6,875 has been recognized in the nine months ended September 30, 2021. Of the remaining amount, the Company expects to recognize no more through December 31, 2021 and the remainder through 2023.
NOTE 11 — Earnings Per Share
Basic net (loss) income per share of common stock is computed by dividing net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the period, excluding the dilutive effects of restricted stock. Diluted net (loss) income per share of common stock is computed by dividing the net (loss) income attributable to common stockholders by the sum of the weighted-average number of shares of common stock outstanding during the period plus the potential dilutive effects of restricted stock outstanding during the period calculated in accordance with the treasury stock method, although restricted stock is excluded if their effect is anti-dilutive. Because the impact of these items is anti-dilutive during periods of net loss, there was no difference between basic and diluted net loss per share of common stock for the three and nine months ended September 30, 2021. Because their effect would be anti-dilutive, 2,237 shares of common stock underlying equity-based awards were excluded from the calculation of diluted earnings per share for both three and nine months ended September 30, 2020. There is no reconciliation between weighted average common shares outstanding and diluted weighted average shares of common stock outstanding for any period presented.
NOTE 12 — Stock-Based Compensation
Equity Incentive Plan
In November 2016, in connection with its initial public offering, the Company adopted the 2016 Omnibus Incentive Plan (“2016 Plan”) which provides for the issuance of Awards (as defined in the 2016 Plan) of up to a maximum of 3,911 shares of the Company’s common stock to employees, non-employee members of the 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 available shares of common stock authorized for issuance by an additional 2,088 shares. On July 27, 2021, the Company’s board of directors authorized 231 shares currently held in treasury stock for issuance under the 2016 Plan. During the nine months ended September 30, 2021 and 2020, 1,982 and 0 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 $2.44 - $7.79. The shares vest over one to four years from their respective grant dates. For equity awards issued under the 2016 Plan, the grant date fair value was either the actual market price of the Company’s shares or an adjusted price using a Monte Carlo simulation for awards subject to the Company’s performance as compared to a defined peer group. The Company recognized, in operating expenses and cost of goods sold on the condensed consolidated income statements, $879 and $941 of compensation expense for the restricted stock during the three months ended September 30, 2021 and 2020, respectively. The Company recognized, in operating
17

SMART SAND, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
expenses and cost of goods sold on the condensed consolidated income statements, $2,131 and $2,910 of compensation expense for the restricted stock during the nine months ended September 30, 2021 and 2020, respectively. There is no impact to the cash flows of the Company related to stock-based compensation expense. At September 30, 2021, the Company had unrecognized compensation expense of $7,201 related to granted but unvested stock awards, which is to be recognized as follows:

Remainder of 2021 |  | $ | 1,022 |
2022 |  | 2,632 |
2023 |  | 1,917 |
2024 |  | 1,158 |
2025 |  | 472 |
Total |  | $ | 7,201 |

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

| Number of Shares |  | Weighted Average
Unvested, December 31, 2020 | 1,886 |  |  | $ | 5.14 |
Granted | 1,982 |  |  | $ | 2.88 |
Vested | (325) |  |  | $ | 8.31 |
Forfeited | (138) |  |  | $ | 6.26 |
Unvested, September 30, 2021 | 3,405 |  |  | $ | 3.04 |

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, 2021 and 2020, the effective tax rate was approximately 2.3% and 5.1%, respectively, based on the annual effective tax rate net of discrete federal and state taxes. For the nine months ended September 30, 2021 and 2020, the effective tax rate was approximately 13.7% and 12.0%, respectively, based on the annual effective tax rate net of discrete federal and state taxes. For the three and nine months ended September 30, 2021 and 2020, the statutory tax rate was 21.0%. The computation of the effective tax rate includes modifications from the statutory rate such as income tax credits, tax depletion deduction, carrybacks, and state apportionment changes, among other items.
The Company has recorded a liability of $2,172 for uncertain tax positions included in deferred tax liabilities, long-term, net on its consolidated balance sheet as of September 30, 2021, related to its depletion deduction methodology, and a corresponding increase to the income tax expense on its condensed consolidated income statements. There was no liability for uncertain tax positions as of December 31, 2020.
As of September 30, 2021, the Company determine 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 valuation allowance against the deferred tax
18

SMART SAND, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
liabilities, long-term, net on its consolidated balance sheet in the amount of $1,305, and a corresponding increase to the income tax expense on its condensed consolidated income statements.
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, 2021, two customers accounted for 55% of the Company’s total accounts receivable. As of December 31, 2020, 78% of the Company’s total accounts receivable balance was with one customer and was subject to ongoing litigation. The litigation was settled during the second quarter of 2021 as described in Note 15.
During the three months ended September 30, 2021, 50% of the Company’s revenues were earned from three customers. During the three months ended September 30, 2020, 85% of the Company’s revenues were earned from three customers. During the nine months ended September 30, 2021, 68% of the Company’s revenues were earned from four customers. During the nine months ended September 30, 2020, 69% of the Company’s revenues were earned from three customers.
As of September 30, 2021, one vendor accounted for 23% of the Company’s accounts payable. As of December 31, 2020, three vendors accounted for 42% of the Company’s accounts payable.
During the three months ended September 30, 2021, one supplier accounted for 23% of the Company’s cost of goods sold. During the three months ended September 30, 2020, two suppliers accounted for 70% 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. During the nine months ended September 30, 2020, two suppliers accounted for 64% of the Company’s cost of goods sold.
The Company’s primary product is Northern White frac sand and its mining operations are limited to Wisconsin and Illinois. There is a risk of loss if there are significant environmental, legal or economic changes to this geographic areas of our mines, the oil and natural gas producing basins they serve, or the transportation routes between them.
NOTE 15 — Commitments and Contingencies
Future Minimum Commitments
The Company is obligated under certain contracts for minimum payments for the right to use land for extractive activities, which is not within the scope of leases under ASC 842. Future minimum annual commitments under such contracts at September 30, 2021 are as follows:

Remainder of 2021 | $ | 1,554 |
2022 | 2,467 |
2023 | 2,573 |
2024 | 2,469 |
2025 | 2,462 |
Thereafter | 26,886 |
Total | $ | 38,411 |

Litigation
In addition to the matters described below, we may be subject to various legal proceedings, claims and governmental inspections, audits or investigations arising out of our operations in the normal course of business, which cover matters such as general commercial, governmental and trade regulations, product liability, environmental, intellectual property, employment
19

SMART SAND, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
and other actions. Although the outcomes of these routine claims cannot be predicted with certainty, in the opinion of management, the ultimate resolution of these matters will not have a material adverse effect on our financial statements.
U.S. Well Services, LLC
On January 14, 2019, the Company, as plaintiff filed suit against U.S. Well Services, LLC (“defendant”), in the Superior Court of the State of Delaware in and for New Castle County (C.A. No. N19C-01-144-PRW [CCLD]) (the “Court”). In the suit, the Company alleged that defendant was in breach of contract for failure to pay amounts due and payable under a long-term take-or-pay Master Product Purchase Agreement and coterminous Railcar Usage Agreement. The trial took place in December 2020. On June 17, 2021, the Court issued an Order of Final Judgment (the “Order”) awarding $50,896 in damages to the Company. On June 28, 2021, the Company entered into a Settlement Agreement and Release (“Settlement Agreement”) with defendant, pursuant to which defendant paid to the Company a $35,000 cash payment, and defendant and the Company each agreed to withdraw appeals of certain rulings that they each filed after the Order was issued. The Company and defendant also entered into a two year Right of First Refusal Agreement covering all purchases of Northern White frac sand by defendant and its affiliates in the continental United States from January 1, 2022 through December 31, 2023. The Company recorded $19,592 as non-cash bad debt expense, which is the difference between the $54,592 accounts receivable balance that was under litigation and the cash received under the Settlement Agreement.
Bonds
The Company has performance bonds with various public and private entities regarding reclamation, permitting and maintenance of public roadways. Total aggregate principal amount of performance bonds outstanding as of September 30, 2021 was $9,478.
20

SMART SAND, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis summarizes the significant factors affecting the consolidated operating results, financial condition, liquidity and cash flows of the Company as of and for the periods presented below. The following discussion and analysis should be read in conjunction with our unaudited condensed consolidated financial statements and related information contained herein and our audited financial statements as of December 31, 2020 contained in our Annual Report on Form 10-K. We use 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, 2020. Our estimates and forward-looking statements are primarily based on our current expectations and estimates of future events and trends, which affect or may affect our business and operations. Although we believe that these estimates and forward-looking statements are based upon reasonable assumptions, they are subject to several risks and uncertainties and are made in light of information currently available to us. Important factors, in addition to the factors described in this 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 sand supply and services company, offering complete mine to wellsite proppant supply and logistics solutions to our customers. We produce low-cost, high quality Northern White frac sand, which is a premium proppant used to enhance hydrocarbon recovery rates in the hydraulic fracturing of oil and natural gas wells. We also offer proppant logistics solutions to our customers through our in-basin transloading terminal and our SmartSystems TM wellsite proppant storage capabilities. We market our products and services, as one operating segment, primarily to oil and natural gas exploration and production companies and oilfield service companies. We sell our sand under a combination of contract and spot sales in the open market, and provide wellsite proppant storage solutions services and equipment under flexible contract terms custom tailored to meet the needs of our customers. We believe that, among other things, the size and favorable geologic characteristics of our sand reserves, the strategic location and logistical advantages of our facilities, our proprietary SmartDepot TM portable wellsite proppant storage silos, SmartPath TM transloader, and the industry experience of our senior management team make us as a highly attractive provider of frac sand and proppant logistics services from the mine to the wellsite.
We incorporated in Delaware in July 2011 and began operations with 1.1 million tons of annual processing capacity in July 2012. After several expansions and an acquisition, our current operational annual processing capacity is approximately 7.1 million tons of frac sand. Our mine and related processing facility near Oakdale, Wisconsin, at which we have approximately
21

SMART SAND, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)
315 million tons of proven recoverable sand reserves as of December 31, 2020, has approximately 5.5 million tons of annual processing capacity. This integrated facility, with on-site rail infrastructure and wet and dry sand processing facilities, has onsite access to the Canadian Pacific Class I rail line and access to the Union Pacific Class I rail line through the Byron, Wisconsin transload facility located nearby. Our mine and processing facility in Utica, Illinois, has approximately 130 million tons of proven and probable sand reserves as of December 31, 2020, and has approximately 1.6 million tons of annual processing capacity. This facility has access to the BNSF Class I rail line through the Peru, Illinois transload facility located nearby. We began operating the Utica, Illinois mine and Peru, Illinois transload facility in October 2020.
We operate a unit train capable transloading terminal in Van Hook, North Dakota to service the Bakken Formation in the Williston Basin. We operate this terminal under a long-term agreement with Canadian Pacific Railway to service the Van Hook terminal directly along with the other key oil and natural gas exploration and production basins of North America. In September 2021, we acquired the rights to construct and operate an additional transloading terminal in Waynesburg, Pennsylvania to service the Appalachian Basin, including the Marcellus and Utica Formations. We expect this terminal to become operational in the fourth quarter of 2021. These terminals allow us to offer more efficient delivery options to our customers.
We also offer to our customers portable wellsite proppant storage and management solutions through our SmartSystems products and services. Our SmartSystems provide our customers with the capability to unload, store and deliver proppant at the wellsite, as well as the ability to rapidly set up, takedown and transport the entire system. This capability creates efficiencies, flexibility, enhanced safety and reliability for customers. Through our SmartSystems wellsite proppant storage solutions, we offer the SmartDepot and SmartDepotXL™ silo systems, SmartPath transloader, and our rapid deployment trailers. Our SmartDepot silos include passive and active dust suppression technology, along with the capability of a gravity-fed operation. Our self-contained SmartPath transloader is a mobile sand transloading system designed to work with bottom dump trailers and features a drive over conveyor, surge bin, and dust collection system, and we believe the system has the ability to keep up with any hydraulic fracturing operation. Our rapid deployment trailers are designed for quick setup, takedown and transportation of the entire SmartSystem, and detach from the wellsite equipment, which allows for removal from the wellsite during operation. We have also developed a proprietary software program, the SmartSystem Tracker™, which allows our SmartSystems customers to monitor silo-specific information, including location, proppant type and proppant inventory.
Business Combination
On September 18, 2020, we acquired Eagle Oil and Gas Proppants Holdings LLC (“Eagle Proppants Holdings”), for aggregate consideration of approximately $2.1 million. The estimated aggregate fair value of the net assets acquired was $41.7 million, which exceeded the total consideration and resulted in a bargain purchase gain of $39.6 million on the acquisition date.
The Utica, Illinois mining and processing assets were idle at the date of acquisition; we started mining and selling sand out of this location in the fourth quarter of 2020.
Market Trends
Our historical results of operations and cash flows are not indicative of results of operations and cash flows to be expected in the future.
In recent years, the increasing supply of sand, particularly in-basin sand, relative to demand, has led to a continued depression of frac sand prices. During most of 2020, demand for frac sand declined significantly as a result of decreased demand for oil 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 the nine months ended September 2021 as the global distribution of COVID-19 vaccines ramped up and travel restrictions lessened. We have seen an increase in the volume of sand sold since the global economy began reopening, however the prices of frac sand have continued to be depressed due to overbuilt capacity and we cannot predict when frac sand prices will increase or stabilize.
Northern White frac sand, which is found predominantly in Wisconsin and limited portions of Minnesota, Illinois, and Missouri, is considered a premium proppant due to its favorable physical characteristics. While we anticipate that regional sand will continue to affect the demand for Northern White sand in some of the oil and natural gas producing basins in which we operate, we believe there will continue to be demand for our high-quality Northern White frac sand. In particular, we believe
22

SMART SAND, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)
that Northern White frac sand has logistical advantages in the Marcellus, Bakken, and western basins of Colorado and Wyoming. We expect demand for our frac sand to continue to be supported by customers who are focused on long-term well performance and ultimate recovery of reserves from the oil and natural gas wells they are completing as well as those interested in the efficiency of their logistics supply chain and delivery of sand to the wellsite. Additionally, we believe market trends continue to support increased proppant usage per well drilled due to operator focus on well efficiencies through increasing lengths of drilling laterals, use of simul-fracking techniques and other well enhancement strategies. Finally, we believe that the adoption of our SmartSystems in the marketplace, which has a smaller footprint on customer sites than other solutions, will allow us to sell more sand when packaged with our last mile solutions.
23

SMART SAND, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)
GAAP Results of Operations
Three Months Ended September 30, 2021 Compared to Three Months Ended September 30, 2020
The following table summarizes our revenue and expenses for the periods indicated.

| Three Months Ended September 30, |  | Change
| 2021 |  | 2020 |  | Dollars |  | Percentage
Revenues: |  |  |  |  |  |  |
Sand sales revenue | $ | 31,343 |  |  | $ | 12,445 |  |  | $ | 18,898 |  |  | 152 | %
Shortfall revenue | 2,680 |  |  | 6,842 |  |  | (4,162) |  |  | (61) | %
Logistics revenue | 456 |  |  | 4,122 |  |  | (3,666) |  |  | (89) | %
Total revenue | 34,479 |  |  | 23,409 |  |  | 11,070 |  |  | 47 | %
Cost of goods sold | 36,526 |  |  | 18,227 |  |  | 18,299 |  |  | 100 | %
Gross profit | (2,047) |  |  | 5,182 |  |  | (7,229) |  |  | (140) | %
Operating expenses: |  |  |  |  |  |  |
Salaries, benefits and payroll taxes | 2,490 |  |  | 2,058 |  |  | 432 |  |  | 21 | %
Depreciation and amortization | 352 |  |  | 440 |  |  | (88) |  |  | (20) | %
Selling, general and administrative | 3,867 |  |  | 3,933 |  |  | (66) |  |  | (2) | %
Total operating expenses | 6,709 |  |  | 6,431 |  |  | 278 |  |  | 4 | %
Operating (loss) income | (8,756) |  |  | (1,249) |  |  | (7,507) |  |  | 601 | %
Other income (expenses): |  |  |  |  |  |  |
Gain on bargain purchase | — |  |  | 39,889 |  |  | (39,889) |  |  | Not meaningful
Interest expense, net | (467) |  |  | (497) |  |  | 30 |  |  | (6) | %
Other income | 1,792 |  |  | 80 |  |  | 1,712 |  |  | 2,140 | %
Total other (expenses) income, net | 1,325 |  |  | 39,472 |  |  | (38,147) |  |  | (97) | %
(Loss) income before income tax (benefit) expense | (7,431) |  |  | 38,223 |  |  | (45,654) |  |  | (119) | %
Income tax (benefit) expense | (169) |  |  | 1,941 |  |  | (2,110) |  |  | (109) | %
Net (loss) income | $ | (7,262) |  |  | $ | 36,282 |  |  | $ | (43,544) |  |  | (120) | %

Revenues
Revenues were $34.5 million for the three months ended September 30, 2021, during which time we sold approximately 790,000 tons of sand. Revenues for the three months ended September 30, 2020 were $23.4 million, during which time we sold approximately 309,000 tons of sand. The key factors contributing to the increase in revenues for the three months ended September 30, 2021 as compared to the three months ended September 30, 2020 were as follows:
•Sand sales revenue increased from $12.4 million for the three months ended September 30, 2020 to $31.3 million for the three months ended September 30, 2021 as a result of higher total volumes sold. The volumes sold during the third quarter of 2020 were negatively impacted by depressed oil prices driven by oversupply relative to the decreased demand due to the COVID-19 coronavirus pandemic.
•We had $2.7 million contractual shortfall revenue for the three months ended September 30, 2021 compared to $6.8 million of contractual shortfall revenue for the three months ended September 30, 2020. Our customer contracts
24

SMART SAND, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)
dictate whether shortfall is earned quarterly or at the end of their respective contract year. We recognize revenue to the extent of the unfulfilled minimum contracted quantity at the shortfall price per ton as stated in the contract.
•Logistics revenue, which includes freight for certain mine gate sand sales, railcar usage, logistics services, and SmartSystems rentals, was approximately $0.5 million for the three months ended September 30, 2021 compared to $4.1 million for the three months ended September 30, 2020. The decrease in logistics revenue was due to the shift from mine gate sales to in-basin sales, which include transportation and any other handling services.
Cost of Goods Sold
Cost of goods sold was $36.5 million and $18.2 million for the three months ended September 30, 2021 and 2020, respectively. The increase was primarily due to higher volumes sold and increased freight cost due to the shift of sales to more in-basin deliveries. In 2020, headcount reductions and other cost savings measures were implemented as a result of the onset of COVID-19. Headcount has since increased to support the increased sales activity, though we remain focused on other cost-saving measures.
Gross Profit
Gross profit was $(2.0) million for the three months ended September 30, 2021, compared to $5.2 million for the three months ended September 30, 2020. The decline in profitability for the three months ended September 30, 2021 as compared to the three months ended September 30, 2020 was primarily due to decreased shortfall revenue and lower average sales price relative to our cost to produce and deliver sand to our customers.
Operating Expenses
Operating expenses were $6.7 million for the three months ended September 30, 2021 as compared to $6.4 million for the three months ended September 30, 2020. Salaries, benefits and payroll taxes were $2.5 million for the three months ended September 30, 2021 as compared to $2.1 million for the three months ended September 30, 2020. Depreciation and amortization was also relatively consistent at $0.4 million for the three months ended September 30, 2021 and 2020. Selling, general and administrative expenses remained consistent at $3.9 million for the three months ended September 30, 2020 and $3.9 million for the three months ended September 30, 2021.
Other Income
We qualified for federal government assistance through employee retention credit provisions of the Consolidated Appropriations Act of 2021. During the three months ended September 30, 2021, the Company recorded $1.7 million of employee retention credits. The calculation of the credit is based on employees continued employment and represents a portion of the wages paid to them. For income tax purposes, the credit will result in decreased expense related to the wages it offsets in the period received. There was a change in existing legislation and we do not expect to continue to qualify for the employee retention credit in the fourth quarter of 2021.
Interest Expense
We incurred $0.5 million of net interest expense for each of the three months ended September 30, 2021 and 2020, respectively. We continue to reduce debt levels and decrease interest expense through scheduled amortizing payments.
Income Tax Expense
For the three months ended September 30, 2021 and 2020, our effective tax rate was approximately 2.3% and 5.1%, 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, 2021, we have recorded $2.2 million of 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, 2021, we have determined it is more likely than not that it will not be able to fully realize the benefits of certain existing deductible temporary differences and have recorded a valuation allowance against the deferred tax liabilities, long-term, net on our balance sheet in
25

SMART SAND, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)
the amount of $1.3 million, and a corresponding increase to the income tax expense on our condensed consolidated income statements.
Net (Loss) Income
Net loss was $(7.3) million for the three months ended September 30, 2021 as compared to net income of $36.3 million for the three months ended September 30, 2020. The net loss for the three months ended September 30, 2021 is primarily attributable to continued low average selling prices relative to our cost to produce and deliver products to our customers. Net income for the three months ended September 30, 2020 was primarily due to the gain on bargain purchase related to our acquisition of Eagle Proppants Holdings.
Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020
The following table summarizes our revenue and expenses for the periods indicated.

| Nine Months Ended September 30, |  | Change
| 2021 |  | 2020 |  | Dollars |  | Percentage
| (in thousands) |  |  |  |
Revenues: |  |  |  |  |  |  |
Sand sales revenue | $ | 83,291 |  |  | $ | 50,809 |  |  | 32,482 |  |  | 64 | %
Shortfall revenue | 4,421 |  |  | 22,148 |  |  | (17,727) |  |  | (80) | %
Logistics revenue | 3,856 |  |  | 24,046 |  |  | (20,190) |  |  | (84) | %
Total revenue | 91,568 |  |  | 97,003 |  |  | (5,435) |  |  | (6) | %
Cost of goods sold | 100,952 |  |  | 71,221 |  |  | 29,731 |  |  | 42 | %
Gross profit | (9,384) |  |  | 25,782 |  |  | (35,166) |  |  | (136) | %
Operating expenses: |  |  |  |  |  |  |
Salaries, benefits and payroll taxes | 7,150 |  |  | 7,115 |  |  | 35 |  |  | — | %
Depreciation and amortization | 1,490 |  |  | 1,354 |  |  | 136 |  |  | 10 | %
Selling, general and administrative | 10,876 |  |  | 10,393 |  |  | 483 |  |  | 5 | %
Bad debt expense | 19,592 |  |  | — |  |  | 19,592 |  |  | Not meaningful
Change in the estimated fair value of contingent consideration | — |  |  | (1,020) |  |  | 1,020 |  |  | (100) | %
Total operating expenses | 39,108 |  |  | 17,842 |  |  | 21,266 |  |  | 119 | %
Operating (loss) income | (48,492) |  |  | 7,940 |  |  | (56,432) |  |  | (711) | %
Other income (expenses): |  |  |  |  |  |  |
Gain on bargain purchase | — |  |  | 39,889 |  |  | (39,889) |  |  | Not meaningful
Interest expense, net | (1,527) |  |  | (1,576) |  |  | 49 |  |  | (3) | %
Other income | 5,457 |  |  | 162 |  |  | 5,295 |  |  | 3,269 | %
Total other (expenses) income, net | 3,930 |  |  | 38,475 |  |  | (34,545) |  |  | (90) | %
(Loss) income before income tax (benefit) expense | (44,562) |  |  | 46,415 |  |  | (90,977) |  |  | (196) | %
Income tax (benefit) expense | (6,121) |  |  | 5,576 |  |  | (11,697) |  |  | (210) | %
Net (loss) income | $ | (38,441) |  |  | $ | 40,839 |  |  | $ | (79,280) |  |  | (194) | %

Revenues
Revenues were $91.6 million for the nine months ended September 30, 2021, during which time we sold approximately 2,317,000 tons of sand. Revenues for the nine months ended September 30, 2020 were $97.0 million, during which time we sold approximately 1,273,000 tons of sand. The key factors contributing to the decrease in revenues for the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020 were as follows:
26

SMART SAND, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)
•Sand sales revenue increased from $50.8 million for the nine months ended September 30, 2020 to $83.3 million for the nine months ended September 30, 2021 as a result of higher total volumes sold, partially offset by lower prices compared to the prior period. The volumes sold during the third quarter of 2020 were negatively impacted by depressed oil prices driven by the oversupply caused by decreased demand due to the COVID-19 pandemic.
•We had $4.4 million of contractual shortfall revenue for the nine months ended September 30, 2021 compared to $22.1 million of contractual shortfall revenue for the nine months ended September 30, 2020. Our customer contracts dictate whether shortfall is earned quarterly or at the end of their respective contract year. We recognize revenue to the extent of the unfulfilled minimum contracted quantity at the shortfall price per ton as stated in the contract.
•Logistics revenue, which includes freight for certain mine gate sand sales, railcar usage, logistics services, and SmartSystems rentals, was approximately $3.9 million for the nine months ended September 30, 2021 compared to $24.0 million for the nine months ended September 30, 2020. The decrease in logistics revenue was due to the shift from mine gate sales to in-basin sales, which include transportation and any other handling services.
Cost of Goods Sold
Cost of goods sold was $101.0 million and $71.2 million for the nine months ended September 30, 2021 and September 30, 2020, respectively. The increase was primarily due to higher volumes sold and increased freight cost due to the shift of sales to more in-basin deliveries. During 2020, headcount reductions and other cost savings measures were implemented as a result of the onset of COVID-19. Headcount has increased in the first nine months of 2021 to support increased sales activity, though we remain focused on other cost-saving measures.
Gross Profit
Gross profit was $(9.4) million and $25.8 million for the nine months ended September 30, 2021 and September 30, 2020, respectively. The decline in profitability for the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020 was primarily due to decreased shortfall revenue and low average sales price of our sand relative to the cost to produce and deliver products to our customers.
Operating Expenses
Operating expenses were $39.1 million and $17.8 million for the nine months ended September 30, 2021 and September 30, 2020, respectively. We recorded $19.6 million as non-cash bad debt expense, which is the difference between the $54.6 million accounts receivable balance that was subject to litigation and the $35.0 million cash payment received under the Settlement Agreement. Salaries, benefits and payroll taxes increased to $7.2 million for the three months ended September 30, 2021 as compared to $7.1 million for the nine months ended September 30, 2020. Depreciation and amortization increased slightly from $1.4 million for the nine months ended September 30, 2020 to $1.5 million for the nine months ended September 30, 2021. Selling, general and administrative expenses were $10.9 million for the nine months ended September 30, 2021 compared to $10.4 million for the nine months ended September 30, 2020. The nine months ended September 30, 2020 included a $1.0 million gain on contingent consideration.
Other Income
We qualified for federal government assistance through employee retention credit provisions of the Consolidated Appropriations Act of 2021. During the nine months ended September 30, 2021, the Company recorded $5.0 million of employee retention credits. The calculation of the credit is based on employees’ continued employment and represents a portion of the wages paid to them. For income tax purposes, the credit will result in decreased expense related to the wages it offsets in the period received. Unless there is a change in existing legislation, we expect to continue to qualify for the employee retention credit for approximately $1.7 million for the fourth quarter of 2021.
Interest Expense
We incurred $1.5 million and $1.6 million of net interest expense for the nine months ended September 30, 2021 and September 30, 2020, respectively. We continue to reduce debt levels and decrease interest expense through scheduled amortizing payments.
27

SMART SAND, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)
Income Tax (Benefit) Expense
For the nine months ended September 30, 2021 and September 30, 2020, our effective tax rate was approximately 13.7% and 12.0%, 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, 2021, we have recorded $2.2 million of 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, 2021, we determined it is more likely than not that it will not be able to fully realize the benefits of certain existing deductible temporary differences and have recorded a valuation allowance against the deferred tax liabilities, long-term, net on our balance sheet in the amount of $1.3 million, and a corresponding increase to the income tax expense on our condensed consolidated income statements.
Net (Loss) Income
Net loss was $(38.4) million for the nine months ended September 30, 2021 as compared to the net income of $40.8 million for the nine months ended September 30, 2020. The difference was primarily due to non-cash bad debt expense recorded against the residual balance of accounts receivable that were previously the subject of litigation recorded in 2021 combined with lower average sale prices per ton of our sand, substantially lower shortfall revenue in the current period, and the gain on bargain purchase related to our acquisition of Eagle Proppants Holdings in September 2020.
Non-GAAP Financial Measures
Contribution margin, EBITDA, Adjusted EBITDA and free cash flow are not financial measures presented in accordance with GAAP. We believe that the presentation of these non-GAAP financial measures will provide useful information to investors in assessing our financial condition and results of operations. Gross profit is the GAAP measure most directly comparable to contribution margin, net income is the GAAP measure most directly comparable to EBITDA and Adjusted EBITDA and net cash provided by operating activities is the GAAP measure most directly comparable to free cash flow. Our non-GAAP financial measures should not be considered as alternatives to the most directly comparable GAAP financial measures. Each of these non-GAAP financial measures has important limitations as analytical tools because they exclude some but not all items that affect the most directly comparable GAAP financial measures. You should not consider contribution margin, EBITDA, Adjusted EBITDA or free cash flow in isolation or as substitutes for an analysis of our results as reported under GAAP. Because contribution margin, EBITDA, Adjusted EBITDA and free cash flow may be defined differently by other companies in our industry, our definitions of these non-GAAP financial measures may not be comparable to similarly titled measures of other companies, thereby diminishing their utility.
Contribution Margin
We use contribution margin, which we define as total revenues less 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
28

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

| Three Months Ended September 30, |  | Nine Months Ended September 30,
| 2021 |  | 2020 |  | 2021 |  | 2020
| (in thousands, except per ton amounts)
Revenue | $ | 34,479 |  |  | $ | 23,409 |  |  | $ | 91,568 |  |  | $ | 97,003 |
Cost of goods sold | 36,526 |  |  | 18,227 |  |  | 100,952 |  |  | 71,221 |
Gross profit | (2,047) |  |  | 5,182 |  |  | (9,384) |  |  | 25,782 |
Depreciation, depletion, and accretion of asset retirement obligations | 6,145 |  |  | 5,177 |  |  | 18,009 |  |  | 15,351 |
Contribution margin | $ | 4,098 |  |  | $ | 10,359 |  |  | $ | 8,625 |  |  | $ | 41,133 |
Contribution margin per ton | $ | 5.19 |  |  | $ | 33.52 |  |  | $ | 3.72 |  |  | $ | 32.31 |
Total tons sold | 790 |  |  | 309 |  |  | 2,317 |  |  | 1,273 |

Contribution margin was $4.1 million and $10.4 million, or $5.19 and $33.52 per ton sold, for the three months ended September 30, 2021 and 2020, respectively. The decrease in contribution margin and contribution margin per ton was due primarily to $4.2 million higher shortfall revenue in the prior period and low average sale price relative to our cost to produce and deliver sand to our customers in the current period.
Contribution margin was $8.6 million and $41.1 million, or $3.72 and $32.31 per ton sold, for the nine months ended September 30, 2021 and 2020, respectively. The decrease in overall contribution margin and contribution margin per ton was due primarily to $17.7 million higher shortfall revenue in the prior period and low average sale price relative to our cost to produce and deliver sand to our customers in the current period.
EBITDA and Adjusted EBITDA
We define EBITDA as net income, plus: (i) depreciation, depletion and amortization expense; (ii) income tax expense (benefit); (iii) interest expense; and (iv) franchise taxes. We define Adjusted EBITDA as EBITDA, plus: (i) gain or loss on sale of fixed assets or discontinued operations; (ii) integration and transition costs associated with specified transactions; (iii) equity compensation; (iv) acquisition and development costs; (v) non-recurring cash charges related to restructuring, retention and other similar actions; (vi) earn-out, contingent consideration obligations and other acquisition and development costs; and (vii) non-cash charges and unusual or non-recurring charges. Adjusted EBITDA is used as a supplemental financial measure by management and by external users of our financial statements, such as investors and commercial banks, to assess:
•the financial performance of our assets without regard to the impact of financing methods, capital structure or historical cost basis of our assets;
•the viability of capital expenditure projects and the overall rates of return on alternative investment opportunities;
•our ability to incur and service debt and fund capital expenditures;
•our operating performance as compared to those of other companies in our industry without regard to the impact of financing methods or capital structure; and
•our debt covenant compliance, as Adjusted EBITDA is a key component of critical covenants to the ABL Credit Facility.
29

SMART SAND, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)
We believe that our presentation of EBITDA and Adjusted EBITDA will provide useful information to investors in assessing our financial condition and results of operations. Net income is the GAAP measure most directly comparable to EBITDA and Adjusted EBITDA. EBITDA and Adjusted EBITDA should not be considered alternatives to net income presented in accordance with GAAP. Because EBITDA and Adjusted EBITDA may be defined differently by other companies in our industry, our definitions of EBITDA and Adjusted EBITDA may not be comparable to similarly titled measures of other companies, thereby diminishing their utility. The following table presents a reconciliation of EBITDA and Adjusted EBITDA to net income for each of the periods indicated.

| Three Months Ended September 30, |  | Nine Months Ended September 30,
| 2021 |  | 2020 |  | 2021 |  | 2020
| (in thousands)
Net (loss) income | $ | (7,262) |  |  | $ | 36,282 |  |  | $ | (38,441) |  |  | $ | 40,839 |
Depreciation, depletion and amortization | 6,165 |  |  | 5,529 |  |  | 18,941 |  |  | 16,466 |
Income tax (benefit) expense | (169) |  |  | 1,941 |  |  | (6,121) |  |  | 5,576 |
Interest expense | 484 |  |  | 506 |  |  | 1,554 |  |  | 1,605 |
Franchise taxes | 42 |  |  | 63 |  |  | 237 |  |  | 212 |
EBITDA | $ | (740) |  |  | $ | 44,321 |  |  | $ | (23,830) |  |  | $ | 64,698 |
Loss on sale of fixed assets | 281 |  |  | (27) |  |  | 223 |  |  | 248 |
Equity compensation (1) | 784 |  |  | 832 |  |  | 2,050 |  |  | 2,600 |
Employee retention credit (2) | (1,674) |  |  | — |  |  | (5,026) |  |  | — |
Acquisition and development costs (3) | — |  |  | 823 |  |  | 17 |  |  | 145 |
Gain on bargain purchase | — |  |  | (39,889) |  |  | — |  |  | (39,889) |
Cash charges related to restructuring and retention of employees | 8 |  |  | — |  |  | 9 |  |  | 82 |
Accretion of asset retirement obligations | 332 |  |  | 88 |  |  | 558 |  |  | 239 |
Adjusted EBITDA | $ | (1,009) |  |  | $ | 6,148 |  |  | $ | (25,999) |  |  | $ | 28,123 |

(1)Represents the non-cash expenses for stock-based awards issued to our employees and employee stock purchase plan compensation expense.
(2)Employee retention credit is part of the Consolidated Appropriations Act of 2021 and is recorded in other income on the income statements for the three and nine months ended September 30, 2021.
(3)The three and nine months ended September 30, 2020 include acquisition cost of $817 and $875, respectively. The nine months ended September 2020 was offset by $1,020 fair value adjustment of contingent consideration.
____________________
Adjusted EBITDA was $(1.0) million for the three months ended September 30, 2021 compared to $6.1 million for the three months ended September 30, 2020. The decrease in Adjusted EBITDA was primarily due to $4.2 million less shortfall revenue in the current period and low average sale prices of our sand relative to the cost to produce and deliver it despite having higher overall volumes in the current period.
Adjusted EBITDA was $(26.0) million for the nine months ended September 30, 2021 compared to $28.1 million for the nine months ended September 30, 2020. The decrease in Adjusted EBITDA was primarily due to $19.6 million of non-cash bad debt expense in the current period related to collecting less than the amount recorded as a receivable from the settlement of litigation, $17.7 million less shortfall revenue in the current period and lower average sale prices of our sand relative to the cost to produce and deliver products to our customers despite having higher overall volumes in the current period.
Free Cash Flow
Free cash flow, which we define as net cash provided by operating activities less purchases of property, plant and equipment, is used as a supplemental financial measure by our management and by external users of our financial statements, such as investors and commercial banks, to measure the liquidity of our business.
30

SMART SAND, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)
Net cash provided by operating activities is the GAAP measure most directly comparable to free cash flows. Free cash flows should not be considered an alternative to net cash provided by operating activities presented in accordance with GAAP. Because free cash flows may be defined differently by other companies in our industry, our definition of free cash flows may not be comparable to similarly titled measures of other companies, thereby diminishing its utility. The following table presents a reconciliation of free cash flows to net cash provided by operating activities.

| Three Months Ended September 30, |  | Nine Months Ended September 30,
| 2021 |  | 2020 |  | 2021 |  | 2020
| (in thousands, except per ton amounts)
Net cash provided by operating activities | $ | 1,064 |  |  | $ | (3,618) |  |  | $ | 37,544 |  |  | $ | 22,224 |
Purchases of property, plant and equipment | (1,933) |  |  | (1,021) |  |  | (6,976) |  |  | (7,393) |
Free cash flow | $ | (869) |  |  | $ | (4,639) |  |  | $ | 30,568 |  |  | $ | 14,831 |

Free cash flow was $(0.9) million for the three months ended September 30, 2021 compared to $(4.6) million for the three months ended September 30, 2020. The increase in free cash flow was primarily attributable to cash collections from higher sand volumes sold to customers, offset by lower average sale prices of our sand recognized in the three months ended September 30, 2021 compared to the three months ended September 30, 2020.
Free cash flow was $30.6 million for the nine months ended September 30, 2021 compared to $14.8 million for the nine months ended September 30, 2020. The increase in free cash flow was primarily attributable to cash collections from higher sand volumes sold to customers, including the $35.0 million cash payment received under the Settlement Agreement, offset by lower average sale prices of our sand recognized in the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020. Capital expenditures for the nine months ended September 30, 2021, compared to the same period in 2020, were lower as we continue to focus on maintaining positive cash flow.
Liquidity and Capital Resources
Our primary sources of liquidity are cash flow generated from operations and availability under our ABL Credit Facility and other equipment financing sources. As of September 30, 2021, cash on hand was $36.7 million and we had $16.5 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, including continued investment in our SmartSystems wellsite proppant storage solutions, completion of our new Waynesburg terminal to service the Marcellus and other capital projects.
Working Capital
Working capital is a measure of our ability to pay our liabilities as they become due. The following table presents the components of our working capital as of September 30, 2021 compared to December 31, 2020.

| September 30, 2021 |  | December 31, 2020
| (in thousands)
Total current assets | $ | 82,666 |  |  | $ | 112,086 |
Total current liabilities | 39,989 |  |  | 37,263 |
Working capital | $ | 42,677 |  |  | $ | 74,823 |

31

SMART SAND, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)
Our working capital was $42.7 million at September 30, 2021 compared to $74.8 million at December 31, 2020. The decrease in working capital was primarily due to the removal of $19.6 million of accounts receivable to non-cash bad debt expense, related to collecting less than the amount recorded as a receivable from the settlement of litigation, reduced inventory levels related to the increased sales volume activity in 2021 and a decline in profitability as frac sand prices continue to be depressed as a result of oversupply. As of December 31, 2020, $54.6 million of accounts receivable was attributable to U.S. Well and subject to ongoing litigation. The Company settled the litigation for a $35.0 million cash payment, which was collected during the second quarter of 2021.
Summary Cash Flows for the Nine Months Ended September 30, 2021 and September 30, 2020:

| Nine Months Ended September 30,
| 2021 |  | 2020
| (in thousands)
Net cash provided by operating activities | 37,544 |  |  | 22,224 |
Net cash used in investing activities | (6,898) |  |  | (7,393) |
Net cash used in financing activities | (5,692) |  |  | (6,476) |

Net Cash Provided by Operating Activities
Net cash provided by operating activities was $37.5 million for the nine months ended September 30, 2021, which included net loss of $(38.4) million, net non-cash items of $34.2 million, the $35.0 million cash payment received under the Settlement Agreement, and a decrease of $6.8 million in other operating assets and liabilities.
Net cash provided by operating activities was $22.2 million for the nine months ended September 30, 2020, which included net income of $40.8 million, non-cash expenses of $(20.2) million, and $1.6 million in changes in operating assets and liabilities.
Net Cash Used in Investing Activities
Net cash used in investing activities was $6.9 million for the nine months ended September 30, 2021, which was primarily for manufacturing of our SmartSystems equipment.
Net cash used in investing activities was $7.4 million for the nine months ended September 30, 2020, which was primarily for manufacturing of our SmartSystems equipment.
Net Cash Used in Financing Activities
Net cash used in financing activities was $5.7 million for the nine months ended September 30, 2021, which consisted primarily of $5.3 million of net repayment for notes payable and finance leases, $0.3 million of share repurchases, and $0.2 million of payments of contingent consideration related to the manufacture of our SmartSystems equipment.
Net cash used in financing activities was $6.5 million for the nine months ended September 30, 2020, which consisted primarily of $2.5 million of net repayments on our ABL Credit Facility, $2.7 million of net repayment for notes payable and finance leases, $1.0 million of share repurchases, and $0.3 million of payments of contingent consideration related to the manufacture of our SmartSystems equipment.
32

SMART SAND, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)
Indebtedness
The follow summarizes the maturity of our debt:

| ABL Credit Facility |  | Oakdale Equipment Financing |  | Notes Payable |  | Finance Leases |  | Total
| (in thousands)
Remainder of 2021 | $ | — |  |  | $ | 1,160 |  |  | $ | 1,056 |  |  | $ | 38 |  |  | $ | 2,254 |
2022 | — |  |  | 4,638 |  |  | 3,387 |  |  | 137 |  |  | $ | 8,162 |
2023 | — |  |  | 4,638 |  |  | 2,371 |  |  | 245 |  |  | $ | 7,254 |
2024 | — |  |  | 6,888 |  |  | 807 |  |  | — |  |  | $ | 7,695 |
2025 | — |  |  | 1,724 |  |  | 187 |  |  | — |  |  | $ | 1,911 |
2026 and thereafter | — |  |  | — |  |  | 355 |  |  | — |  |  | 355 |
Total minimum payments | — |  |  | 19,048 |  |  | 8,163 |  |  | 420 |  |  | 27,631 |

ABL Credit Facility
In December 2019, we entered into a $20.0 million five-year senior secured asset-based credit facility with Jefferies Finance LLC. The available borrowing amount under the ABL Credit Facility as of September 30, 2021 was $17.8 million and is based on our eligible accounts receivable and inventory. As of September 30, 2021, the Company was in compliance with all covenants under the ABL Credit Facility and there were no amounts outstanding under the ABL Credit Facility, $1.2 million letters of credit and $16.5 million was available to be drawn. There were no borrowings during the three and nine months ended September 30, 2021.
Oakdale Equipment Financing
In December 2019, we entered into a $23.0 million equipment financing arrangement with Nexseer, secured by substantially all of the assets at our Oakdale facility. The Oakdale Equipment Financing amortizes over 5 years and bears interest at 5.79%.
Notes Payable
We have entered into various financing arrangements secured primarily by our manufactured SmartSystems equipment. Title to the equipment is held by the financial institutions as collateral, though the equipment is included in the Company’s property, plant and equipment. In June 2020, we executed a note payable to defer certain near-term minimum royalty payments. All notes payable bear interest at rates between 4.00% and 7.49%.
Capital Requirements
We expect full year 2021 capital expenditures to be between $14 million and $16 million, which we anticipate will primarily support incremental growth in our SmartSystems products and services, the completion of our new Waynesburg terminal to service the Appalachian Basin and maintenance and efficiency improvements at our mining facilities. These expenditures exclude any potential acquisitions. We expect to fund these capital expenditures with cash from operations, equipment financing options available to us or borrowings under the ABL Credit Facility. For the nine months ended September 30, 2021, we spent approximately $7.0 million on capital expenditures.
Off-Balance Sheet Arrangements
We had outstanding performance bonds of $9.5 million and $10.0 million at September 30, 2021 and December 31, 2020, respectively.
33

SMART SAND, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)
Contractual Obligations
As of September 30, 2021, 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 to primarily non-winter months. As a consequence, we have experienced lower cash operating costs in the first and fourth quarter of each calendar year, and higher cash operating costs in the second and third quarter of each calendar year when we overproduced to meet demand in the winter months. These higher cash operating costs were capitalized into inventory and expensed when these tons are sold, which can lead to us having higher overall cost of production in the first and fourth quarters of each calendar year as we expense inventory costs that were previously capitalized. We have indoor wet processing facilities at each of our plant locations, which allow us to produce wet sand inventory year-round to support a portion of our dry sand processing capacity, which may reduce certain of the effects of this seasonality. We may also sell frac sand for use in oil and natural gas producing basins where severe weather conditions may curtail drilling activities and, as a result, our sales volumes to those areas may be reduced during such severe weather periods.
Customer Concentration
For the nine months ended September 30, 2021, revenue from EQT Corporation, Halliburton Energy Services, Liberty, and Enerplus accounted for 26.1%, 18.2%, 13.0%, and 10.6%, respectively, of total revenue. For the nine months ended September 30, 2020, revenue from Rice Energy (a subsidiary of EQT Corporation), Liberty, and U.S. Well Services accounted for 29.4%, 20.5%, and 18.9%, 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, 2021.
Use of Estimates
The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Significant estimates used in the preparation of these financial statements include, but are not limited to: existing sand reserves and their impact on calculating the depletion expense under the units-of-production method; depreciation and amortization associated with property, plant and equipment and definite-lived intangible assets; impairment considerations of assets (including impairment of identified intangible assets and other long-lived assets); estimated cost of future asset retirement obligations; fair values of acquired assets and assumed
34

SMART SAND, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)
liabilities; stock-based compensation; recoverability of deferred tax assets; inventory reserve; collectability of receivables; and certain liabilities.
Actual results could differ from management’s best estimates as additional information or actual results become available in the future, and those differences could be material. The COVID-19 pandemic caused a significant amount of volatility in the oilfield services sector during 2020 and frac sand prices in particular have remained depressed, despite recent increases in oil prices. We continue to actively monitor the global impact of current events, but we are currently unable to estimate the impact of these events on our future financial position and results of operations.
35

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have considered changes in our exposure to market risks during the nine months ended September 30, 2021 and have determined that there have been no material changes to our exposure to market risks from those described in our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on March 3, 2021.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Report. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of such date, our disclosure controls and procedures were effective.
Changes in Internal Control Over Financial Reporting
There have been no changes in internal control over financial reporting for the quarter ended September 30, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
36

PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time we may be involved in litigation relating to claims arising out of our operations in the normal course of business. The disclosure called for by Part II, Item 1 regarding our legal proceedings is incorporated by reference herein from Part I, Item 1. Note 15 - Commitments and Contingencies - Litigation of the notes to the condensed consolidated financial statements in this Form 10-Q for the three and nine months ended September 30, 2021.
ITEM 1A. RISK FACTORS
There have been no material changes to the risk factors described in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2020.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the three months ended September 30, 2021, no shares were sold by the Company without registration under the Securities Act of 1933, as amended.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
We are committed to maintaining a culture that prioritizes mine safety. We believe that our commitment to safety, the environment and the communities in which we operate is critical to the success of our business. Our sand mining operations are subject to mining safety regulation. The U.S. Mining Safety and Health Administration (“MSHA”) is the primary regulatory organization governing frac sand mining and processing. Accordingly, MSHA regulates quarries, surface mines, underground mines and the industrial mineral processing facilities associated with and located at quarries and mines. The mission of MSHA is to administer the provisions of the Federal Mine Safety and Health Act of 1977 and to enforce compliance with mandatory miner safety and health standards. As part of MSHA’s oversight, representatives perform at least two unannounced inspections annually for each above-ground facility.
We are also subject to regulations by the U.S. Occupational Safety and Health Administration, 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.
37

ITEM 5. OTHER INFORMATION
The information set forth below is included herewith for the purpose of providing the disclosure required under “Item 1.01 Entry into a Material Definitive Agreement” and “Item 9.01 Financial Statements and Exhibits” of Form 8-K.
On November 9, 2021, the Company entered into an Open Market Sale Agreement (the “Sale Agreement”) with Clearlake Capital Partners II (Master), L.P. (the “Selling Stockholder”) and Jefferies LLC (the “Sales Agent”). Pursuant to the terms of the Sale Agreement, (i) the Company may sell, from time to time, shares of its common stock having an aggregate value of up to $25,000,000 and (ii) the Selling Stockholder may sell, from time to time, up to 10,920,445 shares of the Company’s common stock. The sales, if any, of shares of common stock made under the Sale Agreement may be made in sales deemed to be “at-the-market” offerings as defined in Rule 415 under the Securities Act, including sales made directly on the Nasdaq Global Select Market, on any other existing trading market for the Company’s common stock, or to or through a market maker. Sales of shares of the Company’s common stock may also be made by any method permitted by law, including, but not limited to, in privately negotiated transactions. The Sales Agent will use its commercially reasonable efforts consistent with normal trading and sales practices to solicit offers to purchase shares of the Company’s common stock, on mutually agreed terms between the Sales Agent and the Company or the Selling Stockholder, as applicable.. The Company intends to use the net proceeds from the offering, after deducting the Sales Agent’s commissions and the Company’s offering expenses, for general corporate purposes, which may include repayment of indebtedness, financing of future acquisitions and capital expenditures and additions to working capital. The Company will not receive any proceeds from the sale of shares of the Company’s common stock, if any, by the Selling Stockholder, including pursuant to any forward sale agreement.
The Company and the Selling Stockholder, as applicable, will pay the Sales Agent a commission of three percent (3.0%) of the aggregate gross proceeds the Company or the Selling Stockholder, as applicable, receive from each sale of shares of the Company’s common stock, which may come in the form of a reduction to the amounts received by the Selling Stockholder in settlement of any forward sale agreement. In addition, the Company has agreed to reimburse Jefferies for certain fees and disbursements of its counsel in an amount not to exceed $75,000 in connection with entry into the sales agreement, in addition to certain ongoing disbursements of its legal counsel. The Company and the Selling Stockholder have no obligation to sell any shares under the Sale Agreement, and may at any time suspend the offering of shares under the Sale Agreement.
We have been advised that the Selling Stockholder may enter into one or more forward sale agreements in respect of the sale of up to 10,920,445 shares of our common stock with the Sales Agent and/or one of its affiliates (which we refer to in such capacity as the forward counterparty). We have been advised that, in order to hedge its obligations under any forward sale agreement, if consummated, the forward counterparty may borrow shares of our common stock from the Selling Stockholder or from unrelated stock lenders, and the forward counterparty or its affiliates will sell those shares short (i) in privately negotiated transactions, (ii) as block transactions or (ii) by any other method permitted by law deemed to be an “at the market offering” as defined in Rule 415(a)(4) under the Securities Act, including sales made directly on the Nasdaq Global Select Market or sales made into any other existing trading market of the Company’s common stock.
The Sale Agreement contains customary representations and warranties of the parties and indemnification and contribution provisions under which the Company, the Selling Stockholder and the Sales Agent have agreed to indemnify each other against certain liabilities, including liabilities under the Securities Act.
The Shares will be offered and sold pursuant to a shelf registration statement on Form S-3 (File No. 333-251915), which was filed with the SEC on January 6, 2021 and was deemed effective on January 19, 2021.
The foregoing description of the Sale Agreement is not complete and is qualified in its entirety by reference to the full text of such agreement, a copy of which is filed herewith as Exhibit 10.1 to this Report and is incorporated herein by reference.
The legal opinion and consent of Latham & Watkins LLP relating to the Shares being offered is filed as Exhibit 5.1 and 23.1, respectively, to this Report .
38

ITEM 6. EXHIBITS

3.1 |  | Second Amended and Restated Certificate of Incorporation of Smart Sand, Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on November 15, 2016)
3.2 |  | Second Amended and Restated Bylaws of Smart Sand, Inc. (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed with the SEC on November 15, 2016)
5.1* |  | Opinion of Latham & Watkins LLP
10.1* |  | Open Market Sale Agreement, dated as of November 9, 2021, by and among Smart Sand, Inc., Clearlake Capital Partners II (Master), L.P. and Jefferies LLC
10.2 |  | Master Product Purchase Agreement, dated effective August 1, 2021, by and between Smart Sand, Inc. and EQT Production Company (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on August 4, 2021)
23.1* |  | Consent of Latham & Watkins LLP (included in Exhibit 5.1)
31.1* |  | Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2* |  | Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*† |  | Certification Pursuant to 18 U.S.C. adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2*† |  | Certification Pursuant to 18 U.S.C. adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
95.1* |  | Mine Safety Disclosure Exhibit
101.INS |  | Extracted XBRL Instance Document - the instance document does not appear in the Interactive Data File as XBRL tags are embedded in the Inline XBRL document.
101.SCH* |  | XBRL Taxonomy Extension Schema
101.CAL* |  | XBRL Taxonomy Extension Calculation Linkbase
101.DEF* |  | XBRL Taxonomy Extension Definition Linkbase
101.LAB* |  | XBRL Taxonomy Extension Label Linkbase
101.PRE* |  | XBRL Taxonomy Extension Presentation Linkbase
104* |  | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

* | Filed Herewith.
† | This certification is deemed not filed for purposes of section 18 of the 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.

39

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 9, 2021 | By: | /s/ Charles E. Young
|  | Charles E. Young, Chief Executive Officer
|  | (Principal Executive Officer)

| Smart Sand, Inc.
November 9, 2021 | By: | /s/ Lee E. Beckelman
|  | Lee E. Beckelman, Chief Financial Officer
|  | (Principal Financial Officer)

40