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| ☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
2019
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| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
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| Delaware | 45-2809926 | ||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) | ||||
24 Waterway Avenue, Suite 350
The Woodlands, Texas 77380
(Address of principal executive offices) (Zip Code)
Telephone: (281) 231-2660
(Registrant’s telephone number)
Securities registered pursuant to Section 12(b) of the Act:
| 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 | Name of each exchange on which registered | |||||||
Common Stock, par value | The NASDAQ Stock Market LLC | |||||||
Securities registered pursuant to Section 12(g) of the Act: None | ||||||||
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐
| Large accelerated filer ☐ |
Accelerated Filer ý |
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Non-accelerated filer ☐ |
| Smaller reporting company ☒ |
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The Company was not a public company as
February 19, 2020 was 42,847,996.
Part III of Form 10-K - Certain sections
•fluctuations in demand for •the cyclical nature of our •operating risks that are beyond our control, such as changes in the price and availability of transportation, natural gas or electricity; unusual or unexpected geological formations or pressures; pit wall failures or rock falls: or unanticipated ground, grade or water •our dependence on our Oakdale •the level of activity in the oil and natural gas industries; •federal, state and local legislative and regulatory initiatives relating to hydraulic fracturing and the potential for related regulatory action or litigation affecting our •our rights and ability to mine our properties and our renewal or receipt of the required permits and approvals from governmental authorities and other third parties; •our ability to successfully compete in •loss of, or reduction in, business from our largest customers; •increasing costs or a lack of dependability or availability of transportation services and transload network access or infrastructure; •increases in the prices of, or interruptions in the supply of, natural gas, •increases in the price of diesel fuel; •loss of or diminished access to water; •our ability to successfully complete acquisitions or integrate acquired •our ability to fully protect our intellectual property rights; •restrictions imposed by our indebtedness on our current and future •contractual obligations that require us to deliver minimum amounts of frac sand or purchase minimum amounts of products or services; •the accuracy of our estimates of mineral reserves and resource deposits; •a shortage of skilled labor and rising costs in the frac sand mining •our ability to attract and retain key personnel; •our ability to maintain effective quality control systems at our mining, processing and production facilities; •seasonal and severe weather conditions; •fluctuations in our sales and results of operations due to seasonality and other factors; •interruptions or failures in our information technology •the impact of a terrorist attack or armed conflict; •extensive and evolving environmental, mining, health and safety, licensing, reclamation and other regulation (and changes in their enforcement or interpretation); •silica-related health issues and corresponding •our ability to acquire, maintain or renew financial assurances related to the reclamation and restoration of mining property; and •other factors disclosed in Item I A. — BUSINESS wellsite. monitor silo-specific information, including location, proppant type, and proppant inventory. We are currently developing a new transload technology to complement our existing solutions. the spot market at market prices. through packaging it with our last mile solutions. •Long-lived, strategically located, high-quality reserve base. We believe our Oakdale facility is one of the few We believe our reserve base positions us well to take advantage of current market trends of increasing demand for finer mesh We also believe that having our mine, processing facilities and primary rail loading facilities at our Oakdale facility provides us with an overall low-cost structure, which enables us to compete effectively for sales of •Intrinsic logistics advantage. We believe that we are one of the few •Experienced management team. The members of our senior management team bring significant experience to the market environment in which we operate. Their expertise covers a range of disciplines, including industry-specific operating and technical knowledge •Focusing on being a low-cost natural gas exploration and production and oilfield service companies. We sell meet their specific needs. We recognize rental revenue when the business. , Black Mountain Sand, Vista Proppants and Logistics, Atlas Sand, and Solaris Oilfield Infrastructure, Inc. Change For example, the dunes sagebrush lizard, which is found in the active and semi-stable shinnery oak dunes of southeastern New Mexico and adjacent portions of Texas, was a candidate species for listing under the ESA by the FWS for many years. In 2010, the FWS proposed listing the dunes sagebrush lizard as an endangered species under the ESA. In 2012, the FWS and the Texas Comptroller’s Office agreed to the Texas Conservation Plan (“TCP”), a voluntary Candidate Conservation Agreement with Assurances (“CCAA”), to minimize disturbances to the dunes sagebrush lizard’s habitat. Our site in Crane County, Texas has been included in the TCP. In June 2012, the FWS declined to list the species as endangered under the ESA, in part because of the TCP. However, the Texas Comptroller’s Office, which administers the TCP, provided notice to the FWS in November 2018 of its intention to relinquish the TCP. The Texas Comptroller’s Office has proposed a new CCAA that, among other things, includes a new map with habitat suitability classifications. FWS is reviewing the draft proposed CCAA. In May 2018, certain environmental groups formally petitioned the FWS again to list the dunes sagebrush lizard as a threatened or endangered species under the ESA. The FWS has not acted on the environmental groups’ petition, and the environmental groups filed a lawsuit against the FWS in October 2019 alleging that the FWS failed to take action on the petition within the time period required under the ESA. That litigation is currently pending. August 1, 2019. directors, and William John Young, our Chief Operating Officer. — RISK FACTORS A prolonged reduction in oil and natural gas prices or a sustained lack of key resources that impact drilling activity would generally depress the level of oil and natural gas exploration, development, production and well completion activity and would result in a corresponding decline in the demand for the proppants we We are exposed to the credit risk of our customers, and any material nonpayment or nonperformance by our customers could adversely affect our business, results of operations and financial condition. 2019 and may continue to impact results going forward. Some of our competitors have greater financial and natural other resources than we do. In addition, our larger competitors may develop technology superior to ours or may have production facilities that offer lower-cost transportation to certain customer locations than we do. When the demand for hydraulic fracturing services decreases or the supply of proppant available in the market increases, prices in the For example, new supplies of regional frac sand from our competitors have come online in 2018, primarily in the Permian Basin of West Texas. These new supplies may have a negative long-term impact on our ability to market our Northern White Sand in the Permian Basin or other markets in close proximity to these new mines, which could lead to pressure to reduce prices to compete effectively with these new regional suppliers. cost of production. •geological and mining conditions and/or effects from prior mining that may not be fully identified by available data or that may differ from experience; •assumptions concerning future prices of •assumptions concerning future effects of regulation, including wetland mitigation requirements, the issuance of required permits and the assessment of taxes by governmental agencies. All of our sand sales are generated at one facility, and that facility is primarily served by one rail line. Any adverse developments at that facility or on the primary rail line could have a material adverse effect on our business, financial condition and results of operations. •mistaken assumptions about revenues and costs, including synergies; •inability to integrate successfully the businesses we acquire; •inability to hire, train or retain qualified personnel to manage and operate our business and newly acquired assets; •the assumption of unknown liabilities; •limitations on rights to indemnity from the seller; •mistaken assumptions about the overall costs of equity or debt; •diversion of management’s attention from other business concerns; •unforeseen difficulties operating in new product areas or new geographic areas; and •customer or key employee losses at the acquired businesses. Restrictions in our •grant liens; •incur additional indebtedness; •engage in a merger, consolidation or dissolution; •enter into transactions with affiliates; •sell or otherwise dispose of assets, businesses and operations; •materially alter the character of our business as conducted at the time of filing of this annual report; and •make acquisitions, investments and capital expenditures. ratios. An increase in the supply of 2020. We foregoing customer. We are not fully insured against all risks incident to our business, including the risk of our operations being interrupted due to severe weather and natural disasters. Furthermore, we may be unable to maintain or obtain insurance of the type and amount we desire at reasonable rates. As a result of market conditions, premiums and deductibles for certain of our insurance policies have increased and could escalate further. In addition, sub-limits have been imposed for certain risks. In some instances, certain insurance could become unavailable or available only for reduced amounts of coverage. If we were to incur a significant liability for which we are not fully insured, it could have a material adverse effect on our business, results of operations and financial condition. Our operations are dependent on our rights and ability to mine our properties and on our having renewed or received the required permits and approvals from governmental authorities and other third parties. expected or lasting longer than expected) may result in us not having a sufficient sand stockpile to operate our dry plants during winter months, which could result in us being unable to deliver our contracted sand amounts during such time and lead to a material adverse effect on our business, results of operations and financial condition. systems, including cyber-attacks. to the extent we fail to retain existing customers or attract new customers, adversely impact our revenues. our facilities or extract our mineral deposits or could require us to acquire costly equipment or to incur other significant expenses in connection with our business. Future events, including adoption of new, or changes in any existing environmental requirements (or their interpretation or enforcement) and the costs associated with complying with such requirements, could have a material adverse effect on us. •issuance of administrative, civil, or criminal penalties; •denial, modification, or revocation of permits or other authorizations; •occurrence of delays in permitting or performance of projects; •imposition of injunctive obligations or other limitations on our operations, including cessation of operations; and •requirements to perform site investigatory, remedial, or other corrective actions. We and our customers are subject to other extensive regulations, including licensing, plant and wildlife protection and reclamation regulation, that impose, and will continue to impose, significant costs and liabilities. In addition, future regulations, or more stringent enforcement of existing regulations, could increase those costs and liabilities, which could adversely affect our results of operations. •the lack of availability, higher expense, or unreasonable terms of such financial assurances; •the ability of current and future financial assurance counterparties to increase required collateral; and •the exercise by financial assurance counterparties of any rights to refuse to renew the financial assurance instruments. •our operating and financial performance; •quarterly variations in the rate of growth of our financial indicators, such as revenues, EBITDA, Adjusted EBITDA, •the public reaction to our press releases, our other public announcements, and our filings with the SEC; •strategic actions by our competitors; •our failure to meet revenue or earnings estimates by research analysts or other investors; •changes in revenue or earnings estimates, or changes in recommendations or withdrawal of research coverage, by equity research analysts; •speculation in the press or investment community; •the failure of research analysts to cover our common stock; •sales of our common stock by us •changes in accounting principles, policies, guidance, interpretations, or standards; •additions or departures of key management personnel; •actions by our stockholders; •general market conditions, including fluctuations in commodity prices, sand-based proppants, or industrial and recreational •domestic and international economic, legal and regulatory factors unrelated to our performance; and •the realization of any risks described under this We Our amended and restated certificate of incorporation contains a provision renouncing our interest and expectancy in certain corporate opportunities. •advance notice provisions for stockholder proposals and nominations for elections to the board of directors to be acted upon at meetings of stockholders; •provisions that divide our board of directors into three classes of directors, with the classes to be as nearly equal in number as possible; •provisions that prohibit stockholder action by written consent after the date on which our Principal Stockholders collectively cease to beneficially own at least 50% of the voting power of the outstanding shares of our stock entitled to vote; •provisions that provide that special meetings of stockholders may be called only by the board of directors or, for so long as a Principal Stockholder continues to beneficially own at least 20% of the voting power of the outstanding shares of our stock, such Principal Stockholder; •provisions that provide that our stockholders may only amend our certificate of incorporation or bylaws with the approval of at least 66 2/3% of the voting power of the outstanding shares of our stock entitled to vote, or for so long as our Principal Stockholders collectively continue to beneficially own at least 50% of the voting power of the outstanding shares of our stock entitled to vote, with the approval of a majority of the voting power of the outstanding shares of our stock entitled to vote; •provisions that provide that the board of directors is expressly authorized to adopt, or to alter or repeal our bylaws; and •provisions that establish advance notice and certain information requirements for nominations for election to our board of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings. We do not currently We will remain an emerging growth company for up to five years, although we will lose that status sooner if we have more than — PROPERTIES Van Hook, North Dakota. Situated on Proven recoverable reserves Deposits Sand reserves of up to 200 feet; grade mesh sizes 20/40, 30/50, 40/70 and 100 mesh. Proven reserve mix Approximately 19% of 20/40 and coarser substrate, 41% of finer 40/70 mesh substrate and approximately 40% of fine 100 mesh substrate. Our 30/50 gradation is a derivative of the 20/40 and 40/70 blends. Excavation technique Generally shallow overburden allowing for surface excavation. Annual nameplate processing capacity Logistics capabilities Dual served rail line logistics capabilities. On-site transportation infrastructure capable of simultaneously accommodating multiple unit trains and connected to the Canadian Pacific rail network. Additional unit train capable transload facility located approximately Royalties $0.50 per ton sold of 70 mesh and coarser substrate. Expansion Capabilities We believe that with further development and permitting, the Oakdale facility could ultimately be expanded to allow production of up to 9 million tons of — LEGAL PROCEEDINGS 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. — MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Sales Price Low High Fiscal 2016 November 4, 2016 - December 31, 2016 $ 10.30 $ 16.97 The Graph assumes $100 was invested on November 4, 2016, the first day our stock was traded on the NASDAQ, in our common stock, the Russell 3000, the Standard and Poor’s Small Cap 600 GICS Oil &Gas Equipment & Services Sub-Industry Index and a composite of publicly traded proppant peer companies. The cumulative total return assumes the reinvestment of all dividends. We elected to include the stock performance of a composite of our publicly traded peers as we believe it is an appropriate benchmark for our line of business/industry. — SELECTED FINANCIAL DATA Year Ended December 31, 2016 (4) 2015 2014 (in thousands, except per share amounts) Statement of Operations Data: Revenues $ 59,231 $ 47,698 $ 68,170 Cost of goods sold 26,569 21,003 29,934 Gross profit 32,662 26,695 38,236 Operating expenses: Salaries, benefits and payroll taxes 7,385 5,055 5,088 Depreciation and amortization 384 388 160 Selling, general and administrative 4,502 4,669 7,222 Total operating expenses 12,271 10,112 12,470 Operating income 20,391 16,583 25,766 Other (expenses) income: Preferred stock interest expense (1) (5,565 ) (5,078 ) (5,601 ) Other interest expense (2,862 ) (2,748 ) (2,231 ) Other income 8,860 362 370 Total other expenses, net (1) 433 (7,464 ) (7,462 ) Loss on extinguishment of debt (1,051 ) — (1,230 ) Income before income tax expense (1) 19,773 9,119 17,074 Income tax expense 9,394 4,129 9,518 Net income (1) $ 10,379 $ 4,990 $ 7,556 Net income per common share (1): Basic $ 0.43 $ 0.23 $ 0.34 Diluted $ 0.42 $ 0.19 $ 0.29 Weighted-average number of common shares: Basic 24,322 22,114 22,040 Diluted 24,579 26,400 26,243 Balance Sheet Data (at period end): Property, plant and equipment, net $ 104,096 $ 108,928 $ 85,815 Total assets 173,452 132,564 109,629 Long-term debt obligations 860 64,583 60,842 Total stockholders' equity (deficit) (1) 142,442 3,729 (1,957 ) Cash Flow Statement Data: Net cash provided by operating activities $ 26,703 $ 30,703 $ 22,137 Net cash used in investing activities (2,470 ) (29,375 ) (30,888 ) Net cash provided by financing activities 19,405 1,766 7,434 Other Data: Capital expenditures (3) (546 ) $ 28,102 $ 34,719 Cash dividends declared per common share — — — Adjusted EBITDA (2) 37,839 23,881 33,330 Production costs (2) 12,728 10,114 20,690 — MANAGEMENT’S DISCUSSION AND ANALYSIS FINANCIAL CONDITION AND RESULTS OF OPERATIONS wellsite. proppant inventory. had four SmartSystems fleets with customers. equipment. We incur •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 •our ability to incur and service debt and fund capital Year Ended December 31, 2016 2015 2014 (in thousands) Net Income $ 10,379 $ 4,990 $ 7,556 Depreciation and depletion 6,445 5,289 3,620 Income tax expense 9,394 4,129 9,518 Interest expense 8,436 7,826 7,832 Franchise taxes 21 35 139 EBITDA $ 34,675 $ 22,269 $ 28,665 (Gain) loss on sale of fixed assets (1) (59 ) 54 57 Initial public offering related costs (2) 725 221 2,687 Restricted stock compensation (3) 1,426 792 420 Development costs (4) — 76 249 Non-cash charges (5) 21 469 22 Loss on extinguishment of debt (6) 1,051 — 1,230 Adjusted EBITDA $ 37,839 $ 23,881 $ 33,330 Year Ended December 31, 2016 2015 2014 (in thousands) Cost of goods sold $ 26,569 $ 21,003 $ 29,934 Depreciation, depletion, and accretion of asset retirement obligations (6,076 ) (4,930 ) (3,481 ) Freight charges (7,765 ) (5,959 ) (5,763 ) Production costs $ 12,728 $ 10,114 $ 20,690 Production costs per ton $ 15.40 $ 13.47 $ 16.49 Year Ended December 31, 2016 2015 2014 (in thousands, except per share amounts) Revenues $ 59,231 $ 47,698 $ 68,170 Cost of goods sold 26,569 21,003 29,934 Gross profit 32,662 26,695 38,236 Operating expenses: Salaries, benefits and payroll taxes 7,385 5,055 5,088 Depreciation and amortization 384 388 160 Selling, general and administrative 4,502 4,669 7,222 Total operating expenses 12,271 10,112 12,470 Income from operations 20,391 16,583 25,766 Preferred stock interest expense (5,565 ) (5,078 ) (5,601 ) Other interest expense (2,862 ) (2,748 ) (2,231 ) Other income 8,860 362 370 Total other expenses, net 433 (7,464 ) (7,462 ) Loss on extinguishment of debt (1,051 ) — (1,230 ) Income before income tax expense 19,773 9,119 17,074 Income tax expense 9,394 4,129 9,518 Net income $ 10,379 $ 4,990 $ 7,556 Working Capital The following table presents the components of our working capital as of December 31, Year Ended December 31, 2016 2015 (in thousands) Total current assets $ 65,024 $ 16,486 Total current liabilities 13,722 48,567 Working capital (deficit) $ 51,302 $ (32,081 ) Year Ended December 31, 2016 2015 2014 (in thousands) Net cash provided by operating activities $ 26,703 $ 30,703 $ 22,137 Net cash used in investing activities $ (2,470 ) $ (29,375 ) $ (30,888 ) Net cash provided by financing activities $ 19,405 $ 1,766 $ 7,434 operating assets and liabilities. operating assets and liabilities. 2017. net proceeds from other notes payable. 2019: Less than 1-3 3-5 More than Total 1 year years years 5 years (in thousands) Equipment lease obligations (1) $ 1,310 $ 721 $ 589 $ — $ — Notes payable (2) 570 282 288 — — Oakdale construction obligations (3) 613 613 — — — Asset retirement obligations (4) 1,384 — 121 — 1,263 Equipment and office operating leases (5) 21,424 6,576 9,225 5,285 338 Revolving credit facility (6) Total $ 25,301 $ 8,192 $ 10,223 $ 5,285 $ 1,601 Critical Accounting Policies and Estimates We sell pay its obligation, and the condition of the general economy and the industry as a whole. Accounts receivable are written off when they are deemed uncollectible, and payments subsequently received on such receivables are credited to bad debt expense. We have not had material allowances or bad debt expense Company was in excess of its carrying value. To perform the test, we used valuation techniques to estimate the fair value of the Company as a single reporting unit under the income and market approaches. Under the discounted cash flow method, an income approach, the business enterprise value is determined by discounting to present value the terminal value which is calculated using debt-free after-tax cash flows for a finite period of years. Key estimates in this approach were internal financial projection estimates prepared by management, business risk, and expected rates of return on capital. The guideline company method, a market approach, develops valuation multiples by comparing our reporting units to similar publicly traded companies. Key estimates and selection of valuation multiples rely on the selection of similar companies, obtaining estimates of forecast revenues and EBITDA estimates for the similar companies and selection of valuation multiples as they apply to the reporting unit characteristics. Under the similar transactions method, a market approach, actual transaction prices and operating data from companies deemed reasonably similar to the reporting units is used to develop valuation multiples as an indication of how much a knowledgeable investor in the marketplace would be willing to pay for the Company. Following the fair value determination using the methods above, we conducted an evaluation of our stock price at or near the measurement date and the relationship between the resulting market capitalization and the fair value of the Company. Number of Shares Granted Grant Date Fair Value For the year ended December 31, 2016 160,600 3.85 For the year ended December 31, 2015 44,000 8.06 For the year ended December 31, 2014 338,800 8.06 — QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 2019. We do not believe this represents a material interest rate risk. — FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Stockholders We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. ASU 2016-02, Leases (Topic 842). December 31, 2016 2015 (in thousands, except share amounts) Assets Current assets: Cash $ 46,563 $ 3,896 Restricted cash 971 — Accounts receivable 5,339 2,020 Unbilled receivable 404 4,021 Inventories 10,344 5,025 Prepaid expenses and other current assets 1,403 1,524 Total current assets 65,024 16,486 Inventories, long-term 3,155 7,117 Property, plant and equipment, net 104,096 108,928 Deferred financing costs, net 1,154 — Other assets 23 33 Total assets $ 173,452 $ 132,564 Liabilities and Stockholders’ Equity Current liabilities: Accounts payable $ 1,663 $ 1,170 Accrued and other expenses 2,430 3,778 Deferred revenue 1,615 7,133 Income taxes payable 7,058 — Current portion of equipment financing obligations 674 409 Current portion of notes payable 282 1,369 Redeemable Series A preferred stock — 34,708 Total current liabilities 13,722 48,567 Revolving credit facility, net — 62,768 Equipment financing obligations, net of current portion 572 1,246 Notes payable, net of current portion 288 569 Deferred tax liabilities, long-term, net 15,044 14,505 Asset retirement obligation 1,384 1,180 Total liabilities 31,010 128,835 Commitments and contingencies (Note 21) Stockholders’ equity Common stock, $0.001 par value, 350,000,000 shares authorized; 38,884,068 issued and 38,816,474 outstanding at December 31, 2016; 22,139,480 issued and 22,114,620 outstanding at December 31, 2015 39 22 Treasury stock, at cost, 67,594 shares and 24,860 shares respectively at December 31, 2016 and 2015, respectively (539 ) (123 ) Additional paid-in capital 132,879 4,146 Retained earnings (Accumulated deficit) 10,063 (316 ) Total stockholders’ equity 142,442 3,729 Total liabilities and stockholders’ equity $ 173,452 $ 132,564 Year Ended December 31, 2016 2015 2014 (in thousands, except per share amounts) Revenues $ 59,231 $ 47,698 $ 68,170 Cost of goods sold 26,569 21,003 29,934 Gross profit 32,662 26,695 38,236 Operating expenses: Salaries, benefits and payroll taxes 7,385 5,055 5,088 Depreciation and amortization 384 388 160 Selling, general and administrative 4,502 4,669 7,222 Total operating expenses 12,271 10,112 12,470 Operating income 20,391 16,583 25,766 Other income (expenses): Preferred stock interest expense (5,565 ) (5,078 ) (5,601 ) Other interest expense (2,862 ) (2,748 ) (2,231 ) Other income 8,860 362 370 Total other income (expenses), net 433 (7,464 ) (7,462 ) Loss on extinguishment of debt (1,051 ) — (1,230 ) Income before income tax expense 19,773 9,119 17,074 Income tax expense 9,394 4,129 9,518 Net income $ 10,379 $ 4,990 $ 7,556 Net income per common share: Basic $ 0.43 $ 0.23 $ 0.34 Diluted $ 0.42 $ 0.19 $ 0.29 Weighted-average number of common shares: Basic 24,322 22,114 22,040 Diluted 24,579 26,400 26,243 Common Stock Treasury Stock Additional Retained Earnings Total Stockholders’ Outstanding Shares Par Value Shares Amount Paid-in Capital (Accumulated Deficit) Equity (Deficit) (in thousands, except share amounts) Balance at December 31, 2013 22,017,600 $ 22 — $ — $ 2,892 $ (12,862 ) $ (9,948 ) Vesting of restricted stock 22,000 — — — — — — Stock-based compensation, inclusive of $18 tax benefit — — — — 437 — 437 Restricted stock buy back (220 ) — 220 (2 ) — — (2 ) Net income — — — — — 7,556 7,556 Balance at December 31, 2014 22,039,380 $ 22 220 $ (2 ) $ 3,329 $ (5,306 ) $ (1,957 ) Vesting of restricted stock 99,880 — — — — — — Stock-based compensation, inclusive of $24 tax benefit — — — — 817 — 817 Restricted stock buy back (24,640 ) — 24,640 (121 ) — — (121 ) Net income — — — — — 4,990 4,990 Balance at December 31, 2015 22,114,620 $ 22 24,860 $ (123 ) $ 4,146 $ (316 ) $ 3,729 Vesting of restricted stock 167,090 — — — — — — Proceeds from equity issuance, net 12,577,500 13 — — 127,289 — 127,302 Exercise of warrants 3,999,998 4 — — 18 — 22 Stock-based compensation, inclusive of $24 tax expense — — — — 1,426 — 1,426 Restricted stock buy back (42,734 ) — 42,734 (416 ) — — (416 ) Net income — — — — — 10,379 10,379 Balance at December 31, 2016 38,816,474 $ 39 67,594 $ (539 ) $ 132,879 $ 10,063 $ 142,442 Year Ended December 31, 2016 2015 2014 (in thousands) Operating activities: Net income $ 10,379 $ 4,990 $ 7,556 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, depletion and amortization of asset retirement obligation 6,481 5,318 3,642 (Gain) loss on disposal of assets (59 ) 54 57 Loss on derivatives 5 455 — Loss on extinguishment of debt 1,051 — 1,230 Revenue reserve — (92 ) — Amortization of deferred financing cost 159 251 86 Accretion of debt discount 263 519 183 Deferred income taxes 539 3,700 8,378 Stock-based compensation, net 1,426 792 418 Non-cash interest expense on revolving credit facility — 706 1,852 Non-cash interest expense on Series A preferred stock 5,565 5,078 5,601 Changes in assets and liabilities: Accounts Receivables (3,319 ) 2,629 (4,367 ) Unbilled Receivables 3,617 — — Inventories (1,357 ) (2,462 ) 316 Prepaid expenses and other assets 133 2,423 (3,492 ) Deferred revenue (5,518 ) 7,133 (183 ) Accounts payable 761 (137 ) 759 Accrued and other expenses (481 ) (654 ) 272 Income taxes payable 7,058 — (171 ) Net cash provided by operating activities 26,703 30,703 22,137 Investing activities: Purchases of property, plant and equipment (2,519 ) (29,375 ) (30,888 ) Proceeds from disposal of assets 49 — — Net cash used in investing activities (2,470 ) (29,375 ) (30,888 ) Financing activities: Repayment of line of credit — — (9,230 ) Repayments of notes payable (1,368 ) (456 ) (139 ) Payments under equipment financing obligations (409 ) (390 ) (231 ) Payment of deferred financing and amendment costs (1,178 ) (415 ) (659 ) Proceeds from revolving credit facility 1,100 12,800 61,199 Repayment of revolving credit facility (65,316 ) (9,647 ) (3,500 ) Proceeds from equity issuance 138,371 — — Payment of equity transaction costs (11,047 ) — — Repayment of Series A preferred stock (40,328 ) — (39,999 ) Cash dividend on Series A preferred stock (4 ) (5 ) (5 ) Purchase of treasury stock (416 ) (121 ) (2 ) Net cash provided by financing activities 19,405 1,766 7,434 Net increase (decrease) in cash and restricted cash 43,638 3,094 (1,317 ) Cash and restricted cash at beginning of year 3,896 802 2,119 Cash and restricted cash at end of year $ 47,534 $ 3,896 $ 802 Supplemental disclosure of cash flow information Cash paid for interest $ 3,369 $ 2,270 $ 2,782 Cash paid for taxes $ 933 $ (1,093 ) $ 3,542 Non-cash investing activities: Asset retirement obligation $ (188 ) $ (614 ) $ 1,544 Non-cash financing activities: Equipment purchased with debt $ — $ 1,982 $ 180 Equipment purchased under equipment financing obligations $ — $ — $ 2,217 Capitalized non-cash interest into property, plant and equipment $ 132 $ 1,808 $ 453 Debt issuance costs netted against proceeds $ — $ — $ 1,414 Capitalized expenditures in accounts payable and accrued expenses $ 48 $ 3,113 $ 4,386 2012, and subsequently expanded its operations in 2014, 2015 and 2018. Currently the Company’s annual processing capacity is approximately 5.5 million tons. and Consolidation revenue, respectively. In addition, the Company sometimes receives shortfall payments from its customers and recognizes the revenue once the rights of use are expired. As of December 31, 2019 and 2018, Sand inventory is stated at the lower of cost or net realizable value using the average cost method. For the years ended December 31, 2019 and 2018, respectively, the Company had 0 write-down of inventory as a result of any lower of cost or market assessment. Amortization expense of the deferred financing charges of balance sheet. Years Land improvements Plant and buildings 5-15 Real estate properties 10-40 Vehicles 3-5 Machinery, equipment and tooling 3-15 Wellsite proppant storage solutions 3-10 Deferred mining costs •Level 1—Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date; •Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active or other inputs corroborated by observable market data for substantially the full term of the assets or liabilities; and •Level 3—Unobservable inputs that reflect the Company’s assumptions that market participants would use in pricing assets or liabilities based on the best information available. Year Ended December 31, 2016 2015 2014 Determination of Shares Weighted average common shares outstanding 24,322,264 22,114,400 22,039,966 Assumed conversion of warrant — 3,999,998 3,999,998 Assumed conversion of restricted stock 257,126 285,602 202,988 Diluted weighted average common stock outstanding 24,579,390 26,400,000 26,242,952 immaterial. December 31, 2016 2015 Raw material $ 229 $ 3 Work in progress 12,758 11,096 Finished goods 451 1,021 Spare parts 61 22 Total inventory 13,499 12,142 Less: current portion 10,344 5,025 Total inventory, net of current portion $ 3,155 $ 7,117 December 31, 2016 2015 Prepaid insurance $ 514 $ 100 Prepaid expenses 861 533 Prepaid income taxes — 888 Other receivables 28 3 Total prepaid expenses and other current assets $ 1,403 $ 1,524 December 31, 2016 2015 Machinery, equipment and tooling $ 4,841 $ 4,673 Vehicles 953 952 Furniture and fixtures 305 303 Plant and building 64,390 64,001 Real estate properties 3,503 3,500 Railroad and sidings 7,927 7,868 Land and improvements 13,317 12,977 Asset retirement obligation 1,324 1,135 Mineral properties 9,785 9,785 Deferred mining costs 417 155 Construction in progress 16,715 16,637 123,477 121,986 Less: accumulated depreciation and depletion 19,381 13,058 Total property, plant and equipment, net $ 104,096 $ 108,928 December 31, 2016 2015 Employee related expenses $ 955 $ 216 Accrued construction 19 917 Accrued legal expenses 22 99 Accrued professional fees 350 139 Accrued freight and delivery charges 383 162 Accrued revolving credit facility interest — 701 Derivative Liability — 455 Other accrued liabilities 701 1,089 Total accrued liabilities $ 2,430 $ 3,778 Facility Financing Year Ended December 31, Amount 2017 $ 721 2018 589 Total minimum lease payments 1,310 Amount representing interest at 0% - 5% (64 ) Present value of payments 1,246 Less: current portion (674 ) Total equipment financing obligations, net of current portion $ 572 December 31, Amount 2017 $ 282 2018 288 Total 570 Less: current portion (282 ) Total notes payable, net current portion $ 288 Balance at December 31, 2014 $ 1,765 Additions to liabilities 105 Reductions to liabilities due to revision of estimates (719 ) Accretion expenses 29 Balance at December 31, 2015 1,180 Additions to liabilities 399 Reductions to liabilities due to revision of estimates (211 ) Accretion expenses 16 Balance at December 31, 2016 $ 1,384 Balance at December 31, 2014 $ 29,059 Accumulated dividends 4,865 Net accretion of issuance & transaction costs 784 Balance at December 31, 2015 34,708 Accumulated dividends $ 4,776 Net accretion of issuance & transaction costs 845 Payoff of Series A Preferred Stock (40,329 ) Balance at December 31, 2016 $ — Year Ending December 31, 2017 $ 608 2018 508 2019 214 2020 17 $ 1,347 Number of Shares Weighted Average Unvested, January 1,2015 370,407 $ 7.89 Granted 44,000 8.06 Vested (98,450 ) (7.61 ) Forfeiture (26,400 ) (7.75 ) Unvested, December 31,2015 289,557 $ 8.02 Granted 160,600 3.85 Vested (167,090 ) (6.79 ) Forfeiture (9,900 ) (6.00 ) Unvested, December 31, 2016 273,167 $ 7.35 Year Ended December 31, 2016 2015 2014 Current Federal $ 8,337 $ 245 $ 820 State and local 518 184 320 Total current expense 8,855 429 1,140 Deferred Federal 537 3,610 8,198 State and local 2 90 180 Total deferred income tax expense 539 3,700 8,378 Total income tax expense $ 9,394 $ 4,129 $ 9,518 Year Ended December 31, 2016 2015 2014 At statutory rate $ 6,921 $ 3,192 $ 5,976 Non-deductible interest expense 1,948 1,777 2,136 State taxes, net of US federal benefit 339 211 393 Federal tax deductions (648 ) (19 ) (19 ) Change in applicable tax rate — — 308 Costs associated with possible restructuring — (940 ) 913 Provision to return permanent difference 933 (68 ) (96 ) Other (99 ) (24 ) (93 ) Total income tax expense $ 9,394 $ 4,129 $ 9,518 Year Ended December 31, 2016 2015 Deferred tax assets: Reserves and accruals $ 568 $ 537 Total gross deferred tax assets 568 537 Deferred tax liabilities: Prepaid expenses and other (132 ) 122 Depreciation and amortization (15,480 ) (15,164 ) Total gross deferred tax liabilities (15,612 ) (15,042 ) Less: current net deferred tax assets — — Noncurrent deferred tax liabilities, net $ (15,044 ) $ (14,505 ) receivable. As of December 31, 2018, four customers accounted for 89% of the Company’s total accounts receivable. Twelve months ending December 31, 2017 $ 6,576 2018 5,173 2019 4,052 2020 3,038 2021 2,247 Thereafter 338 2016: First Quarter Second Quarter Third Quarter Fourth Quarter Revenue $ 10,359 $ 8,494 $ 10,927 $ 29,451 Cost of goods sold 5,337 6,531 5,931 8,770 Operating expenses 2,188 2,214 2,461 5,408 Net income (loss) 382 (2,349 ) (95 ) 12,441 Earnings per share, basic 0.02 (0.11 ) — 0.40 Earnings per share, diluted 0.01 (0.11 ) — 0.40 Weighted average number of shares outstanding, basic 22,135 22,169 22,189 30,952 Weighted average number of shares outstanding, diluted 26,410 22,169 22,189 31,210 2015: First Quarter Second Quarter Third Quarter Fourth Quarter Revenue $ 13,071 $ 10,437 $ 9,025 �� $ 15,165 Cost of goods sold 7,804 4,467 4,865 3,867 Operating expenses 2,739 2,805 2,314 2,254 Net income (loss) 203 726 1,796 2,265 Earnings per share, basic 0.01 0.03 0.08 0.10 Earnings per share, diluted 0.01 0.03 0.07 0.09 Weighted average number of shares outstanding, basic 22,039 22,092 22,112 22,114 Weighted average number of shares outstanding, diluted 26,411 26,410 26,388 26,400 Management’s Report on Internal Control XBRL Instance Document XBRL Taxonomy Extension Schema XBRL Taxonomy Extension Calculation Linkbase XBRL Taxonomy Extension Definition Linkbase XBRL Taxonomy Extension Label Linkbase XBRL Taxonomy Extension Presentation Linkbase /s/ Charles E. Young /s/ Lee E. Beckelman Lee E. Beckelman (Principal Financial Officer) Susan Neumann (Principal Accounting Officer) José E. Feliciano Director /s/ Timothy J. Pawlenty Timothy J. Pawlenty /s/ Sharon Spurlin Sharon SpurlinTABLE OF CONTENTSPAGEPAGE Item 1.4Item 1A.17Item 1B.34Item 2.34Item 3.Item 4.Item 5.Item 6.Item 7.Item 7A.63Item 8.65Item 9.90Item 9A.90Item 9B.90Item 10.91Item 11.91Item 12.91Item 13.91Item 14.91Item 15.929394NOTE ABOUT FORWARD-LOOKING STATEMENTSCertain DefinitionsThe following definitions apply throughout this annual 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. “Former Credit Agreement”, “Former Credit Facility” The $45 million 3-year senior secured revolving credit facility (the “Former Credit Facility”) under a revolving credit agreement, dated December 8, 2016, with Jefferies Finance LLC, as administrative and collateral agent (as amended, the “Former Credit Agreement”). The Former Credit Facility was paid in full and terminated with proceeds from the Oakdale Equipment Financing. “Exchange Act” The Securities Exchange Act of 1934, as amended. “Securities Act” The Securities Act of 1933, as amended. “FCA”, “DAT”, “DAP” Free Carrier, Delivered at Terminal, Delivered at Place, respectively, Incoterms 2010. “FASB”, “ASU”, “ASC”, “GAAP” Financial Accounting Standards Board, Accounting Standards Update, Accounting Standards Codification, Accounting Principles Generally Accepted in the United States, respectively. 3Disclaimer Regarding Forward-looking StatementsThis Annual Report on Form 10-K contains forward-looking statements that are subject to risks and uncertainties. All statements other than statements of historical fact included in this Annual Report on Form 10-K are forward-looking statements. Forward-looking statements give our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as "anticipate,'' “estimate,'' "expect," "project," "plan," "intend," "believe," "may," "will," "should," "can have," "likely"“anticipate’’, “estimate’’, “expect”, “project”, “plan”, “intend”, “believe”, “may”, “will”, “should”, “can have”, “likely” and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events. For example, all statements we make relating to our estimated and projected costs, expenditures, cash flows, growth rates and financial results, our plans and objectives for future operations, growth or initiatives, strategies or the expected outcome or impact of pending or threatened litigation are forward-looking statements. All forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those that we expected, including:including without limitation:raw frac sand;customers'customers’ businesses;conditions;conditions:plantmine and processing facility for current sales;decreased demand for raw frac sand or •the development of either effective alternative proppants or new processes to replace hydraulic fracturing;•increased competition from new or existing sources of frac sand supply, including frac sand mines in locations such as the Permian Basin of West Texas, and elsewhere;customers’ operations, including possible bans on hydraulic fracturing;customers' operations;•potential negative outcomes under our current or future litigation;our ability to implement our capacity expansion plans within our current timetable and budget and our ability to secure demand for our increased production capacity, and the actual operating costs once we have completed the capacity expansion;rawthe frac sand market;and electricity.electricity, or any other energy sources;businesses;businesses:•expiration or termination of our take-or-pay contracts without new contracts to take their place;•our ability to make capital expenditures to maintain, develop and increase our asset base and our ability to obtain needed capital or financing on satisfactory terms;operations:4•border restrictions;and manufacturing industries;industry;
•our ability to maintain satisfactory labor relations;systems, including cyber-attacks;systems;litigation;1itigation:"Risk Factors"“Risk Factors” and elsewhere in this Annual Report on Form 10-K.We derive many of our forward-looking statements from our operating budgets and forecasts, which are based on many detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and it is impossible for us to anticipate all factors that could affect our actual results. Important factors that could cause actual results to differ materially from our expectations, or cautionary statements, are disclosed under Item I A, "Risk Factors"1A, “Risk Factors” and Item 7, "Management's“Management’s Discussion and Analysis of Financial Condition and Results of Operations"Operations” in this Annual Report on Form 10-K. All written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by these cautionary statements as well as other cautionary statements that are made from time to time in our other filings with the Securities and Exchange Commission (the "SEC"“SEC”) and public communications. You should evaluate all forward-looking statements made in this Annual Report on Form 10-K in the context of these risks and uncertainties.We caution youusers of the financial statements that the important factors referenced above may not contain all of the factors that aremay be important to you.every user. In addition, we cannot assure youmake assurances that we will realize the results or developments we expect or anticipate or, even if substantially realized, that they will result in the consequences or affect us or our operations in the way we expect. The forward-looking statements included in this Annual Report on Form 10-K are made only as of the date hereof. We undertake no obligation to update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.5PART IITEM 1. – BusinessOverviewThe CompanyWe are a pure-play,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, producer of high-qualityhigh quality Northern White raw frac sand, which is a preferredpremium proppant used to enhance hydrocarbon recovery rates in the hydraulic fracturing of oil and natural gas wells. We sellalso offer proppant logistics solutions to our customers through our in-basin transloading terminal and our SmartSystemsTM wellsite proppant storage capabilities. We currently market our products and services primarily to oil and natural gas exploration and production companies and oilfield service companies, sell our sand under a combination of long-term take-or-pay contracts and spot sales in the open market.market, and provide wellsite proppant storage solutions services and equipment under flexible contract terms custom tailored to meet customers' needs. We believe that, among other things, the size and favorable geologic characteristics of our sand reserves, and the strategic location and logistical advantages of our facilities, have positionedour proprietary SmartDepotTM portable wellsite proppant storage silos and the industry experience of our senior management team make us as a highly attractive sourceprovider of raw frac sand and proppant logistics services from the mine to the oil and natural gas industry.We own and operate a raw frac sand mine and related processing facility near Oakdale, Wisconsin, at which we have approximately 332316 million tons of proven recoverable sand reserves as of December 31, 2016.2019. We incorporated in Delaware in July 2011 and began operations with 1.1 million tons of annual nameplate processing capacity in July 2012, expanded to 2.22012. After several expansions, our current annual nameplate processing capacity at our Oakdale facility is approximately 5.5 million tons capacity in August 2014 and increased to 3.3 million tons in September 2015.of frac sand. Our integrated Oakdale facility, with on-site rail infrastructure and wet and dry sand processing facilities, has access to two Class I rail lines and enables us to process and cost-effectively deliver products to our customers.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. The Van Hook terminal became operational in April 2018. Since operations commenced, we have been providing Northern White sand in-basin at this terminal to our contracted and spot sales customers. This terminal allows us to offer more efficient delivery options to customers operating in the Bakken Formation in the Williston Basin.We also offer to our customers portable wellsite proppant storage through our SmartSystems storage solutions. The 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, to approximately 3.3 million tonstakedown 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 SmartDepotXLTM silo systems, wellsite transload capabilities, and our rapid deployment trailers. Our SmartDepot silos include passive and active dust suppression technology, along with the capability of raw frac sand per year.In addition to the Oakdale facility, we own a second property in Jackson County, Wisconsin, which we call the Hixton site. The Hixton site is also located adjacent to a Class I rail linegravity-fed operation. Our rapid deployment trailers are designed for quick setup, takedown and is fully permitted to initiate operations and is available for future development. As of August 2014, our Hixton site had approximately 100 million tons of proven recoverable sand reserves.We incorporated in Delaware in July 2011. On November 9, 2016, we completed our initial public offering (the “IPO”) of 11,700,000 shares of our common stock at a price to the public of $11.00 per share ($10.34 per share, nettransportation of the underwriting discount) pursuant to a Registration Statement on Form S-1, as amended (File No. 333-213692) (the “Registration Statement”),initially filed with the SEC on September 19, 2016 pursuant to the Securities Act. The material provisions of the IPO are described in the Registration Statement. We granted the underwriters an option for a period of 30 days to purchase up to an additional 877,500 shares of Common Stock at the initial offering price,entire SmartSystem, and the Selling Shareholders granted the underwriters an option for a period of 30 days to purchase up to an aggregate additional 877,500 shares of Common Stock at the initial offering price. On November 23, 2016, the underwriters exercised in full their option to purchase additional shares of common stock from us and the Selling Shareholders.On February 1, 2017, we entered into an Underwriting Agreement providing for the offer and sale of 1,500,000 shares of common stock at a price of $17.50 per share ($16.58 per share, net of the underwriting discount), generating net proceeds to us of $24.3 million before underwriting discounts and expenses. We intend to use the net proceeds from this offering for future capital projects and general corporate services. The offering closed on February 7, 2017. Additionally, the Selling Shareholders sold 4,450,000 shares of common stock at a price of $17.50 per share. We received no proceedsdetach from the sale of common stock by the Selling Shareholders. The Selling Shareholders granted the underwriters an optionwellsite equipment allowing for a period of 30 days to purchase up to an additional 892,500 shares of common stock. On February 10, 2017, the underwriters exercised in full their option to purchase additional shares of common stockremoval from the Selling Shareholders.wellsite during operation. We received no proceeds fromhave also developed a proprietary software program, the sale of common stockSmartSystem Trackerthe underwriters by the Selling Shareholders.For the years ended December 31, 2016, 20152019, 2018 and 2014,2017, we generated net income of approximately $10.4$31.6 million, $5.0$18.7 million and $7.6$21.5 million, respectively, and Adjusted EBITDA of approximately $37.8$87.1 million, $23.9$66.0 million and $33.3$30.6 million, respectively. For the definition of Adjusted EBITDA and a reconciliation to its most directly comparable financial measure calculated and presented in accordance with Generally Accepted Accounting Principles (“GAAP”),U.S. GAAP, please read “Note Regarding Non-GAAP Financial Measures.” For more financial information about our business, please read “Selected Financial Data.”OverMarketFrom early 2017 through the past decade, exploration and production companies have increasingly focused on exploiting the vast hydrocarbon reserves containedsecond quarter of 2018, improvements in North America’s unconventional oil and natural gas reservoirs by utilizing advanced techniques, suchprices created a more stable market environment. During the second half of 2018, the demand for Northern White sand decreased, which we believe was due primarily to insufficient takeaway capacity for the incremental increases in oil and natural gas production coming online, along with increased availability of regional sand as horizontal drillinga source of proppant in the Permian basin. Additionally, oil and hydraulic fracturing. In recentnatural gas companies reduced their spending in the latter portion of the year due to strong spending in the first half of 2018, decreasing oil prices in the fourth quarter of 2018 and demands from their investors for more disciplined capital spending. Demand briefly6recovered during the summer of 2019 before declining toward the end of 2019 as oil and gas companies exhausted their budgets and managed their capital spending to be in line with their expected operating cash flows.We have found that increasingly over the last two years, this focus has resulted in exploration and production companies drilling more and longer horizontal wells, completing more hydraulic fracturing stages per well and utilizing more proppant per stage in an attemptcustomers are disinclined to maximize the volume of hydrocarbon recoveries per wellbore. From 2010 to 2015enter into long-term contracts for their frac sand demand experienced strong growth, growing at an average annual rate of 25%. In addition, raw frac sand’s share of the total proppant market continues to increase, growing from approximately 78% in 2010 to approximately 92% in 2015 as explorationsupply and production companies continue to look closely at overall well cost, completion efficiency and design optimization, which has led to a greater use of rawhave instead trended toward purchasing their frac sand supply in comparison to resin-coated sand and manufactured ceramic proppants.Northern White raw frac sand, which is found predominantly in Wisconsin and limited portions of Minnesota and Illinois, is highly valued by oil and natural gas producers asconsidered a preferredpremium 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. We believe that the marketexpect demand for high-quality rawour frac sand liketo continue to be supported from customers who are focused on long-term well performance and ultimate recovery of reserves from the Northern White raw fracoil 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 produce, particularly finer mesh sizes, will grow based on the potential recovery inbelieve the development of North America’s unconventional oil and natural gas reservoirs as well as thewill continue to grow and increased proppant volume usage per well. Accordingwell trends will continue, particularly with respect to Kelrik, a notable driver impacting demand for fine mesh sand is increased proppant loadings, specifically, larger volumes of proppant placed per frac stage. Kelrik expects the trend of using larger volumes of finer mesh materials, such as 100 mesh sand and 40/70 mesh sizes. Finally, we believe that the increasing adoption of our SmartSystems in the marketplace will allow us to sell more sand to continue.Competitive StrengthsWe believe that we will be able to successfully execute our business strategies because of the following competitive strengths: raw frac sand mine and production facilities that has the unique combination of a large high-quality reserve base of primarily fine mesh sand that is contiguous to its production and primary rail loading facilities. Our Oakdale facility is situated on 1,196 acres in a rural area of Monroe County, Wisconsin, on a Class I rail line, and contains approximately 332 million tons of proven recoverable reserves as of December 31, 2016. We have ana minimum implied current proven reserve life of approximately 10157 years based on our current annual nameplate processing capacity of 3.35.5 million tons per year. As of December 31, 2016, we have utilized 135 acres for facilities and mining operations, or only 11% of this location’s acreage.tons. We believe that with further development and permitting, the Oakdale facility ultimately could be expanded to allow production of up to 9 million tons of raw frac sand per year.raw frac sand. Approximately 80% of our reserve mix today is 40/70 mesh substrate and 100 mesh substrate, considered to be the finer mesh substrates of raw frac sand. We believe that if oil and natural gas exploration and production companies continue recent trends in drilling and completion techniques to increase lateral lengths per well, the number of frac stages per well, the amount of proppant used per stage and the utilization of slickwater completions, that the demand for the finer grades of raw frac sand will continue to increase, which we can take advantage of due to the high percentage of high-quality, fine mesh sand in our reserve base.rawNorthern White frac sand and to achieve attractive operating margins. The proximity of our mine, processing plants and primary rail loading facilities at one location eliminates the need for us to truck sand on public roads between the mine and the production facility or between wet and drying processing facilities, eliminating additional costs to produce and ship our sand.In addition to the Oakdale facility, we own the Hixton site in Jackson County, Wisconsin. The Hixton site is a second fully permitted location adjacent to a Class I rail line that is fully permitted to initiate operations and is available for future development. As of August 2014, our Hixton site had approximately 100 million tons of proven recoverable sand reserves. raw frac sand producers with a facility custom-designed for the specific purpose of delivering raw frac sand to all of the major U.S. oil and natural gas producing basins by an on-site rail facility that can simultaneously accommodate multiple unit trains. Our on-site transportation assets at Oakdale include approximately sevennine miles of rail track in a double-looptriple-loop configuration and three rail carfour railcar loading facilities that are connected to a Class I rail line owned by Canadian Pacific. We believe our customized on-site logistical configuration typically yields lower operating and transportation costs compared to manifest train or single-unit train facilities as a result of our higher rail carrailcar utilization, more efficient use of locomotive power and more predictable movement of product between mine and destination. In addition, we have recently constructed a transload facility on a Class I rail line owned by Union Pacific in Byron Township, Wisconsin, approximately 3.5three miles from the Oakdale facility. This transload facility, which is also capable of handling multiple unit trains simultaneously, allows us to ship sand directly to our customers on more than one Class I rail carrier. ThisWe believe that we are the only sand facility commenced operations in June 2016 and provides increased delivery options for our customers, greaterWisconsin that has dual-served rail capabilities, which should create competition amongbetween our rail carriers and potentially lower freight costs. With the addition of this transload facility, we believe we are the only mineallow us to provide more competitive logistics options for our customers.•Expanded logistics solutions. Our transloading terminal in Wisconsin with dual served railroad shipment capabilities on the Canadian Pacific and Union Pacific rail networks. Our Hixton site is also located adjacent to a Class I rail line.Significant organic growth potential. We believe that we have a significant pipeline of attractive opportunities to expand our sales volumes and production capacity at our Oakdale facility, which commenced commercial operationsVan Hook, North Dakota, became operational in July 2012April 2018 and was expanded to 3.3 million tonsin 2019. This terminal is capable of annual processing capacity in September 2015. We currently have plans to increase our wet and dry plant processing capacity in order to produce up to approximately 4.4 million tons of raw frac sand per year. We currently have one wet plant and one dryer in storage at Oakdale that will be utilized as part of this capacity expansion. We believe these units could be installed and operational in approximately six to nine months from commencement of construction. We believe, under current regulations and permitting requirements, that we can ultimately expand our annual production capacity at Oakdale to as much as 9 million tons. Other growth opportunities include the ability to expand our Byron Township transload facility to handlehandling multiple unit trains simultaneously, and we have been providing in-basin sand at this terminal to invest in transload facilities located in the shale operating basins. Investments in additional rail loading facilities should enableour customers since operations began. This terminal has allowed us to provide more competitive transportation costs and allow us to offer additional pricing and delivery options to our customers. We also have opportunities to expand our sales into the industrial sand market which would provide us the opportunity to diversify our customer base and sales product mix.Additionally, as of December 31, 2016, we have approximately 2.1 million tons of washed raw frac sand inventory at our Oakdale facility availableoffer more efficient delivery options to be processed through our dryers and soldcustomers operating in the market. This inventory of available washed raw frac sand provides us withBakken Formation in the Williston Basin. Through our SmartSystems wellsite proppant storage solutions equipment, we offer various options 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 quickly meet changing market demandrapidly set up, takedown and strategically sell sand ontransport the entire system. The SmartDepot silo system includes passive and active dust7suppression technology, along with the capability of a spot basisgravity-fed operation. We are currently developing a new transload technology to expandcomplement our market shareexisting solutions. The rapid deployment trailer is designed for rapid set up, takedown and transportation of raw frac sand sales if market conditions are favorable.the entire SmartSystem while detaching from the wellsite equipment allowing for removal from the wellsite during operation.inventory.Strong balance sheet•Ample liquidity and financial flexibility.We believe we have a strong balance sheet and amplesufficient liquidity to pursue our growth initiatives. As of March 13, 2017,December 31, 2019, we have approximately $117.6 million in liquidity from cash on hand and fullof $2.6 million. Further, in December 2019, we entered into a $20 million five-year senior secured asset-based lending credit facility with Jefferies Finance LLC, under which we had undrawn availability of our $45$17.5 million revolving credit facility. Additionally, unlike someas of our peers, we have minimal exposure to unutilized rail cars. As of March 13, 2017, we have 1,540 rail carsDecember 31, 2019. The available borrowing amount under long-term leases, of which 1,010 are currently rented to our customers, which minimizes our exposure to storagethe ABL Credit Facility is based on the Company's eligible accounts receivable and leasing expense for rail cars that are currently not being utilized for sand shipment and provides us greater flexibility in managing our transportation costs prospectively.as well asand experience managing high-growth businesses.•Focus on safety and environmental stewardship. We are committed to maintaining a culture that prioritizes safety, the environment and our relationship with the communities in which we operate, which we believe is critical to the success of our business. In August 2014, we were accepted as a “Tier 1” participant in Wisconsin’s voluntary “Green Tier” program, which encourages, recognizes and rewards companies for voluntarily exceeding environmental, health and safety legal requirements. In addition, we committed to certification under International Organization for Standardization (“ISO”) standards and, in April 2016, we received ISO 9001 and ISO 14001 registrations for our quality management system and environmental management system programs, respectively. In 2018, we received two awards for lowest injury rate for medium-sized companies from the Industrial Mineral Association. We are one of a select group of companies who are members of the Wisconsin Industrial Sand Association, which promotes safe and environmentally responsible sand mining standards.Business StrategiesOur principal business objective is to be a pure-play, low-cost producer of high-quality rawprovide fully-integrated, sustainable frac sand supply and logistics solutions to our customers and increase long-term stockholder value. We expect to achieve this objective through the following business strategies:Focusing on organic growth by increasing•Expanding and optimizing our capacity utilization and processing capacity. We intend to continue to position ourselves as a pure-play producer of high-quality Northern White raw frac sand, as we believe the proppant market offers attractive long-term growth fundamentals. While demand for proppant has declined since late 2014 in connection with the downturn in commodity prices and the corresponding decline in oil and natural gas drilling and production activity in 2015 and 2016, we believe that the demand for proppant is increasing in the short term and will continue to increase over the medium and long term as commodity prices rise from their lows in 2016, which should lead producers to resume completion of their inventory of drilled but uncompleted wells and undertake new drilling activities. We expect this demand growth for raw frac sand will be driven by increased horizontal drilling, increased proppant loadings per well (as operators increase lateral length and increase proppant per lateral foot above current levels), increased wells drilled per rig and the cost advantages of raw frac sand over resin-coated sand and manufactured ceramics. As market dynamics improve, we will continue to evaluate economically attractive facility enhancement opportunities to increase our capacity utilization and processing capacity. For example, our current annual processing capacity is approximately 3.3 million tons per year and we expect to increase this annual processing capacity to 4.4 million tons per year by the end of 2017. We believe that with further development and permitting the Oakdale facility could ultimately be expanded to allow production to as much as 9 million tons of raw frac sand per year.Optimizing ourexisting logistics infrastructure and developing additional origination and destination points.We intend to further optimize our existing logistics infrastructure and may develop additional origination and destination points. We expect to continue to capitalize on our Oakdale facility’s ability to simultaneously accommodate multiple unit trains on-site with the Canadian Pacific rail network and ship on two Class I rail carriers to maximize our product shipment rates, increase rail carour railcar utilization and lower our transportation costs. WithThrough our recently developed transloading facility located on the Union Pacific rail network approximately 3.5three miles from our Oakdale facility, we have the ability to ship our raw frac sand directly to our customers on more than one Class I rail carrier. This facility provides increased delivery options for our customers, greater competition amongbetween our rail carriers and potentially lower freight costs. In addition,2018, we intendadded a multi-unit train capable terminal in Van Hook, North Dakota, which we further expanded in 2019. We believe this allows us to be one of the most efficient and low-cost sources of frac sand in the Bakken Formation in the Williston Basin. Additionally, our SmartSystem wellsite storage systems allows us to offer expanded logistics services to our customers.The benefits of our long-term growth strategy for in-basin delivery of sand include expanding our customer base by marketing through our own terminal, more opportunity for spot sales by forward deploying sand and the opportunity to capture incremental margin on the sale of sand farther down the supply chain by managing the cost of rail, terminal and wellsite storage operations. Additionally, having a presence in-basin gives us an opportunity to have a base of operations from which to market our SmartSystems wellsite proppant storage solutions.We believe our patented SmartDepot silos out-perform our competitors in that they can be set up or taken down rapidly and offer multiple setup configurations, they include industry-leading passive and active dust suppression technology, they have the capability of gravity-fed operation and they can be filled by both pneumatic and gravity dump trailers. Our trailers detach, which reduces their footprint on the wellsite and lowers our capital cost for a fleet, as one trailer can service an entire system. We continue to evaluate our solutions to ensure they remain the best available option in the marketplace.8Through the expansion of our SmartSystems fleet and other logistics options, we continue evaluating ways to reduce the landed cost of our products atin-basin and to the basinwellsite for our customers such as investing in transload and storage facilities and assets in our target shale basins to increasewhile increasing our customized service offerings andto provide our customers with additional delivery and pricing alternatives, including selling product on an “as-delivered” basis atto the wellsite.•Focusing on organic growth by increasing the utilization of our Oakdale facility. We intend to continue to pursue opportunities to maximize the value and the utilization of our Oakdale facility through the addition of new customers and increased sales volumes. Despite the emergence of regional sand in oil and natural gas producing basins, we believe the proppant market continues to offer attractive long-term growth fundamentals for Northern White frac sand due to its superior well results outweighing the incremental cost savings of regional sand. We believe coupling our premium proppant with long-term sustainable logistics supply services further mitigate the potential cost savings of using regional sand.target shale basins.According to Spears and Associates, Inc. (“Spears”), demand in 2019, in North American basins, increased approximately 5% over 2018 levels and demand in 2020 is expected be consistent with 2019 levels. While fewer horizontal wells are expected to be completed, the trend of longer laterals and more sand per lateral foot drilled is expected to continue in 2020.producerprovider and continuing to make process improvements. We will continue to focus on being a low-cost producer,provider, which we believe will permit us to compete effectively for sales of raw frac sand and to achieve attractive operating margins. Our low-cost structure results from a number of key attributes, including, among others, our (i) relatively low royalty rates, compared to other industry participants, (ii) balance of coarse and fine mineral reserve deposits and corresponding contractual demand that minimizes yield loss, and (iii) Oakdale facility’s proximity to two Class I rail lines creates competition between railroads and other sand logistics infrastructure which helps reduce transportation costs, fuel costsadvantages, and headcount needs.(iv) maintenance of our status as one of the lowest levered companies in the frac sand supply and services industry. We have strategically designed our operations to provide low per-tonfor low-cost production, costs. For example, we completed the construction ofincluding having two dryers and one wet plant enclosed in a natural gas connectionsingle building allowing for year-round operation. This allows us to more efficiently match our Oakdale facility in October 2015 that provides us the optionality to source lower cost natural gas (as compared to propane under current commodity pricing) as a fuel source forwet sand production with our drying operations.capacity and to better utilize our workforce with a goal to reduce the overall cost of production. We continue to invest in capital projects that increase efficiencies and provide a high return on investment. In addition, we seek to maximize our mining yields on an ongoing basis by targeting sales volumes that more closely match our reserve gradation in order to minimize mining and processing of superfluous tonnage andtonnage. We also continue to evaluate the potential ofother mining by dredgetechniques to reduce the overall cost of our mining operations.Maintaining financial strength and flexibility.We plan to pursue a disciplined financial policy to maintain financial strength and flexibility. •Creating flexible sales activities. We believe that demand for our cashproducts will remain strong in basins where regional sand is not widely available, such as the Bakken in North Dakota, the Marcellus and Utica formations in the Northeast region of the United States and the Colorado and Wyoming basins. We continue to have discussions with operators in these regions regarding new relationship and growth opportunities. We also believe that the long-term benefits of high quality Northern White sand outweighs the short-term cost savings provided by regional sand in the Permian, Eagle Ford and SCOOP/STACK basins. We believe there are additional opportunities for customers in the Permian and other basins, which have regional supply, who are focused on hand, available borrowing capacitythe long-term performance of their production and abilityon the long-term efficiency of their logistics.We intend to access debtincrease focus on shorter term contracts and equity capital markets will provide us withincrease sales in the financial flexibility necessaryspot market given the reluctance of our customers to achieve our organic expansion and acquisition strategy.enter into long-term take-or-pay contracts in the current market environment.Our CustomersOur core customers are oil and Contracts raw frac sand under long-term take-or-pay contracts as well as in the spot market, if we have excess production and the spot market conditions are favorable. As of March 13, 2017, we have approximately 63.3% ofprovide proppant logistics solutions through our current annual production capacity contractedin-basin transloading terminal and SmartSystems wellsite proppant storage solutions and other logistics services.Generally, customers under four long-term take-or-pay contracts withare required to take minimum volumes of sand or make shortfall payments for a volume-weighted average remaining termspecified period of approximately 3.1 years.Demand for proppantstime. We recognize revenue in 2015 and throughour results of operations in the first half of 2016 dropped due toperiod in which the downturn in commodity prices since late 2014 and the corresponding reduction in oil and natural gas drilling, completion and production activity. The change in demand during this period impacted contract discussions and negotiated terms with our customers as existing contracts were adjusted, resulting in a combination of reduced average selling prices per ton, and adjustments to take-or-payobligation becomes due. Contracted volumes and lengths of contracts. We believe we have mitigated the short-term negative impact on revenues of some of these adjustments through contractual shortfall and reservation payments. During the market downturn, customers began to purchase more volumes on a spot basis as compared to committing to term contracts, and this trend continued until oil and natural gas drilling and completion activity began to increase beginningdecreased in the fourth quarter of 2016. However,2018 and for the year-ended December 31, 2019, resulting in additional shortfall revenue.Frac sand demand increased in 2017 from 2016 levels as increased drilling and completion activity has begun to return to higher levels, and we believeled customers will begin to more actively consider contracting proppant volumes under termlong-term contracts rather than continuing to rely on buying proppant on a spot basis in the market.Product Purchase Agreements From early 2017 through the second quarter of 2018, improvements in oil and Spot SalesOn December 14, 2016,natural9gas prices created a more stable market environment. During the second half of 2018, the demand for Northern White sand decreased, which we entered into a multi-year Master Product Purchase Agreement (the “Rice PPA”)believe was due primarily to insufficient takeaway capacity for the incremental oil and natural gas production coming online in the Permian Basin, along with Rice Drilling B, LLC (“Rice”), a subsidiaryincreased availability of Rice Energy Inc. Rice began purchasing fracregional sand under the Rice PPA in January 2017. The Rice PPA is structured as a take-or-pay agreement and includes a monthly nonrefundable capacity reservation charge. In connection with the Rice PPA, on December 14, 2016, we also entered into a Railcar Usage Agreement with Rice, pursuant to which Rice will borrow railcars from us to transport the purchased products.On March 8, 2017, we entered into a multi-year Master Product Purchase Agreement (the “PPA”) with Liberty Oilfield Services, LLC (the “Buyer”) for finer mesh sands. We expect that the Buyer will begin purchasing frac sand under the PPA in May 2017. The PPA is structured as a take-or-pay agreement.We are currently in discussions with certain existing and prospective customerssource of proppant in the pressure pumpingPermian basin. Additionally, oil and explorationnatural gas companies reduced their spending in the latter portion of the year due to strong spending in the first half of 2018, decreasing oil prices in the fourth quarter of 2018, as well as demands from their investors for more disciplined capital spending. Demand briefly recovered during the summer of 2019 before declining toward the end of 2019 as oil and production industriesgas companies exhausted their budgets and managed their capital spending to be in line with their expected operating cash flows.We have found that, increasingly over the last two years, customers are disinclined to enter into long-term take-or-pay agreements with minimum volume commitments, particularlycontracts for finer mesh sand. We alsotheir frac sand supply and have experienced a recentinstead trended toward purchasing their frac sand supply in the spot market at market prices. Should our customer base continue to limit their exposure to longer term contracts, we intend to increase in interest for recurring spotfocus on shorter term contracts and increase sales in the open market and have conducted some spot sales on a select basis. If we were to enter into any such long-term agreement or conduct additional spot sales, the additional volumes we sell could be material to our performance and prospects. We can provide no assurance, however, that we will bemarket.Customers renting SmartSystems are able to enter into any of these agreements or complete any such sales. Entry intotailor the long-term contractual agreements is subject to, among other things, agreement on the purchase price for our frac sand and the negotiation and execution of definitive documentation, and entry into spot sales is subject to agreement on the terms of any such sale.Capital PlansBased on our assessment of increased demand for our products, particularly fine mesh sand, we have decided to increase the wet and dry plant processing capacity at our Oakdale facility in order to produce up to approximately 4.4 million tons of raw frac sand per year. We have also decided to expand rail and logistics infrastructure in Wisconsin to support this potential increase in customer demand. Additionally, we continue to evaluate other proposed projects and related expenditures, such as investments in transload facilities located in the shale operating basins, in light of customer demand and energy market trends. There can be no assurance, however, that all or any of these initiatives will be executed or that the results therefrom will be materially beneficial to our financial performance.Industry Trends Impacting Our BusinessUnless otherwise indicated, the information set forth under “—Industry Trends Impacting Our Business,”contract, including all statistical data and related forecasts, is derived from The Freedonia Group’s Industry Study #3302, “Proppants in North America,” published in September 2015, Spears & Associates’ “Hydraulic Fracturing Market 2005-2017” published in the fourth quarter 2016, PropTester, Inc. and Kelrik, LLC’s “2015 Proppant Market Report” published in March 2016 and Baker Hughes’ “North America Rotary Rig Count” published in July 2016. While we are not aware of any misstatements regarding the proppant industry data presented herein, estimates involve risks and uncertainties and are subject to change based on various factors, including those discussed under the heading “Risk Factors.”Demand TrendsAccording to Spears, the U.S. proppant market, including raw frac sand, ceramic and resin-coated proppant, was approximately 35.5 million tons in 2016. Kelrik estimates that the total raw frac sand market in 2015 represented approximately 92.3% of the total proppant market by weight. Market demand in 2015 dropped by approximately 28% from 2014 record demand levels (and a further estimated decrease of 43% in 2016 from 2015) due to the downturn in commodity prices since late 2014, which led to a corresponding decline in oil and natural gas drilling and production activity. According to the Freedonia Group, during the period from 2009 to 2014, proppant demand by weight increased by 42% annually. Spears estimates from 2016 through 2020 proppant demand is projected to grow by 37.0% per year, from 35.5 million tons per year to 125 million tons per year, representing an increase of approximately 89.5 million tons in annual proppant demand over that time period.
Demand growth for raw frac sand and other proppants is primarily driven by advancements in oil and natural gas drilling and well completion technology and techniques, such as horizontal drilling and hydraulic fracturing. These advancements have made the extraction of oil and natural gas increasingly cost-effective in formations that historically would have been uneconomic to develop. While current horizontal rig counts have fallen significantly from their peak of approximately 1,370 in 2014, rig count grew at an annual rate of 18.7% from 2009 to 2014. Additionally, the percentage of active drilling rigs used to drill horizontal wells, which require greater volumes of proppant than vertical wells, has increased from 42.2% in 2009 to 68.4% in 2014, and as of July 2016 the percentage of rigs drilling horizontal wells is 77% according to the Baker Hughes Rig Count. Moreover, the increase of pad drilling has led to a more efficient use of rigs, allowing more wells to be drilled per rig. As a result of these factors, well count, and hence proppant demand, has grown at a greater rate than overall rig count. Spears estimates that in 2018, proppant demand will exceed the 2014 peak (of approximately 74 million tons) and reach 85 million tons even though the projection assumes approximately 10,000 fewer wells will be drilled. Spears estimates that average proppant usage per well will be approximately 5,000 tons per well by 2020. Kelrik notes that current sand-based slickwater completions use in excess of 7,500 tons per well of proppant.While demand for proppant has declined since late 2014 in connection with the downturn in commodity prices and the corresponding decline in oil and natural gas drilling and production activity, we believe that the demand for proppant will increase over the medium and long term as commodity prices rise from their lows in 2016, which will lead producers to resume completion of their inventory of drilled but uncompleted wells and undertake new drilling activities. Further, we believe that demand for proppant will be amplified by the following factors:improved drilling rig productivity, resulting in more wells drilled per rig per year;completion of exploration and production companies’ inventory of drilled but uncompleted wells;increases in the length of the typical horizontal wellbore;increases inadjusting the number of fracture stages per foot inSmartDepot silos to be supplied, to meet their short-term and long-term needs and may adjust the typical completed horizontal wellbore;increases in the volumenumber of proppant used per fracturing stage;renewed focus of exploration and production companies to maximize ultimate recovery in active reservoirs through downspacing; andincreasing secondary hydraulic fracturing of existing wellsSmartDepot silos as early shale wells age.Recent growth in demand for raw frac sand has outpaced growth in demand for other proppants, and industry analysts predict that this trend will continue. As well completion costs have increased as a proportion of total well costs, operators have increasingly looked for ways to improve per well economics by lowering costs without sacrificing production performance. To this end, the oil and natural gas industry is shifting away from the use of higher-cost proppants towards more cost-effective proppants, such as raw frac sand. Evolution of completion techniques and the substantial increase in activity in U.S. oil and liquids-rich resource plays has further accelerated the demand growth for raw frac sand.Historically, oil and liquids-rich wells use a higher proportion of coarser proppant while dry gas wells typically use finer grades of sand. In the past, with the majority of U.S. exploration and production spending focused on oil and liquids-rich plays, demand for coarser grades of sand exceeded demand for finer grades; however, due to innovations in completion techniques, demand for finer grade sands have shown a considerable resurgence. According to Kelrik, a notable driver impacting demand for fine mesh sand is increased proppant loadings, specifically, larger volumes of proppant placed per frac stage. Kelrik expects the trend of using larger volumes of finer mesh materials such as 100 mesh sand and 40/70 sand, to continue.Supply TrendsIn recent years, through the fall of 2014, customer demand for high-quality raw frac sand outpaced supply. Several factors contributed to this supply shortage, including:the difficulty of finding raw frac sand reserves that meet API specifications and satisfy the demands of customers who increasingly favor high-quality Northern White raw frac sand;the difficulty of securing contiguous raw frac sand reserves large enough to justify the capital investment required to develop a processing facility;challenges of identifying reserves with the above characteristics that have rail access neededequipment is made available for low-cost transportation to major shale basins;the hurdles to securing mining, production, water, air, refuse and other federal, state and local operating permits from the proper authorities;local opposition to development of certain facilities, especially those that require the use of on-road transportation, including moratoria on raw frac sand facilities in multiple counties in Wisconsin and Minnesota that hold potential sand reserves; andthe long lead time required to design and construct sand processing facilities that can efficiently process large quantities of high-quality raw frac sand.Supplies of high-quality Northern White raw frac sand are limited to select areas, predominantly in western Wisconsin and limited areas of Minnesota and Illinois. The ability to obtain large contiguous reserves in these areas is a key constraint and can be an important supply consideration when assessing the economic viability of a potential raw frac sand facility. Further constraining the supply and throughput of Northern White raw frac sand is that not all of the large reserve mines have onsite excavation and processing capability. Additionally, much of the recent capital investment in Northern White raw frac sand mines was used to develop coarser deposits in western Wisconsin. With the shift to finer sands in the liquid and oil plays, many mines may not be economically viable as their ability to produce finer grades of sand may be limited.We operate in a highly regulated environment overseen by many government regulatory and enforcement bodies at the local, state and federal levels. To conduct our mining operations, we are required to have obtained permits and approvals that address environmental, land use and safety issues at our Oakdale facility, Byron transload facility and our Hixton mine location. Our current and planned areas for excavation at our Oakdale property are permitted for extraction of our proven reserves. Outlying areas at the edge of our Oakdale property’s boundaries that lie in areas designated as wetlands will require additional local, state and federal permits prior to mining and reclaiming those areas.We also meet requirements for several international standards concerning safety, greenhouse gases and rail operations. We have voluntarily agreed to meet the standards of the Wisconsin DNR’s “Green Tier” program and the “Wisconsin Industrial Sand Association.” Further, we have agreed to meet the standards required to maintain our ISO 9001/14001 quality/environmental management system registrations. These voluntary requirements are tracked and managed along with our permits.While resources invested in securing permits are significant, this cost has not had a material adverse effect on our results of operations or financial condition. We cannot assure that existing environmental laws and regulations will not be reinterpreted or revised or that new environmental laws and regulations will not be adopted or become applicable to us. Revised or additional environmental requirements that result in increased compliance costs or additional operating restrictions could have a material adverse effect on our business.Our Customers and ContractsOur core customers are major oil and natural gas exploration and production and oilfield service companies. These customers have signed long-term take-or-pay contracts, which mitigate our risk of non-performance by such customers. Our contracts provide for a true-up payment in the event the customer does not take delivery of the minimum annual volume of raw frac sand specifiedto use or other obligations in the contract are met. Our first SmartDepot silos became available in the third quarter of 2018 and has not purchasedthe first set were contracted in certain prior periods an amount exceeding the minimum volume, resulting in a shortfall. The true-up payment is designed to compensate us, at least in part, for our margins for the applicable contract year and is calculated by multiplying the contract price (or, in some cases, a discounted contract price) by the tonnage shortfall. Any salesJanuary 2019. As of the shortfall volumes to other customers on the spot market would provide usDecember 31, 2019, we had four fleets of SmartSystems operating with additional margin on these volumes. Additionally, some of our contracts include monthly reservation charges that the customer is required to pay for minimum monthly volumes regardless of whether the customer takes delivery of the sand. customers.For the year ended December 31, 2016, EOG Resources, US2019, Liberty, Rice Energy (a subsidiary of EQT Corporation), Hess Corporation, and U.S. Well Services, Weatherford and Nabors Completion & Production Services accounted for 37%23.8%, 22% 19.0%, 15.5%,and 25%14.7% respectively, of total revenue, and 11%the remainder of our revenues were from 20 customers. For the year ended December 31, 2018, Liberty, EQT, WPX Energy, and Hess accounted for 22.8%, 21.4%, 11.6%, and 10.6%, respectively, of our total revenues, and the remainder of our revenues represented sales to fivewere from 18 customers. For the year ended December 31, 2015, EOG Resources, US2017, Rice Energy, Liberty, Weatherford, and U.S. Well Services Weatherford, and Archer Pressure Pumping accounted for 35.0%27.1%, 24.6%20.6%, 18.4%13.7%, and 15.8%10.2%, respectively, of our total revenues, and the remainder of our revenues represented sales to three customers. For the year ended December 31, 2014, Weatherford, EOG Resources and US Well Services accounted for 32.1%, 30.6%, 16%, respectively, of our total revenues, and the remainder of our revenues represented sales to elevenwere from 16 customers. Please read “Risk Factors—Risks Inherent in Our Business—A substantial majority of our revenues have been generated under contracts with a limited number of customers, and the loss of, material nonpayment or nonperformance by or significant reduction in purchases by any of them could adversely affect our business, results of operations and financial condition.” As of March 13, 2017, we have approximately 63.3% of our current annual production capacity contracted under long-term take-or-pay contracts, with a volume-weighted average remaining term of approximately 3.1 years. For the years ended December 31, 2016, 20152019, 2018, and 2014,2017, we generated approximately 97.6%92.5%, 96.4%80.1%, and 90.1%79.8%, respectively, of our revenues from raw frac sand delivered under long-term take-or-pay contracts.Capital PlansWe sell raw frac sand under long-term contractsexpect to continue expanding our SmartSystems wellsite proppant storage solutions and evaluate other proposed projects and related expenditures, such as well as in the spot market if we have excess production and the spot market conditions are favorable.Our current contracts include agreed price ranges indexed to the price of crude oil (based upon the average WTI as listed on www.eia.doe.gov). Our contracts contain provisions allowing for upward adjustment including: (i) annual percentage price escalators, or (ii) market factor increases, including a natural gas surcharge and/or a propane surcharge which are applied if the Average Natural Gas Price or the Average Quarterly Mont Belvieu TX Propane Spot Price, respectively, as listed by the U.S. Energy Information Administration, are above the benchmark set in the contract for the preceding calendar quarter.Our contracts generally provide that, if we are unable to deliver the contracted minimum volume of raw frac sand, the customer has the right to purchase replacement raw frac sand from alternative sources, provided that our inability to supply is not the result of an excusable delay. In the event that the price of replacement raw frac sand exceeds the contract price and our inability to supply the contracted minimum volume is not the result of an excusable delay, we are responsible for the price difference. At December 31, 2016, we had significant levels of raw frac sand inventory on hand; therefore, the likelihood of any such penalties was considered remote.Each of our contracts contains a minimum volume purchase requirement and provides for delivery of raw frac sand free carrier (“FCA”)improvements at our Oakdale facility and investments in transload facilities located in various operating basins, in light of customer demand and energy market trends. There can be no assurance, however, that all or any of these initiatives will be executed or that the results therefrom will be materially beneficial to our financial performance.Industry Trends Impacting Our BusinessUnless otherwise indicated, the information set forth under this section, including all statistical data and related forecasts, is derived from Spears’ “Proppant Market Report with Frac Market Overview - Q4 2020” published in the first quarter of 2020. While we are not aware of any misstatements regarding the proppant industry data presented herein, estimates involve risks and uncertainties and are subject to change based on various factors, including those discussed under the heading “Risk Factors.”10Demand TrendsAccording to Spears, the North American proppant market, including frac sand, ceramic and resin-coated proppant, was approximately 111 million tons in 2019, which is a 5% increase over the 105 million tons Spears reported for 2018. Spears estimates that 2020 demand will be flat with 111 million tons of proppant demand. 
2014 2015 2016 2017 2018 2019 2020E New U.S. Horizontal Wells 20,906 14,500 8,638 13,166 15,686 14,615 12,607 Proppant Demand (Mil Tons) 69 55 44 80 105 111 111 Although the horizontal rig count is expected to decrease in 2020, frac sand demand is projected to be consistent with 2019 levels due to longer laterals, an increase in the number of frac stages per well and an increase in the amount of proppant used in each stage. Demand growth for frac sand and other proppants is primarily driven by advancements in oil and natural gas drilling and well completion technology and techniques, such as horizontal drilling and hydraulic fracturing. These advancements have made the extraction of oil and natural gas increasingly cost-effective in formations that historically would have been uneconomic to develop. More proppant is being used per well, which is supporting proppant demand despite horizontal drilling activity stabilizing. Spears estimates that proppant demand in 2020 will be consistent with 2019, as new wells will decrease while the average proppant used per well is expected to increase from 6,600 tons per well in 2019 to approximately 7,600 tons per well by the end of 2020.Supply TrendsThere has been consolidation activity including mergers, acquisitions, closures of mines and bankruptcy filings among our peers. Additional consolidation activity is expected in 2020 in the mining, transloading and logistics businesses. Many large oil and natural gas exploration and production companies have continued to integrate vertically by sourcing their own proppant and some own their own sand mines. Spears identifies a growing trend in this direction and estimates 50% of the North American proppant demand is currently direct-sourced. In-basin demand in the Permian basin more than tripled from 2017 through 2019. Sand supply is expected to peak in late 2019 or early 2020 with few additional suppliers entering the field.Supplies of high-quality Northern White frac sand are limited to select areas, predominantly in western Wisconsin and limited areas of Minnesota and Illinois. We believe the ability to obtain large contiguous reserves in these areas is a key constraint and can be an important supply consideration when assessing the economic viability of a potential frac sand facility. CertainFurther constraining the supply and throughput of Northern White frac sand is that not all of the large reserve mines have on-site excavation, processing or logistics capabilities. Historically, much of the capital investment in Northern White frac sand11mines was used for the development of coarser deposits in western Wisconsin, which is inconsistent with the increasing demand for finer mesh frac sand in recent years. As such, we’ve seen competitors in the Northern White frac sand market reduce their capacity by shuttering or idling operations as the shift to finer sands in hydraulic fracturing of oil and natural gas wells erodes the ongoing economic viability of producing coarser grades of sand.Environmental, Social & GovernanceIn 2019, we set a Company objective of adopting a formal Environmental, Social & Governance (“ESG”) program. Smart Sand already has an exceptional legacy of environmental performance. In 2014, we joined the Wisconsin Green Tier program, a marquee public/private partnership, under which the Wisconsin Department of Natural Resources worked with us on a plan to meet applicable legal requirements and to improve our facility from an environmental perspective. In addition to documenting seven years of compliant operations, we have worked on, among other things, protecting wetlands, reducing usage and impact of heavy equipment, reducing fuel usage of equipment and vehicles and defining best practices for onsite water management. We are also a member of Wisconsin’s sustainability initiative, Green Masters. As part of this program, we have completed a detailed survey of our contracts allowsustainability and social responsibility activities and started the customerprocess of a complete carbon inventory. As a mining company, we invest and plan for reclamation, ensuring that the land is returned to deferbeneficial use. Smart Sand has held ISO 9001/14001-2015 environmental and quality management systems for the past five years. Smart Sand is also a portionmember of the annual minimum volume to future contract years, subjectWisconsin Industrial Sand Association, a select group of mining companies focused on safety, environmental and public policy.One of the goals of the United Nations’ Paris Agreement is a carbon neutral world by the year 2050 and we are aligned with this goal. We believe that reducing our carbon footprint will lead to a maximum deferral amount. The mesh size specificationsbetter world. As a mining company, we are an energy consumer, and we have already seen that we can reduce greenhouse gas emissions by using the best technologies and taking a thoughtful approach to our energy choices. We know that energy consumption is only one part of ethical operations. For additional information regarding the United Nations’ Paris Agreement, see “Item 1A Risk Factors - Risks Related to Environmental, Mining and Other Regulation - Climate change legislation and regulatory initiatives could result in increased compliance costs for us and our customers.”We provide social value through our excellent employment opportunities. Our first priority is keeping our employees safe, which we accomplish through daily training and inspections. Our business supports hundreds of families and we are proud to offer rewarding and interesting work with competitive compensation and benefits. We promote from within, provide continuous training, hire with a passion for diversity and provide every employee with the opportunity to participate in retirement plans and ownership of the Company. Smart Sand is an active charitable partner in the communities in which it operates, making both financial and time investments in those communities.Sustainability has always been part of the Smart Sand story, but we are looking forward to evaluating what we have done and identifying improvement opportunities. In 2020, we will articulate our ESG goals and lay out our vision for reaching carbon-neutrality. We are embracing this growing movement and designing an area in our contracts varywebsite to articulate our ESG goals and includereport on our performance.PermitsWe operate in a mix of 20/40, 30/50, 40/70highly regulated environment overseen by many governmental regulatory and 100 mesh raw frac sand. Inenforcement bodies at the eventlocal, state and federal levels. To conduct our operations, we are required to have obtained permits and approvals that one or moreaddress environmental, land use and safety issues at our Oakdale, Byron and Van Hook transload facilities. Our current and planned areas for excavation at our Oakdale facility are permitted for extraction of our current contract customers decidesproven reserves. Portions of our Oakdale facility lie in areas designated as wetlands, which will require additional local, state and federal permits prior to mining and reclaiming those areas.We also must meet requirements for certain international standards concerning safety, greenhouse gases and rail operations. We have voluntarily agreed to meet the standards of the Wisconsin Department of Natural Resources’ “Green Tier” program, the “National Industrial Sand Association” (“NISA”) and the “Wisconsin Industrial Sand Association.” Further, we have agreed to meet the standards required to maintain our ISO 9001-2015 and ISO 14001-2015 quality/environmental management system registrations. These voluntary requirements are tracked and managed along with our permits.While resources invested in securing permits are significant, this cost has not had a material adverse effect on our results of operations or financial condition. We cannot ensure that existing environmental laws and regulations will not be reinterpreted12or revised or that new environmental laws and regulations will not be adopted or become applicable to continue purchasingus. Revised or additional environmental requirements that result in increased compliance costs or additional operating restrictions could have a material adverse effect on our raw frac sand following the expiration of its contract with us, we believe that we will be able to sell the volume of sand that they previously purchased to other customers through long-term contracts or sales on the spot market.Major StockholderOur Relationship with Our SponsorOur sponsorlargest stockholder is a fund managed by Clearlake Capital Group, L.P., which, together with its affiliates and related persons we refer to as Clearlake.(“Clearlake”). Clearlake Capital Group, L.P. is a leading private investment firm founded in 2006. With a sector-focused approach, the firm seeks to partner with world-class management teams by providing patient, long-term capital to dynamic businesses that can benefit from Clearlake’s operational improvement approach, O.P.S.SM.® The firm’s core target sectors are industrials, and energy; software, and technology-enabled services;technology, and consumer. Clearlake currently has over $3$17 billion of assets under management and its senior investment principals have led or co-led 90over 200 investments. We believe our relationship with Clearlake provides us with a unique resource to effectively compete for acquisitions within the industry by being able to take advantage of their experience in acquiring businesses to assist us in seeking out, evaluating and closing attractive acquisition opportunities over time.CompetitionThe proppant industry is highly competitive. Please read “Risk Factors—Risks Inherent in Our Business—We face significant competition that may cause us to lose market share.” There are numerous large and small producers in all sand producing regions of the United StatesNorth America with whom we compete.compete, many of which also offer solutions for unloading, storing and delivering proppant to the wellsite. Our main competitors include Badger Mining Corporation, Emerge Energy Services LP, Fairmount Santrol, Hi-Crush, Partners LP, UniminInc., Covia Holdings Corporation, and U.S. Silica Holdings, Inc.Although some of our competitors may have greater financial and otheror natural resources than we do, we believe that we are well-positioned competitively well positioned due to our low cost of sand production, transportationlow debt levels, logistics infrastructure and high-quality, balanced reserve profile.profile and patented SmartSystems wellsite proppant storage solutions, which offer numerous benefits over our competition. The most important factors on which we compete are our service capabilities, product quality, proven performance, sand characteristics, transportation capabilities, reliability of supply, price, logistics services and price.the performance of patented SmartSystems wellsite proppant storage solutions technology. Demand for raw frac sand and logistics solutions and the prices that we will be able to obtain for our products, to the extent not subject to a fixed price or take-or-pay contract, are closely linked to proppant consumption patterns for the completion of oil and natural gas wells in North America. These consumption patterns are influenced by numerous factors, including, among other things, the price for hydrocarbons, the drilling rig countoil and natural gas and hydraulic fracturing activity, including the number of stages completed and the amount of proppant used per stage. Further, these consumption patterns are also influenced by the location, quality, price and availability of raw frac sand and other types of proppants such as resin-coated sand and ceramic proppant.SeasonalityOur business is affected to some extent by seasonal fluctuations in weather that impact the production levels atfor a portion of our wet processing plant.plant capacity. While our dry plants are able to process finished product volumes evenly throughout the year, our excavation and our wet sand processing activities arehave historically been limited to primarily non-winter months. As a consequence, we experiencehave 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 overproduceoverproduced wet sand to meet demand in the winter months. These higher cash operating costs are capitalized into inventory and expensed when these tons are sold.sold, which can lead to us having higher overall costs in the first and fourth quarters of each calendar year as we expense inventory costs that were previously capitalized. However, during the fourth quarter of 2017, we finished construction of one of our new wet plants, which is an indoor facility that allows 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 raw 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. For a discussion of the impact of weather on our operations, please read “Risk Factors—Seasonal and severe weather conditions could have a material adverse impact on our business, results of operations and financial condition” and “Risk Factors—Our cash flow fluctuates on a seasonal basis.”13Intellectual PropertyOur intellectual property primarily consists of trade secrets, know-how and trademarks. We own patents and have patent applications pending related to our SmartSystems wellsite proppant storage solutions. All of the issued patents have an expiration date after July 2030. With respect to our other products, we principally rely on trade secrets, rather than patents, to protect our proprietary processes, methods, documentation and other technologies, as well as certain other business information.InsuranceWe believe that our insurance coverage is customary for the industry in which we operate and adequate for our business. As is customary in the proppant industry, we review our safety equipment and procedures and carry insurance against most, but not all, risks of our business. Losses and liabilities not covered by insurance would increase our costs. To address the hazards inherent in our business, we maintain insurance coverage that includes physical damage coverage, third-party general liability insurance, employer’s liability, business interruption, environmental and pollution and other coverage, although coverage for environmental and pollution-related losses is subject to significant limitations.Environmental and Occupational Health and Safety RegulationsWe are subject to stringent and complex federal, state, local and localinternational laws and regulations governing the discharge of materials into the environment or otherwise relating to protection of worker health, safety and the environment. Compliance with these laws and regulations may expose us to significant costs and liabilities and cause us to incur significant capital expenditures in our operations. Any failure to comply with these laws and regulations may result in the assessment of administrative, civil and criminal penalties, imposition of remedial obligations, and the issuance of injunctions delaying or prohibiting operations. Private parties may also have the right to pursue legal actions to enforce compliance as well as to seek damages for non-compliance with environmental laws and regulations or for personal injury or property damage. In addition, the clear trend in environmental regulation is to place more restrictions on activities that may affect the environment, and thus, any changes in, or more stringent enforcement of, these laws and regulations that result in more stringent and costly pollution control equipment, the occurrence of delays in the permitting or performance of projects, or waste handling, storage, transport, disposal or remediation requirements could have a material adverse effect on our operations and financial position.We do not believe that compliance by us and our customers with federal, state, local or localinternational environmental laws and regulations will have a material adverse effect on our business, financial position or results of operations or cash flows. We cannot assure you,be assured, however, that future events, such as changes in existing laws or enforcement policies, the promulgation of new laws or regulations or the development or discovery of new facts or conditions adverse to our operations will not cause us to incur significant costs. The following is a discussion of material environmental and worker health and safety laws, as amended from time to time that relate to our operations or those of our customers that could have a material adverse effect on our business.Air EmissionsOur operations are subject to the federal Clean Air Act (“CAA”) and related state and local laws, which restrict the emission of air pollutants and impose permitting, monitoring and reporting requirements on various sources. These regulatory programs may require us to install emissions abatement equipment, modify operational practices, and obtain permits for existing or new operations. Obtaining air emissions permits has the potential to delay the development or continued performance of our operations. Over the next several years, we may be required to incur certain capital expenditures for air pollution control equipment or to address other air emissions-related issues. Changing and increasingly stricterstringent requirements, future non-compliance, or failure to maintain necessary permits or other authorizations could require us to incur substantial costs or suspend or terminate our operations.Climate changeIn recent years, the U.S. Congress has considered legislation to reduce emissions of greenhouse gases (“GHG”). It presently appears unlikely that comprehensive climate legislation will be passed by either house of Congress in the near future, although energy legislation and other regulatory initiatives are expected to be proposed that may be relevant to GHG emissions issues. In addition,future. However, a number of states are addressing GHG emissions, primarily through the development of emission inventories or regional GHG cap and trade programs. Depending on the particular program, we could be required to control GHG emissions or to purchase and surrender allowances for GHG emissions resulting from our operations. Independent of Congress, the EPAU.S. Environmental Protection Agency (“EPA”) has adopted regulations controlling GHG emissions under its existing authority under the CAA. For example, following its findings that emissions of GHGs present an endangerment to human health and the environment because such emissions contributed to warming of the Earth’s atmosphere and other climatic changes, the EPA has adopted regulations under existing provisions of the CAA that, among other things, establish construction and operating permit reviews for GHG emissions from certain large stationary sources that are already potential major sources for conventional pollutants. In addition, the EPA has adopted rules requiring the monitoring and reporting of GHG emissions from specified production, processing, transmission and storage facilities in the United States on an annual basis. Also, the United States is one of almost 200 nations that, in December 2015, agreed to the Paris Agreement, an international climate change agreement in Paris, France that calls for countries to set their own GHG emissions targets and be transparent about the measures each country will use to achieve its GHG emissions targets. The agreement was signed in April 2016, and became effective November 2016. The United States is one of over 70 nations having ratified or otherwise consented to be bound by the agreement. Although it is not possible at this time to predict howauthority. Compliance with new laws or regulations in the United States or any legal requirements imposed following the United States’ agreeing to the Paris Agreement thatlegislation may be adopted or issued to address GHG emissions would impact our business, any such future laws, regulations or legal requirements imposing reporting or permitting obligations on, or limiting emissions of GHGs from, our equipment and operations could require us to incur substantial costs to reduce emissions of GHGs associated withor suspend or terminate our operations as well as delays or restrictions in our ability to permit GHG emissions from new or modified sources. In addition, substantial limitations on GHG emissions could adversely affect demand for the oil and natural gas we produce. Finally, it should be noted that increasing concentrations of GHGs in the Earth’s atmosphere may produce climate changes that have significant physical effects, such as increased frequency and severity of storms, floods and other climatic events; if any such effects were to occur, they could have an adverse effect on our exploration and production operations.Water DischargesThe Clean Water Act (“CWA”), and analogous state laws impose restrictions and strict controls with respect to the discharge of pollutants, including spills and leaks of oil and other substances, into state waters or waters of the United States. The discharge of pollutants into regulated waters is prohibited, except in accordance with the terms of a permit issued by the EPA or an analogous state agency. Spill prevention control and countermeasure requirements require containment to mitigate or prevent contamination of navigable waters in the event of an oil overflow, rupture or leak, and the development and maintenance of Spill Prevention Control and Countermeasure, or SPCC, plans at our facilities. The CWA and regulations implemented thereunder also prohibit the discharge of dredge and fill material into regulated waters, including jurisdictional wetlands, unless authorized by the Army Corps of Engineers (“Corps”) pursuant to an appropriately issued permit. In addition, the CWA and analogous state laws require individual permits or coverage under general permits for discharges of storm water runoff from certain types of facilities. The EPA has issued final rules attempting to clarify the federal jurisdictional reach over waters of the United States but this rule has been stayed nationwide by the U.S. Sixth Circuit Court of Appeals as that appellate court and numerous district courts ponder lawsuits opposing implementation of the rule. In February 2016, a split three-judge panel of the Sixth Circuit Court of Appeals concluded that it has jurisdiction to review challenges to these finalCompliance with new rules and the Sixth Circuit subsequently elected notlegislation could require us to review this decision en banc but it is currently unknown whether other federal Circuit Courts or state courts currently considering this rulemaking will place their cases on hold, pending the Sixth Circuit’s hearing of the case.face increased costs and delays with respect to obtaining permits for expansion activities. Federal and state regulatory agencies can impose administrative, civil and criminal penalties as well as other enforcement mechanisms for non-compliance with discharge permits or other requirements of the CWA and analogous state laws and regulations.Hydraulic FracturingWe supply raw frac sand to hydraulic fracturing operators in the oil and natural gas industry. Hydraulic fracturing is an important and increasingly common practice that is used to stimulate production of oil and natural gas and oil from low permeability hydrocarbon bearing subsurface rock formations. The hydraulic fracturing process involves the injection of water, proppants, and chemicals under pressure into the formation to fracture the surrounding rock, increase permeability and stimulate production. Although we do not directly engage in hydraulic fracturing activities, our customers purchase our raw frac sand for use in their hydraulic fracturing activities. Hydraulic fracturing is typically regulated by state oil and natural gas commissions and similar agencies. Some states have adopted, and other states are considering adopting, regulations that could impose new or more stringent permitting, disclosure or well construction requirements on hydraulic fracturing operations. Aside from state laws, local land use restrictions may restrict drilling in general or hydraulic fracturing in particular. Municipalities may adopt local ordinances attempting to prohibit hydraulic fracturing altogether or, at a minimum, allow such fracturing processes within their jurisdictions to proceed but regulating the time, place and manner of those processes. In addition, federal agencies have started to assert regulatory authority over the process and various studies have been conducted or are currently underway by the EPA, and other federal agencies concerning the potential environmental impacts and, in some instances, have pursued voter ballot initiatives of hydraulic fracturing activities. At the same time, certain environmental groups have suggested that additional laws may be needed to more closely and uniformly limit or otherwise regulate the hydraulic fracturing process, and legislation has been proposed by some members of Congress to provide for such regulation.The adoption of new laws or regulations at the federal or state levels imposing reporting obligations on, or otherwise limiting or delaying, the hydraulic fracturing process could make it more difficult to complete natural gas wells, increase our customers’ costs of compliance and doing business, and otherwise adversely affect the hydraulic fracturing services they perform, which could negatively impact demand for our raw frac sand. In addition, heightened political, regulatory, and public scrutiny of hydraulic fracturing practices could expose us or our customers to increased legal and regulatory proceedings, which could be time-consuming, costly, or result in substantial legal liability or significant reputational harm. We could be directly affected by adverse litigation involving us, or indirectly affected if the cost of compliance limits the ability of our customers to operate. Such costs and scrutiny could directly or indirectly, through reduced demand for our raw frac sand, have a material adverse effect on our business, financial condition and results of operations.The Resource Conservation and Recovery Act (“RCRA”) and comparable state laws control the management and disposal of hazardous and non-hazardous waste. These laws and regulations govern the generation, storage, treatment, transfer and disposal of wastes that we generate. In the course of our operations, we generate waste that are regulated as non-hazardous wastes and hazardous wastes, obligating us to comply with applicable standards relating to the management and disposal of such wastes. In addition, drilling fluids, produced waters, and most of the other wastes associated with the exploration, development, and production of oil or natural gas, if properly handled, are currently exempt from regulation as hazardous waste under RCRA and, instead, are regulated under RCRA’s less stringent non-hazardous waste provisions, state laws or other federal laws. However, it is possible that certain oil and natural gas drilling and production wastes now classified as non-hazardous could be classified as hazardous wastes in the future. Forexample, in May 2016, several non-governmental environmental groups filed suit against the EPA in the U.S. District Court for the District of Columbia for failing to timely assess its RCRA Subtitle D criteria regulations for oil and natural gas wastes, asserting that the agency is required to review its Subtitle D regulations every three years but has not conducted an assessment on those oil and natural gas waste regulations since July 1988. A loss of the RCRA exclusion for drilling fluids, produced waters and related wastes could result in an increase in our customers’ costs to manage and dispose of generated wastes and a corresponding decrease in their drilling operations, which developments could have a material adverse effect on our business.Site RemediationThe Comprehensive Environmental Response, Compensation, and Liability Act, as amended (“CERCLA”) and comparable state laws impose strict, joint and several liability without regard to fault or the legality of the original conduct on certain classes of persons that contributed to the release of a hazardous substance into the environment. These persons include the owner and operator of a disposal site where a hazardous substance release occurred and any company that transported, disposed of, or arranged for the transport or disposal of hazardous substances released at the site. Under CERCLA, such persons may be liable for the costs of remediating the hazardous substances that have been released into the environment, for damages to natural resources, and for the costs of certain health studies. In addition, where contamination may be present, it is not uncommon for the neighboring landowners and other third parties to file claims for personal injury, property damage and recovery of response costs. We have not received notification that we may be potentially responsible for cleanup costs under CERCLA at any site.Endangered SpeciesThe Endangered Species Act (“ESA”) restricts activities that may affect endangered or threatened species or their habitats. Similar protections are offered to migratory birds under the Migratory Bird Treaty Act. As a result of a settlement approved by the U.S. District Court for the District of Columbia in 2011, the U.S. Fish and Wildlife Service is(“FWS”) was required to consider listing numerous species as endangered or threatened under the Endangered Species Act before the15completion of the agency’s 2017 fiscal year. The FWS did not meet the deadline. Current ESA listings and the designation of previously unprotected species as threatened or endangered in areas where we or our customers operate could cause us or our customers to incur increased costs arising from species protection measures and could result in delays or limitations in our or our customers’ performance of operations, which could adversely affect or reduce demand for our raw frac sand.Mining and Workplace SafetyOur sand mining operations are subject to mining safety regulation. MSHAThe U.S. Mining Safety and Health Administration (“MSHA”) is the primary regulatory organization governing raw 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. To date, these inspections have not resulted in any citations for material violations of MSHA standards.OSHA has promulgated new rules for workplace exposure to respirable silica for several other industries. Respirable silica is a known health hazard for workers exposed over long periods. The MSHA is expected to adopt similar rules although they may change as part of its “Long Term Items” for rulemaking, and in August 2019 published a result of multiple legal challenges against the OSHA rules.formal request for information and data on feasible, best practices to protect miners' health from exposure to silica in respirable dust. Airborne respirable silica is associated with a limited number of 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. Smart Sand voluntarilyalso adheres to the National Industrial Sand Association’s (NISA)NISA’s respiratory protection program, and ensures that workers are provided with fitted respirators and ongoing radiological monitoring.Environmental ReviewsOur operations may be subject to broad environmental review under the National Environmental Policy Act, as amended, (“NEPA”). NEPA requires federal agencies to evaluate the environmental impact of all “major federal actions” significantly affecting the quality of the human environment. The granting of a federal permit for a major development project, such as a mining operation, may be considered a “major federal action” that requires review under NEPA. As part of this evaluation, the federal agency considers a broad array of environmental impacts, including, among other things, impacts on air quality, water quality, wildlife (including threatened and endangered species), historic and archeological resources, geology, socioeconomics, and aesthetics. NEPA also requires the consideration of alternatives to the project. The NEPA review process, especially the preparation of a full environmental impact statement, can be time consuming and expensive. The purpose of the NEPA review process is to inform federal agencies’ decision-making on whether federal approval should be granted for a project and to provide the public with an opportunity to comment on the environmental impacts of a proposed project. Though NEPA requires only that an environmental evaluation be conducted and does not mandate a particular result, a federal agency could decide to deny a permit or impose certain conditions on its approval, based on its environmental review under NEPA, or a third party could challenge the adequacy of a NEPA review and thereby delay the issuance of a federal permit or approval. In January 2020, the White House Council on Environmental Quality (“CEQ”) published a Notice of Proposed Rulemaking that would revise NEPA’s implementing regulations, with the stated purpose of facilitating more efficient and timely NEPA reviews. CEQ is currently soliciting public comments on its proposal through March 10, 2020. At this time we cannot predict what revisions, if any, will be made to NEPA’s implementing regulations, and what impacts, if any, they will have on our operations.16State and Local RegulationWe are subject to a variety of state and local environmental review and permitting requirements. Some states, including Wisconsin where our current projects are located, have state laws similar to NEPA; thus, our development of a new site or the expansion of an existing site may be subject to comprehensive state environmental reviews even if it is not subject to NEPA. In some cases, the state environmental review may be more stringent than the federal review. Our operations may require state-law based permits in addition to federal permits, requiring state agencies to consider a range of issues, many the same as federal agencies, including, among other things, a project’s impact on wildlife and their habitats, historic and archaeological sites, aesthetics, agricultural operations, and scenic areas. Wisconsin has specific permitting and review processes for commercial silica mining operations, and state agencies may impose different or additional monitoring or mitigation requirements than federal agencies. The development of new sites and our existing operations also are subject to a variety of local environmental and regulatory requirements, including land use, zoning, building, and transportation requirements.Demand for raw frac sand in the oil and natural gas industry drove a significant increase in the production of frac sand. As a result, some local communities expressed concern regarding silica sand mining operations. These concerns have generally included exposure to ambient silica sand dust, truck traffic, water usage and blasting. In response, certain state and local communities have developed or are in the process of developing regulations or zoning restrictions intended to minimize dust from becoming airborne, control the flow of truck traffic, significantly curtail the amount of practicable area for mining activities, provide compensation to local residents for potential impacts of mining activities and, in some cases, ban issuance of new permits for mining activities. To date, we have not experienced any material impact to our existing mining operations or planned capacity expansions as a result of these types of concerns. We would expect this trend to continue as oil and natural gas production increases.In August 2014, we were accepted as a “Tier 1”Tier 1 participant in Wisconsin’s voluntary “Green Tier”Green Tier program, which encourages, recognizes and rewards companies for voluntarily exceeding environmental, health and safety legal requirements. Successful Tier 1 participants are required to demonstrate a strong record of environmental compliance, develop and implement an environmental management system meeting certain criteria, conduct and submit annual performance reviews to the Wisconsin Department of Natural Resources, promptly correct any findings of non-compliance discovered during these annual performance reviews, and make certain commitments regarding future environmental program improvements. Our most recent annual report required under the Tier 1 protocol was submitted to the Green Tier Program contact on July 28, 2016.EmployeesAs of December 31, 2016,2019, we employed 103285 people. None of our employees are subject to collective bargaining agreements. We offer competitive salaries and a comprehensive package of employee benefits, including bonuses, retirement savings plans, medical, dental, life and disability coverage. We consider our employee relations to be good.Executive Officers of the RegistrantCharles E. YoungCharles E. Young was named Chief Executive Officer in July 2014. Mr. Young has also served as a director since September 2011. Mr. Young founded Smart Sand, LLC (our predecessor) and served as its President from November 2009 to August 2011. Mr. Young served as our President and Secretary from September 2011 to July 2014. Mr. Young has over 2025 years of executive and entrepreneurial experience in the high-technology, telecommunications and renewable energy industries. He previously served as the President and Founder of Premier Building Systems, a construction, solar, geothermal and energy audit company in Pennsylvania and New Jersey from 2006 to 2011. Mr. Young serves as a director for GlobeLTR Energy,Gravity Oilfield Services, Inc., a privately-held company. Mr. Young received a B.A. in Political Science from Miami University. Mr. Young is the brother of William John Young, our Chief Operating Officer, and James D. Young, our Executive Vice President, of SalesGeneral Counsel and Logistics.Secretary. We believe that Mr. Young’s industry experience and deep knowledge of our business makes him well suited to serve as Chief Executive Officer and Director.Lee E. BeckelmanLee E. Beckelman was named Chief Financial Officer in August 2014. From December 2009 to February 2014, Mr. Beckelman served as Executive Vice President and Chief Financial Officer of Hilcorp Energy Company, an exploration and production company. From February 2008 to October 2009, he served as the Executive Vice President and Chief Financial Officer of Price Gregory Services, Incorporated, a crude oil and natural gas pipeline construction firm until its sale to Quanta17Services. Prior thereto, Mr. Beckelman served in various roles from 2002 to 2007 at Hanover Compressor Company, an international oil fieldoilfield service company, until its merger with Universal Compression to form Exterran Holdings. Mr. Beckelman received his BBA in Finance with High Honors from the University of Texas at Austin.
William John YoungWilliam John Young was named Chief Operating Officer in April 2018. Prior to that time, he served as Executive Vice President of Sales and Logistics from October 2016 to April 2018. Mr. Young served as Vice President of Sales and Logistics from May 2014 to September 2016 and Director of Sales from November 2011 to April 2014. Prior to joining us, Mr. Young was a Director of Sales for Comcast Corporation from 2002 to 2011. Mr. Young brings over 25 years of experience in the mining, commercial telecommunications and broadband industries. Mr. Young received a BSc in Biology from Dalhousie University. Mr. Young is the brother of Charles E. Young, our Chief Executive Officer and member of our board of directors, and James D. Young, our Executive Vice President, General Counsel and Secretary.Robert KiszkaRobert Kiszka was named Executive Vice President of Operations in May 2014. Previously, Mr. Kiszka has served as the Vice President of Operations sincefrom September 2011.2011 to May 2014. Mr. Kiszka has over 2025 years of construction, real estate, renewable energy and mining experience. Mr. Kiszka has been the owner of A-1 Bracket Group Inc. since 2005 and was a member of Premier Building Systems LLC from 2010 to 2011. Mr. Kiszka attended Pedagogical University in Krakow, Poland and Rutgers University.William John YoungWilliam John YoungRonald P. WhelanRonald P. Whelan was named Executive Vice President of Sales and Logistics in October 2016. Mr. YoungJune 2018. Prior to that time, he served as Executive Vice President of SalesBusiness Development from April 2017 to June 2018, Vice President of Business Development from September 2016 to March 2017 and Logisticsas Director of Business Development from MayApril 2014 to September 2016 andAugust 2016. Prior to being named Director of SalesBusiness Development, Mr. Whelan was the Operations Manager responsible for the design, development and production of the Oakdale facility from November 2011 to April 2014. Before joining Smart Sand, Mr. Whelan ran his own software design company from 2004 to 2011 and was a member of Premier Building Systems LLC from 2008 to 2009. Mr. Whelan has over 18 years of entrepreneurial experience in mining, technology and renewable energy industries. Mr. Whelan received a B.A. in Marketing from Bloomsburg University and M.S. in Instructional Technology from Bloomsburg University.James D. YoungJames D. Young was named Executive Vice President, General Counsel and Secretary in June 2017. Prior to joining Smart Sand, Inc.,us, Mr. Young was Directora partner of Salesthe law firm Fox Rothschild LLP, where he worked for Comcast Corporation from 2002 to 2011. Mr. Young brings over 20thirteen years of experience in the mining, commercial telecommunications and broadband industries.served as our outside general counsel. Mr. Young received a BScJ.D. from Rutgers University School of Law and a B.A. in BiologyHistory and Political Science from Dalhousie University.the University of Toronto. Mr. Young is the brother of Charles E. Young, our Chief Executive Officer and member of our board of directors.Susan NeumannSusan Neumann was named Vice President of Accounting Controller and SecretaryController in October 2016. Previously, Ms. Neumann was named Controller and Secretary in April 2013 and July 2014, respectively. Prior to joining Smart Sand, Inc.us in April 2013, Ms. Neumann was an assurance senior manager at BDO USA, LLP (“BDO”). At BDO, she served in various roles in the assurance group from September 2000 to March 2013. Ms. Neumann received an MBA with a Global Perspective from Arcadia University in March 2008, and a B.A. in Accounting from Beaver College (currently Arcadia University) in May 2000.Ronald P. WhelanRonald P. Whelan was named Vice President of Business Development in September 2016. Mr. Whelan has.Available InformationOur website address is www.smartsand.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports are available on our website, without charge, as soon as reasonably practicable after they are filed electronically with the SEC. The SEC also served as Director of Business Development for Smart Sand, Inc. from April 2014 to August 2016maintains a website that contains reports, proxy and prior to that he wasinformation statements and other information statements and other information regarding issuers who file electronically with the Operations Manager responsible for the design, development and production of the Oakdale facility from November 2011 to April 2014. Prior to joining Smart Sand, Mr. Whelan ran his own software design company from 2004 to 2011 and was a member of Premier Building Systems LLC from 2008 to 2009. Mr. Whelan has over 15 years of entrepreneurial experience in mining, technology and renewable energy industries. Mr. Whelan received a B.A. in Marketing from Bloomsburg University and M.S. in Instructional Technology from Bloomsburg University.www.sec.gov.18ITEM 1A. – Risk FactorsRisks Inherent in Our BusinessOur business and financial performance depend on the level of activity in the oil and natural gas industry.Substantially all of our revenues are derived from sales to companies in the oil and natural gas industry. As a result, our operations are dependent on the levels of activity in oil and natural gas exploration, development and production. More specifically, the demand for the proppants we produce and our wellsite storage solutions is closely related to the number of oil and natural gas wells completed in geological formations where sand-based proppants are used in fracturing activities. These activity levels are affected by both short- and long-term trends in oil and natural gas prices, among other factors.In recent years, oilOil and natural gas prices and, therefore, the level of exploration, development and production activity, have experienced a high level of volatility leading to sustained declinedeclines from the highs in the latter half of 2014. Beginning in September 2014 and continuingthat have continued through early 2016, increasing global supply of oil, including a decision by the Organization of the Petroleum Exporting Countries (“OPEC”) to sustain its production levels in spite of the decline in oil prices, in conjunction with weakened demand from slowing economic growth in the Eurozone and China, created downward pressure on crude oil prices resulting in reduced demand for our products and pressure to reduce our product prices. In November and December 2016, OPEC and non-OPEC producers reached a curtailment agreement to curb output for the first six months of 2017 which has led to less oil price volatility and increased drilling and well completion activity in the short term. However, if the 2017 curtailment agreement is not upheld, this could lead to lower oil prices and reduced drilling and well completion activity which could adversely impact our operations.2020. Furthermore, the availability of key resources that impact drilling activity has experienced significant fluctuations andsignificantly fluctuated recently, which could impact product demand.produce.produce and our wellsite proppant storage solutions. Such a decline would have a material adverse effect on our business, results of operation and financial condition. The commercial development of economically-viableeconomically viable alternative energy sources (such as wind, solar, geothermal, tidal, fuel cells and biofuels) could have a similar effect. In addition, certain U.S. federal income tax deductions currently available with respect to oil and natural gas exploration and development including the repeal of the percentage depletion allowance for oil and natural gas properties, may be eliminated as a result of proposed legislation.eliminated. Any future decreases in the rate at which oil and natural gas reserves are discovered or developed, whether due to the passage of legislation, increased governmental regulation leading to limitations, or prohibitions on exploration and drilling activity, including hydraulic fracturing, or other factors, could have a material adverse effect on our business and financial condition, even in a stronger oil and natural gas price environment.We previously had difficulty maintaining compliance with the covenants and ratios required under our former revolving credit facility. We may have similar difficulties with our new revolving credit facility. Failure to maintain compliance with these financial covenants or ratios could adversely affect our business, financial condition, results of operations and cash flows.We have historically relied on our former revolving credit facility and expect to rely on our revolving credit facility to provide liquidity and support for our operations and growth objectives, as necessary. Our revolving credit facility requires us to comply with certain financial covenants and ratios. Our ability to comply with these restrictions and covenants in the future is uncertain and will be affected by the levels of cash flow from our operations and events or circumstances beyond our control, including events and circumstances that may stem from the condition of financial markets and commodity price levels. For example, as of September 30, 2015, our total leverage ratio exceeded the threshold of 3.00 to 1.00 under our former revolving credit facility. We were in compliance with all other covenants at that time. On December 18, 2015, we entered into the fourth amendment to our former revolving credit facility (the “Fourth Amendment”) which, among other things, waived the event of default related to the September 30, 2015 leverage ratio. At September 30, 2016, we were in compliance with the covenants contained in our former revolving credit facility. At December 31, 2016 we were in compliance with the covenants contained in our existing revolving credit facility.In the event that we are unable to access sufficient capital to fund our business and planned capital expenditures, we may be required to curtail potential acquisitions, strategic growth projects, portions of our current operations and other activities. A lack of capital could result in a decrease in our operations, subject us to claims of breach under customer and supplier contracts and may force us to sell some of our assets or issue additional equity on an untimely or unfavorable basis, each of which could adversely affect our business, financial condition, results of operations and cash flows.A substantial majority of our revenues have been generated under contracts with a limited number of customers, and the loss of, material nonpayment or nonperformance by or significant reduction in purchases by any of them could adversely affect our business, results of operations and financial condition.As of January 1, 2017,2020, we were contracted to sell raw frac sand produced from our Oakdale facility under foursix long-term take-or-pay contracts with a weightedvolume-weighted average remaining life of approximately 3.4 years.fifteen months. Because we have a small number of customers contracted under long-term take-or-pay contracts, these contracts subject us to counterparty risk. The ability or willingness of each of our customers to perform its obligations under a contract with us will depend on a number of factors that are beyond our control and may include, among other things, the overall operations and financial condition of the counterparty, the condition of the U.S. oil and natural gas exploration and production industry, continuing use of raw frac sand in hydraulic fracturing operations and general economic conditions. In addition, in depressed market conditions, our customers may no longer need the amount of raw frac sand for which they have contracted or may be able to obtain comparable products at a lower price. If our customers experience a significant downturn in their business or financial condition, they may attempt to renegotiate our contracts. For example, a numbercertain of our existing contracts were adjusted in 2015late 2018 and early 20162019 resulting in a combination of reduced average selling prices per ton, adjustments to take-or-pay volumes and length of contract, andcontract. We are also in litigation with one of our contracted customers recently initiated negotiations to extend the commencement dateover nonpayment of their contract. In the current market environment, customers have begun to purchase more volumes on a spot basis as compared to committing to term contracts, and we expect this trend to continue in the near term until oil and natural gas drilling and completion activity begins to increase.amounts due under such contracts. If any of our major customers substantially reduces or altogether ceases purchasing our raw frac sand and we are not able to generate replacement sales of raw frac sand into the market, our business, financial condition and results of operations could be adversely affected until such time as we generate replacement sales in the market. In addition, as contracts expire, depending on market conditions at the time, our customers may choose not to extend these contracts which could lead to a significant reduction of sales volumes and corresponding revenues, cash flows and financial condition if we are not able to replace these contracts with new sales volumes. For example, we had one contract of 1.1 million tons per year that expired in November 2016, and this contract was not renewed beyond its current term. Additionally, even if we were to replace any lost contract volumes, under current market conditions, lower prices for our product could materially reduce our revenues, cash flow and financial condition.We are subject to the risk of loss resulting from nonpayment or nonperformance by our customers. Our credit procedures and policies may not be adequate to fully eliminate customer credit risk. If we fail to adequately assess the creditworthiness of19existing or future customers or unanticipated deterioration in their creditworthiness, any resulting increase in nonpayment or nonperformance by them and our inability to re-market or otherwise use the production could have a material adverse effect on our business, results of operations and financial condition. TheA decline and volatility in natural gas and crude oil prices over the last two years hascould negatively impactedimpact the financial condition of our customers and further declines, sustained lower prices or continued volatility could impact their ability to meet their financial obligations to us. Further, our contract counterparties may not perform or adhere to our existing or future contractual arrangements. To the extent one or more of our contract counterparties is in financial distress or commences bankruptcy proceedings, contracts with these counterparties may be subject to renegotiation or rejection under applicable provisions of the United States Bankruptcy Code. Any material nonpayment or nonperformance by our contract counterparties due to inability or unwillingness to perform or adhere to contractual arrangements could adversely affect our business and results of operations. For example, in July 2016, one of our contracted customers, C&J Energy Services, filed for bankruptcy and rejected our contract, which had 2.3 years and 0.7 million tons contracted remaining under its term. There is no guarantee, however, that we will be able to find new customers for these contracted volumes, if needed, and even if we are able to find new customers for such volumes, we may be forced to sell at a price lower than what was agreed to with C&J Energy Services. C&J Energy Services also demanded a refund of the remaining balance of prepayments it claimed to have made pursuant to its contract with us. As of September 30, 2016, the balance of this prepayment was approximately $5 million and was presented as deferred revenue in the consolidated balance sheet. In November 2016, this claim was settled favorably for us; accordingly, the full amount of the prepayment was recognized as revenue in the fourth quarter of 2016. As part of this settlement, we were granted an unsecured bankruptcy claim of approximately $12 million; in December 2016, a third party purchased our unsecured claim for approximately $6.6 million, which was recognized in earnings in the fourth quarter.Our proppant sales are subject to fluctuations in market pricing.A majoritySeveral of our supply agreements involving the sale of raw frac sand have market-based pricing mechanisms. Accordingly, in periods with decreasing prices, our results of operations may be lower than if our agreements had fixed prices. During these periods our customers may also elect to reduce their purchases from us and seek to find alternative, cheaper sources of supply. In periods with increasing prices, these agreements permit us to increase prices; however, these increases are generally calculated on a quarterly basis and do not increase on a dollar-for-dollar basis with increases in spot market pricing. Furthermore, certain volume-based supply agreements may influence the ability to fully capture current market pricing. These pricing provisions may result in significant variability in our results of operations and cash flows from period to period.Changes in supply and demand dynamics could also impact market pricing for proppants. A number of existing proppant providers and new market entrants have recently announced reserve acquisitions,started new operations or expanded existing operations, primarily in regional sand and mobile sand processing capacity expansions and greenfield projects. In periods where sources of supply of raw frac sand exceed market demand, market prices for raw frac sand may decline and our results of operations and cash flows may continue to decline, be volatile, or otherwise be adversely affected. For example, beginning in September 2014 and continuing through 2016,mid-2016, increasing global supply of oil, in conjunction with weakened demand from slowing economic growth in the Eurozone and China, created downward pressure on crude oil prices resulting in reduced demand for hydraulic fracturing services leading to a corresponding reduced demand for our products and pressure to reduce our product prices. From September 2014Similarly, in late 2018, due to a greater than expected increase in the global supply of oil and lowered demand expectations due, in part, to a trade dispute between the United States and China, the price of crude oil decreased in late 2018, which resulted in lower demand for our products starting in the second half of 2018. This decrease in demand continued through December 2016, raw frac sand prices have decreased by approximately 24% per the Frac Sand Index compiled by the Department of Labor Statistics.We face significant competition that may cause us to lose market share.The proppant industry is highly competitive. The proppant market is characterized by a small number of large, national producers and a larger number of small, regional or local producers. Competition in this industry is based on price, consistency and quality of product, site location, distribution capability,and logistics capabilities, customer service, reliability of supply, breadth of product offering (including wellsite storage products and services) and technical support.raw frac sand market can materially decrease. Furthermore, oil and natural gas exploration and production companies and other providers of hydraulic fracturing services have acquired and in the future may acquire their own raw frac sand reserves to fulfill their proppant requirements, and these other market participants may expand their existing raw frac sand production capacity, all of which would negatively impact demand for our raw frac sand. In addition, increased competition in the proppant industry could have an adverse impact on our ability to enter into long-term contracts or to enter into contracts on favorable terms.We may be required to make substantial capital expenditures to maintain develop and increasegrow our asset base. TheWe may not realize enough of a return on such capital expenditures to cover their costs. Also, the inability to obtain needed capital or financing on satisfactory terms, or at all, could have an adverse effect on our business, results of operations and financial condition.Although we currently use a significant amount of ourWe rely on cash generated from our operations to fund the maintenance and development of our asset base, we may depend on the availability of credit to fund futureour capital expenditures. OurWe have made significant capital expenditures, and expect to make additional capital expenditures in the future, particularly as it pertains to growing our SmartSystems last mile storage solution. We cannot provide any assurance that we will receive an adequate return on such capital expenditures.20In addition, our ability to obtain bankdebt financing or to access the capital markets for future equity or debt offerings may be limited by our financial condition at the time of any such financing or offering, the covenants or borrowing base restrictions contained in the new revolving credit facilityour ABL Credit Facility or other current or future debt agreements, adverse market conditions or other contingencies and uncertainties that are beyond our control. Our failure to obtain the funds necessary to maintain, develop and increase our asset base could adversely impact our business, results of operations and financial condition.Even if we are able to obtain financing or access the capital markets, incurring additional debt may significantly increase our interest expense and financial leverage, and our level of indebtedness could restrict our ability to fund future development and acquisition activities. In addition, the issuance of additional equity interests may result in significant dilution to our existing common stockholders.Inaccuracies in estimates of volumes and qualities of our sand reserves could result in lower than expected sales and higher than expected production costs.John T. Boyd, our independent reserve engineers, prepared estimates of our reserves based on engineering, economic and geological data assembled and analyzed by our engineers and geologists. However, raw frac sand reserve estimates are by nature imprecise and depend to some extent on statistical inferences drawn from available data, which may prove unreliable. There are numerous uncertainties inherent in estimating quantities and qualities of reserves and non-reserve raw frac sand deposits and costs to mine recoverable reserves, including many factors beyond our control. Estimates of economically recoverable raw frac sand reserves necessarily depend on a number of factors and assumptions, all of which may vary considerably from actual results, such as: raw frac sand, operating costs, mining technology improvements, development costs and reclamation costs; andAny inaccuracy in John T. Boyd’s estimates related to our raw frac sand reserves or non-reserve raw frac sand deposits could result in lower than expected sales or higher than expected costs. For example, John T. Boyd’s estimates of our proven recoverable sand reserves assume that our revenue and cost structure will remain relatively constant over the life of our reserves. If these assumptions prove to be inaccurate, some or all of our reserves may not be economically mineable, which could have a material adverse effect on our results of operations and cash flows. In addition, our current customer contracts require us to deliver raw frac sand that meets certain API and ISO specifications. If John T. Boyd’s estimates of the quality of our reserves, including the volumes of the various specifications of those reserves, prove to be inaccurate, we may incur significantly higher excavation costs without corresponding increases in revenues, we may not be able to meet our contractual obligations, or our facilities may have a shorter than expected reserve life, any of which could have a material adverse effect on our results of operations and cash flows.All of our sand sales are currently derived from our Oakdale facility located innear Oakdale, Wisconsin, which is served primarily by a single Class I rail line owned by Canadian Pacific. Any adverse development at this facility or on the rail line due to catastrophic events or weather, or any other event that would cause us to curtail, suspend or terminate operations at our Oakdale facility, could result in us being unable to meet our contracted sand deliveries. Although we have access to a second Class I rail line owned by Union Pacific at our Byron facility, we could not facilitate all shipments of product from the Byron facility. We maintain insurance coverage to cover a portion of these types of risks,risks; however, there are potential risks associated with our operations not covered by insurance. There also may be certain risks covered by insurance where the policy does not reimburse us for all of the costs related to a loss. Downtime or other delays or interruptions to our operations that are not covered by insurance could have a material adverse effect on our business, results of operations and financial condition. In addition, under our long-term take-or-pay contracts, if we are unable to deliver contracted volumes and a customer arranges for delivery from a third party at a higher price, we may be required to pay that customer the difference between our contract price and the price of the third-party product.21If we are unable to make acquisitions on economically acceptable terms, our future growth would be limited.A portion of our strategy to grow our business is dependent on our ability to make acquisitions. If we are unable to make acquisitions from third parties because we are unable to identify attractive acquisition candidates or negotiate acceptable purchase contracts, we are unable to obtain financing for these acquisitions on economically acceptable terms or we are outbid by competitors, our future growth may be limited. Any acquisition involves potential risks, some of which are beyond our control, including, among other things:If we consummate any future acquisitions, our capitalization and results of operations may change significantly, and common stockholders will not have the opportunity to evaluate the economic, financial and other relevant information that we will consider in determining the application of these funds and other resources.We may not be able to complete greenfield development or expansion projects or, if we do, we may not realize the expected benefits.Any greenfield development or expansion project requires us to raise substantial capital and obtain numerous state and local permits. A decision by any governmental agency not to issue a required permit or substantial delays in the permitting process could prevent us from pursuing the development or expansion project. In addition, if the demand for our products declines during a period in which we experience delays in raising capital or completing the permitting process, we may not realize the expected benefits from our greenfield facility or expansion project. Furthermore, our new or modified facilities may not operate at designed capacity or may cost more to operate than we expect. The inability to complete greenfield development or expansion projects or to complete them on a timely basis and in turn grow our business could adversely affect our business and results of operations.revolving credit facilityABL Credit Facility may limit our ability to capitalize on potential acquisition and other business opportunities.The operating and financial restrictions and covenants in our revolving credit facility and any future financing agreementsABL Credit Facility could restrict our ability to finance future operations or capital needs or to expand or pursue our business activities. For example, our revolving credit facilityABL Credit Facility restricts or limits our ability to:22Furthermore, the borrowing base under our revolving credit facility contains certain operatingABL Credit Facility is recalculated from time to time based on our eligible accounts receivable and financial covenants. Our abilityinventory. Decreases in our eligible accounts receivable and inventory may limit our available borrowing levels and may require us to comply with such covenants and restrictions contained in our credit facility may be affected by events beyond our control, including prevailing economic,certain financial and industry conditions. If market or other economic conditions deteriorate, our ability to comply with these covenants may be impaired. If we violate any of the restrictions, covenants, ratios or tests in the new revolving credit facility, a significant portion of our indebtedness may become immediately due and payable, and any lenders’ commitment to make further loans to us may terminate. We might not have, or be able to obtain, sufficient funds to make these accelerated payments. Any subsequent replacement of the new revolving credit facility or any new indebtedness could have similar or greater restrictions. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Credit Facilities—Our Credit Facility and Other Arrangements.”We face distribution and logistical challenges in our business.Transportation and logistical operating expenses comprise a significant portion of the costs incurred by our customers to deliver raw frac sand to the wellhead, which could favor suppliers located in close proximity to the customer. As oil and natural gas prices fluctuate, our customers may shift their focus to different resource plays, some of which may be located in geographic areas that do not have well-developed transportation and distribution infrastructure systems, or seek contracts with additional delivery and pricing alternatives including contracts that sell product on an “as-delivered” basis at the target shale basin. Serving our customers in these less-developed areas presents distribution and other operational challenges that may affect our sales and negatively impact our operating costs and any delays we experience in optimizing our logistics infrastructure or developing additional origination and destination points may adversely affect our ability to renew existing contracts with customers seeking additional delivery and pricing alternatives. Disruptions in transportation services, including shortages of rail cars,railcars, lack of developed infrastructure, weather-related problems, flooding, drought, accidents, mechanical difficulties, strikes, lockouts, bottlenecks or other events could affect our ability to timely and cost effectively deliver to our customers and could temporarily impair the ability of our customers to take delivery and, in certain circumstances, constitute a force majeure event under our customer contracts, permitting our customers to suspend taking delivery of and paying for our raw frac sand.sand (and in some cases terminating the agreement after a period of time). Additionally, increases in the price of transportation costs, including freight charges, fuel surcharges, transloading fees, terminal switch fees and demurrage costs, could negatively impact operating costs if we are unable to pass those increased costs along to our customers. Accordingly, because we are so dependent on rail infrastructure, if there are disruptions of the rail transportation services utilized by us or our customers, and we or our customers are unable to find alternative transportation providers to transport our products, our business and results of operations could be adversely affected. Further, declining volumes could result in additional rail carrailcar over-capacity, which would lead to rail carrailcar storage fees while, at the same time, we would continue to incur lease costs for those rail carsrailcars in storage. Failure to find long-term solutions to these logistical challenges could adversely affect our ability to respond quickly to the needs of our customers or result in additional increased costs, and thus could negatively impact our business, results of operations and financial condition.We may be adversely affected by decreased demand for raw frac sand due to the development of effective alternative proppants or new processes to replace hydraulic fracturing.Raw fracFrac sand is a proppant used in the completion and re-completion of oil and natural gas wells to stimulate and maintain oil and natural gas production through the process of hydraulic fracturing. Raw fracFrac sand is the most commonly used proppant and is less expensive than other proppants, such as resin-coated sand and manufactured ceramics. A significant shift in demand from raw frac sand to other proppants, or the development of new processes to make hydraulic fracturing more efficient could replace it altogether, could cause a decline in the demand for the raw frac sand we produce and result in a material adverse effect on our business, results of operations and financial condition. raw frac sand having similar characteristics as the raw frac sand we produce could make it more difficult for us to renew or replace our existing contracts on favorable terms, or at all.If significant new reserves of raw frac sand are discovered and developed, and those raw frac sands have similar characteristics to the raw frac sand we produce, we may be unable to renew or replace our existing contracts on favorable terms, or at all. Specifically, if high-quality raw frac sand becomes more readily available, our customers may not be willing to enter into long-term take-or-pay contracts, may demand lower prices or both, which could have a material adverse effect on our business, results of operations and financial condition.Federal, state For example, new supplies of regional frac sand from our competitors have come online in 2018, primarily in the Permian Basin of West Texas. These new supplies have had, and local legislative and regulatory initiatives relatingmay continue to hydraulic fracturing andhave, a negative impact on our ability to market our Northern White Sand in the potential for related litigation could resultPermian Basin or other markets in increased costs, additional operating restrictions or delays for our customers,close proximity to these new mines, which could causelead to pressure to further reduce prices to compete effectively with these new regional suppliers.A substantial portion of our accounts and unbilled receivables consists of shortfall payments due from one customer under a declinelong-term take-or-pay contract, which is currently subject to litigation.A substantial portion of our accounts and unbilled receivables consists of shortfall payments due from one customer under a long-term take-or-pay contract. We expect additional shortfall amounts to continue to accrue in the demand for our raw frac sand and negatively impact our business, results of operations and financial condition. supply raw frac sand to hydraulic fracturing operators in the oil and natural gas industry. Hydraulic fracturing is an important practice that is used to stimulate production of natural gas and oil from low permeability hydrocarbon bearing subsurface rock formations. The hydraulic fracturing process involves the injection of water, proppants, and chemicals under pressure into the formation to fracture the surrounding rock, increase permeability and stimulate production.Although we do not directly engage in hydraulic fracturing activities, our customers purchase our raw frac sand for use in their hydraulic fracturing activities. Hydraulic fracturing is typically regulated by state oil and natural gas commissions and similar agencies. Some states have adopted, and other states are considering adopting, regulations that could impose new or more stringent permitting, disclosure or well construction requirements on hydraulic fracturing operations. Aside from state laws, local land use restrictions may restrict drilling in general or hydraulic fracturing in particular. Municipalities may adopt local ordinances attempting to prohibit hydraulic fracturing altogether or, at a minimum, allow such fracturing processes within their jurisdictions to proceed but regulating the time, place and manner of those processes. In addition, federal agencies have started to assert regulatory authority over the process and various studies have been conducted or are currently underwayin litigation with such customer regarding, among other things, nonpayment of shortfall amounts due. Litigation, by its nature, can be costly, time consuming, and unpredictable, and we can provide no assurance that the U.S. Environmental Protection Agency (“EPA”),outstanding amounts due will be collected in a timely manner, if at all. As of December 31, 2019, $37.4 million of accounts and other federal agencies concerningunbilled receivables were from the potential environmental impacts of hydraulic fracturing activities. At the same time, certain environmental groups have suggested that additional laws may be needed and, in some instances, have pursued voter ballot initiatives to more closely and uniformly limit or otherwise regulate the hydraulic fracturing process, and legislation has been proposed by some members of Congress to provide for such regulation.The adoption of new laws or regulations at the federal, state or local levels imposing reporting obligations on, or otherwise limiting or delaying, the hydraulic fracturing process could make it more difficult to complete natural gas wells, increase our customers’ costs of compliance and doing business, and otherwise adversely affect the hydraulic fracturing services they perform, which could negatively impact demand for our raw frac sand. In addition, heightened political, regulatory, and public scrutiny of hydraulic fracturing practices could expose us or our customers to increased legal and regulatory proceedings, which could be time-consuming, costly, or result in substantial legal liability or significant reputational harm. We could be directly affected by adverse litigation involving us, or indirectly affected if the cost of compliance limits the ability of our customers to operate. Such costs and scrutiny could directly or indirectly, through reduced demand for our raw frac sand, have a material adverse effect on our business, financial condition and results of operations.23Our long-term take-or-pay contracts may preclude us from taking advantage of increasing prices for raw frac sand or mitigating the effect of increased operational costs during the term of those contracts.The long-term take-or-pay contracts we have may negatively impact our results of operations. Our long-term take-or-pay contracts require our customers to pay a specified price for a specified volume of raw frac sand each month. Although our long-term take-or-pay contracts provide for price increases based on crude oil prices, such increases are generally calculated on a quarterly basis and do not increase dollar-for-dollar with increases in spot market prices. As a result, in periods with increasing prices our sales may not keep pace with market prices.Additionally, if our operational costs increase during the terms of our long-term take-or-pay contracts, we will not be able to pass some of those increased costs to our customers. If we are unable to otherwise mitigate thesethose increased operational costs, our net income could decline.Our operations are subject to operational hazards and unforeseen interruptions for which we may not be adequately insured.Our operations are exposed to potential natural disasters, including blizzards, tornadoes, storms, floods, other adverse weather conditions and earthquakes. If any of these events were to occur, we could incur substantial losses because of personal injury or loss of life, severe damage to and destruction of property and equipment, and pollution or other environmental damage resulting in curtailment or suspension of our operations.Our production process consumes large amounts of natural gas and electricity. An increase in the price or a significant interruption in the supply of these or any other energy sources could have a material adverse effect on our business, results of operations and financial condition.Energy costs, primarily natural gas and electricity, represented approximately 9.7%4.7% of our total cost of goods sold for the year ended December 31, 2016.2019. Natural gas is currently the primary fuel source used for drying in our raw frac sand production process. As a result, our profitability will be impacted by the price and availability of natural gas we purchase from third parties. Because we have not contracted for the provision of all of our natural gas usage on a fixed-price basis, our costs and profitability will be impacted by fluctuations in prices for natural gas. The price and supply of natural gas is unpredictable and can fluctuate significantly based on international, political and economic circumstances, as well as other events outside our control, such as changes in supply and demand due to weather conditions, actions by OPEC, governmental sanctions, and other oil and natural gas producers, regional production patterns, security threats and environmental concerns. In addition, potential climate change regulations or carbon or emissions taxes could result in higher cost of production costs for energy, which may be passed on to us in whole or in part. The price of natural gas has been extremely volatile over the last two years, from a high of $4.12 per million British Thermal Units (“BTUs”) in November 2014 to a low of $1.73 per million BTUs in March 2016, and this volatility may continue. In order to manage thisthe risk of volatile natural gas prices, we may hedge natural gas prices through the use of derivative financial instruments, such as forwards, swaps and futures. However, these measures carry risk (including nonperformance by counterparties) and do not in any event entirely eliminate the risk of decreased margins as a result of propane or natural gas price increases. We further attempt to mitigate these risks by including in our sales contracts fuel surcharges based on natural gas prices exceeding certain benchmarks. A significant increase in the price of energy that is not recovered through an increase in the price of our products or covered through our hedging arrangements or an extended interruption in the supply of natural gas or electricity to our production facilities could have a material adverse effect on our business, results of operations and financial condition.Increases in the price of diesel fuel may adversely affect our business, results of operations and financial condition.Diesel fuel costs generally fluctuate with increasing and decreasing world crude oil prices and, accordingly, are subject to political, economic and market factors that are outside of our control. Our operations are dependent on earthmoving equipment, locomotives and tractor trailers, and diesel fuel costs are a significant component of the operating expense of these vehicles. Accordingly, increased diesel fuel costs could have an adverse effect on our business, results of operations and financial condition.24A facility closure entails substantial costs, and if we close our facility sooner than anticipated, our results of operations may be adversely affected.We base our assumptions regarding the life of our Oakdale facility on detailed studies that we perform from time to time, but our studies and assumptions may not prove to be accurate. If we close our Oakdale facility sooner than expected, sales will decline unless we are able to acquire and develop additional facilities, which may not be possible. The closure of our Oakdale facility would involve significant fixed closure costs, including accelerated employment legacy costs, severance-related obligations, reclamation and other environmental costs and the costs of terminating long-term obligations, including energy contracts and equipment leases. We accrue for the costs of reclaiming open pits, stockpiles, non-saleable sand, ponds, roads and other mining support areas over the estimated mining life of our property. If we were to reduce the estimated life of our Oakdale facility, the fixed facility closure costs would be applied to a shorter period of production, which would increase the cost of production costs per ton produced and could materially and adversely affect our business, results of operations and financial condition.Applicable statutes and regulations require that mining property be reclaimed following a mine closure in accordance with specified standards and an approved reclamation plan. The plan addresses matters such as removal of facilities and equipment, regrading, prevention of erosion and other forms of water pollution, re-vegetation and post-mining land use. We may be required to post a surety bond or other form of financial assurance equal to the cost of reclamation as set forth in the approved reclamation plan. The establishment of the final mine closure reclamation liability is based on permit requirements and requires various estimates and assumptions, principally associated with reclamation costs and production levels. If our accruals for expected reclamation and other costs associated with facility closures for which we will be responsible were later determined to be insufficient, our business, results of operations and financial condition may be adversely affected.We hold numerous governmental, environmental, mining and other permits, water rights and approvals authorizing operations at our Oakdale facility. For our extraction and processing in Wisconsin, the permitting process is subject to federal, state and local authority. For example, on the federal level, a Mine Identification Request (MSHA Form 7000-51) must be filed and obtained before mining commences. If wetlands are impacted, a U.S. Army Corps of Engineers Wetland Permit is required. At the state level, a series of permits are required related to air quality, wetlands, water quality (waste water, storm water), grading permits, endangered species, archeological assessments and high capacity wells in addition to others depending upon site specific factors and operational detail. At the local level, zoning, building, storm water, erosion control, wellhead protection, road usage and access are all regulated and require permitting to some degree. A non-metallic mining reclamation permit is required. A decision by a governmental agency or other third party to deny or delay issuing a new or renewed permit or approval, or to revoke or substantially modify an existing permit or approval, could have a material adverse effect on our business, results of operations and financial condition.Title to, and the area of, mineral properties and water rights may also be disputed. Mineral properties sometimes contain claims or transfer histories that examiners cannot verify. A successful claim that we do not have title to our property or lack appropriate water rights could cause us to lose any rights to explore, develop and extract minerals, without compensation for our prior expenditures relating to such property. Our business may suffer a material adverse effect in the event we have title deficiencies.A shortage of skilled labor together with rising labor costs in the excavation industry may further increase operating costs, which could adversely affect our business, results of operations and financial condition.Efficient sand excavation using modern techniques and equipment requires skilled laborers, preferably with several years of experience and proficiency in multiple tasks, including processing of mined minerals. If there is a shortage of experienced labor in Wisconsin, we may find it difficult to hire or train the necessary number of skilled laborers to perform our own operations which could have an adverse impact on our business, results of operations and financial condition.The manufacturing of our SmartSystems equipment requires skilled and experienced personnel who can perform physically demanding work. Our ability to operate the manufacturing facility in Saskatoon depends upon our ability to have access to the services of skilled workers. The demand for skilled workers is high, and the supply is limited. As a result, competition for experienced personnel is intense, and a significant increase in the wages paid by competing employers could result in a reduction of our skilled labor force, increases in the rates that we must pay or both. If either of these events were to occur, there could be an adverse impact on our business, results of operations and financial condition.25Our business may suffer if we lose, or are unable to attract and retain, key personnel.We depend to a large extent on the services of our senior management team and other key personnel. Members of our senior management and other key employees bring significant experience to the market environment in which we operate. Competition for management and key personnel is intense, and the pool of qualified candidates is limited. The loss of any of these individuals or the failure to attract additional personnel, as needed, could have a material adverse effect on our operations and could lead to higher labor costs or the use of less-qualified personnel. In addition, if any of our executives or other key employees were to join a competitor or form a competing company, we could lose customers, suppliers, know-how and key personnel. We do not maintain key-man life insurance with respect to any of our employees. Our success will beis dependent on our ability to continue to attract, employ and retain highly skilled personnel.Failure to maintain effective quality control systems at our mining, processing and production facilities could have a material adverse effect on our business, results of operations and financial condition.The performance and quality of our products are critical to the success of our business. These factors depend significantly on the effectiveness of our quality control systems, which, in turn, depends on a number of factors, including the design of our quality control systems, our quality-training program and our ability to ensure that our employees adhere to our quality control policies and guidelines. Any significant failure or deterioration of our quality control systems could have a material adverse effect on our business, results of operations and financial condition.Seasonal and severe weather conditions could have a material adverse impact on our business, results of operations and financial condition.Our business could be materially adversely affected by severe weather conditions. Severe weather conditions may affect our customers’ operations, thus reducing their need for our products, impact our operations by resulting in weather-related damage to our facilities and equipment and impact our customers’ ability to take delivery of our products at our plant site. Any weather-related interference with our operations could force us to delay or curtail services and potentially breach our contractual obligations to deliver minimum volumes or result in a loss of productivity and an increase in our operating costs.In addition, winter weather conditions impact our operations by causing us to haltreduce our excavation and wet plant related production activities during the winter months. During non-winter months, we excavate excess sand to build a stockpile that will feed the dry plants (along with the sand provided by our year-round wet plant), which continue to operate during the winter months. Unexpected winter conditions (such as winter arriving earlier thanOur cash flow fluctuates on a seasonal basis.Our cash flow is affected by a variety of factors, including weather conditions and seasonal periods. Seasonal fluctuations in weather impact the production levels at our wet processing plant. While our sales and finished product production levels are contracted evenly throughout the year, our mining and wet sand processing activities are limited to non-winterreduced during winter months. As a consequence, we experience lower cash costs in the first and fourth quarter of each calendar year.We do not own the land on which our Van Hook, North Dakota terminal facility is located, which could disrupt our operations.We do not own the land on which our Van Hook, North Dakota terminal is located and instead own a leasehold interest and right-of-way for the operation of this facility. Upon expiration, termination or other lapse of our current leasehold terms, we may be unable to renew our existing lease or right-of-way on terms favorable to us, or at all. Any renegotiation on less favorable terms or inability to enter into new leases on economically acceptable terms upon the expiration, termination or other lapse of our current lease or right-of-way could cause us to cease operations on the affected land, increase costs related to continuing operations elsewhere and have a material adverse effect on our business, financial condition and results of operations.A terrorist attack or armed conflict could harm our business.Terrorist activities, anti-terrorist efforts and other armed conflicts involving the United States could adversely affect the U.S. and global economies and could prevent us from meeting financial and other obligations. We could experience loss of business, delays or defaults in payments from payors or disruptions of fuel supplies and markets if pipelines, production facilities, processing plants, refineries or transportation facilities are direct targets or indirect casualties of an act of terror or war. Such activities could reduce the overall demand for oil and natural gas, which, in turn, could also reduce the demand for26our raw frac sand. Terrorist activities and the threat of potential terrorist activities and any resulting economic downturn could adversely affect our results of operations, impair our ability to raise capital or otherwise adversely impact our ability to realize certain business strategies.Diminished access to water may adversely affect our operations or the operations of our customers.The mining and processing activities at our facility requires significant amounts of water. Additionally, the development of oil and natural gas properties through fracture stimulation likewise requires significant water use. We have obtained water rights that we currently use to service the activities at our Oakdale facility, and we plan to obtain all required water rights to service other properties we may develop or acquire in the future. However, the amount of water that we and our customers are entitled to use pursuant to our water rights must be determined by the appropriate regulatory authorities in the jurisdictions in which we and our customers operate. Such regulatory authorities may amend the regulations regarding such water rights, increase the cost of maintaining such water rights or eliminate our current water rights, and we and our customers may be unable to retain all or a portion of such water rights. These new regulations, which could also affect local municipalities and other industrial operations, could have a material adverse effect on our operating costs and effectiveness if implemented. Such changes in laws, regulations or government policy and related interpretations pertaining to water rights may alter the environment in which we and our customers do business, which may negatively affect our financial condition and results of operations.We may be subject to interruptions or failures in our information technology systems.We rely on sophisticated information technology systems and infrastructure to support our business, including process control technology. Any of these systems may be susceptible to outages due to fire, floods, power loss, telecommunication failures, usage errors by employees, computer viruses, cyber-attacks or other security breaches, or similar events. If our information technology systems are damaged or cease to function properly, we may have to make a significant investment to fix or replace them, and we may suffer loss of critical data and interruptions or delays in our operations.We may be the target of attempted cyber-attacks, computer viruses, malicious code, phishing attacks, denial of service attacks and other information security threats. To date, cyber-attacks have not had a material impact on our financial condition, results or business; however, we could suffer material financial or other losses in the future and we are not able to predict the severity of these attacks. The failureoccurrence of anya cyber-attack, breach, unauthorized access, misuse, computer virus or other malicious code or other cyber security event could jeopardize or result in the unauthorized disclosure, gathering, monitoring, misuse, corruption, loss or destruction of confidential and other information that belongs to us, our customers, our counterparties, or third-party service providers that is processed and stored in, and transmitted through, our computer systems and networks. The occurrence of such an event could also result in damage to our software, computers or systems, or otherwise cause interruptions or malfunctions in our, our customers’, our counterparties’ or third parties’ operations. This could result in significant losses, loss of customers and business opportunities, reputational damage, litigation, regulatory fines, penalties or intervention, reimbursement or other compensatory costs, or otherwise adversely affect our business, financial condition or results of operations.The reliability and capacity of our information technology systems may cause disruptionsis critical to our operations. Any material disruption in our operations,information technology systems, or delays or difficulties in implementing or integrating new systems or enhancing current systems, could have an adverse effect on our business, and results of operations.If we are unable to fully protect our intellectual property rights, we may suffer a loss in our competitive advantage.The commercial success of our SmartSystems wellsite proppant storage solutions depends on patented and proprietary information and technologies, know-how and other intellectual property. Because of the technical nature of this business, we rely on a combination of patent, copyright, trademark and trade secret laws, and restrictions on disclosure to protect our intellectual property. As of December 31, 2019, we had several patents related to our SmartSystems, including patents related to our silo storage system and patents related to lifting and lowering our storage silos. We customarily enter into confidentiality or license agreements with our employees, consultants and corporate partners and control access to and distribution of our design information, documentation and other patented and proprietary information. In addition, in the future we may develop or acquire additional patents or patent portfolios, which could require significant cash expenditures. However, third parties may knowingly or unknowingly infringe our patent or other proprietary rights, or challenge patents or proprietary rights held by us, and pending and future trademark and patent applications may not be approved. Failure to protect, monitor and control the use of our existing intellectual property rights could cause us to lose our competitive advantage and incur significant expenses. It is possible that our competitors or others could independently develop the same or similar technologies or otherwise obtain access to our unpatented technologies. In such case, our trade secrets would not prevent third parties from competing with us. Consequently, our results of operations may be adversely affected. Furthermore, third parties or our employees may infringe or misappropriate our patented or proprietary technologies or other intellectual property rights, which27could also harm our business and results of operations. Policing unauthorized use of intellectual property rights can be difficult and expensive, and adequate remedies may not be available.We may be adversely affected by disputes regarding intellectual property rights of third parties.Third parties from time to time may initiate litigation against us by asserting that the conduct of our business infringes, misappropriates or otherwise violates intellectual property rights. We may not prevail in any such legal proceedings related to such claims, and our storage systems and related items may be found to infringe, impair, misappropriate, dilute or otherwise violate the intellectual property rights of others. If we are sued for infringement and lose, we could be required to pay substantial damages and/or be enjoined from using or selling the infringing products or technology. Any legal proceeding concerning intellectual property could be protracted and costly regardless of the merits of any claim and is inherently unpredictable and could have a material adverse effect on our financial condition, regardless of its outcome.If we were to discover that our technologies or products infringe valid intellectual property rights of third parties, we may need to obtain licenses from these parties or substantially re-engineer our products in order to avoid infringement. We may not be able to obtain the necessary licenses on acceptable terms, or at all, or be able to re-engineer our products successfully. If our inability to obtain required licenses for our technologies or products prevents us from selling our products, that could adversely impact our financial condition and results of operations.We currently rely on a limited number of suppliers for certain equipment and materials to build our SmartSystems, and our reliance on a limited number of suppliers for such equipment and materials exposes us to risks including price and timing of delivery.We currently rely on a limited number of suppliers for equipment and materials to build our SmartSystems. If demand for our systems or the components necessary to build such systems increases or suppliers of equipment face financial distress or bankruptcy, our suppliers may not be able to provide such equipment on schedule at the current price or at all. In particular, steel is the principal raw material used in the manufacture of our systems, and the price of steel has historically fluctuated on a cyclical basis and will depend on a variety of factors over which we have no control, including trade tariffs. Additionally, we depend on a limited number of suppliers for certain mechanical and electrical components that we use in our systems which may not have direct replacements available from alternate suppliers. If our suppliers are unable to provide the raw materials and components needed to build our systems on schedule at the current price or at all, we could be required to seek other suppliers for the raw materials and components needed to build and operate our systems, which may adversely affect our salesrevenues or increase our costs. Any inability to find alternative components at prices or with quality specifications similar to those deployed today could result in delays or a loss of customers.Unsatisfactory safety performance may negatively affect our customer relationships and, profitability.Our ability to retain existing customers and attract new business is dependent on many factors, including our ability to demonstrate that we can reliably and safely operate all aspects of our business in a manner that is consistent with applicable laws, rules and permits, which legal requirements are subject to change. In addition, certain customers require compliance with their internal safety protocols. Existing and potential customers consider the safety record of their third-party service providers to be of high importance in their decision to engage such providers. If one or more accidents were to occur in connection with our business, the affected customer may seek to terminate, cancel or substantially reduce its business with us, which could cause us to lose substantial revenues. Furthermore, our ability to attract new customers may be impaired if such potential customers elect not to engage us because they view our safety record as unacceptable. In addition, it is possible that we will experience multiple or particularly severe accidents in the future, causing our safety record to deteriorate. This may be more likely as we continue to grow, if we experience high employee turnover or labor shortage, or if we hire inexperienced personnel to bolster our staffing needs.We may be subject to legal claims, such as personal injury and property damage, which could materially adversely affect our financial condition, prospects and results of operations.As we focus on growing our business, particularly as it relates to our SmartSystems offerings, our business may become increasingly subject to inherent risks that can cause personal injury or loss of life, damage to or destruction of property, equipment or the environment or the suspension of our operations. In addition, we may be subject to legal proceedings with our customers or suppliers, particularly as it relates to contract disputes. Regardless of the merit of particular claims, litigation may be expensive, time consuming, disruptive to our operations and distracting to management.The outcome of litigation is inherently uncertain. If one or more legal matters were resolved against us or an indemnified third party in a reporting period for amounts in excess of management’s expectations, our financial condition and operating28results for that reporting period could be materially adversely affected. Further, such an outcome could result in significant compensatory, punitive or trebled monetary damages, disgorgement of revenue or profits, remedial corporate measures or injunctive relief against us that could materially adversely affect our financial condition and operating results. We maintain what we believe is customary and reasonable insurance to protect our business against these potential losses, but such insurance may not be adequate to cover our liabilities, and we are not fully insured against all risks.Risks Related to Environmental, Mining and Other RegulationFederal, state and local legislative and regulatory initiatives relating to hydraulic fracturing and the potential for related litigation could result in increased costs, additional operating restrictions or delays for our customers, which could cause a decline in the demand for our frac sand and negatively impact our business, results of operations and financial condition.We supply frac sand to hydraulic fracturing operators in the oil and natural gas industry. Hydraulic fracturing is an important practice that is used to stimulate production of oil and natural gas from low permeability hydrocarbon bearing subsurface rock formations. The hydraulic fracturing process involves the injection of water, proppants, and chemicals under pressure into the formation to fracture the surrounding rock, increase permeability and stimulate production.Although we do not directly engage in hydraulic fracturing activities, our customers purchase our frac sand for use in their hydraulic fracturing activities. Hydraulic fracturing is typically regulated by state oil and natural gas commissions and similar agencies. Some states have adopted, and other states are considering adopting, regulations that could impose new or more stringent permitting, disclosure or well construction requirements on hydraulic fracturing operations. Aside from state laws, local land use restrictions may restrict drilling in general or hydraulic fracturing in particular. Municipalities may adopt local ordinances attempting to prohibit hydraulic fracturing altogether or, at a minimum, allow such fracturing processes within their jurisdictions to proceed but regulating the time, place and manner of those processes. In addition, federal agencies have started to assert regulatory authority over the process and various studies have been conducted or are currently underway by the EPA, and other federal agencies concerning the potential environmental impacts of hydraulic fracturing activities. At the same time, certain environmental groups have suggested that additional laws may be needed and, in some instances, have pursued voter ballot initiatives to more closely and uniformly limit or otherwise regulate the hydraulic fracturing process, and legislation has been proposed by some members of Congress to provide for such regulation.The adoption of new laws or regulations at the federal, state or local levels imposing reporting obligations on, or otherwise limiting or delaying, the hydraulic fracturing process could make it more difficult to complete natural gas wells, increase our customers’ costs of compliance and doing business, and otherwise adversely affect the hydraulic fracturing services they perform, which could negatively impact demand for our frac sand. In addition, heightened political, regulatory, and public scrutiny of hydraulic fracturing practices could expose us or our customers to increased legal and regulatory proceedings, which could be time-consuming, costly, or result in substantial legal liability or significant reputational harm. We could be directly affected by adverse litigation involving us, or indirectly affected if the cost of compliance limits the ability of our customers to operate. Such costs and scrutiny could directly or indirectly, through reduced demand for our frac sand, have a material adverse effect on our business, financial condition and results of operations.We and our customers are subject to extensive environmental and occupational health and safety regulations that impose, and will continue to impose, significant costs and liabilities. In addition, future regulations, or more stringent enforcement of existing regulations, could increase those costs and liabilities, which could adversely affect our results of operations.We are subject to a variety of federal, state, and local regulatory environmental requirements affecting the mining and mineral processing industry, including among others, those relating to employee health and safety, environmental permitting and licensing, air and water emissions, water pollution, waste management, remediation of soil and groundwater contamination, land use, reclamation and restoration of properties, hazardous materials, and natural resources. Some environmental laws impose substantial penalties for noncompliance, and others, such as the federal CERCLA, may impose strict, retroactive, and joint and several liabilityliabilities for the remediation of releases of hazardous substances. Liability under CERCLA, or similar state and local laws, may be imposed as a result of conduct that was lawful at the time it occurred or for the conduct of, or conditions caused by, prior operators or other third parties. Failure to properly handle, transport, store, or dispose of hazardous materials or otherwise conduct our operations in compliance with environmental laws could expose us to liability for governmental penalties, cleanup costs, and civil or criminal liability associated with releases of such materials into the environment, damages to property, natural resources and other damages, as well as potentially impair our ability to conduct our operations. In addition, future environmental laws and regulations could restrict our ability to expand29Any failure by us to comply with applicable environmental laws and regulations may cause governmental authorities to take actions that could adversely impact our operations and financial condition, including:Any such regulations could require us to modify existing permits or obtain new permits, implement additional pollution control technology, curtail operations, increase significantly our operating costs, or impose additional operating restrictions among our customers that reduce demand for our services.We may not be able to comply with any new or amended laws and regulations that are adopted, and any new or amended laws and regulations could have a material adverse effect on our operating results by requiring us to modify our operations or equipment or shut down our facility. Additionally, our customers may not be able to comply with any new or amended laws and regulations, which could cause our customers to curtail or cease operations. We cannot at this time reasonably estimate our costs of compliance or the timing of any costs associated with any new or amended laws and regulations, or any material adverse effect that any new or modified standards will have on our customers and, consequently, on our operations.Silica-related legislation, health issues and litigation could have a material adverse effect on our business, reputation or results of operations.We are subject to laws and regulations relating to human exposure to crystalline silica. Several federal and state regulatory authorities, including the U.S. Mining Safety and Health Administration (“MSHA”)MSHA, may continue to propose changes in their regulations regarding workplace exposure to crystalline silica, such as permissible exposure limits and required controls and personal protective equipment. We may not be able to comply with any new or amended laws and regulations that are adopted, and any new or amended laws and regulations could have a material adverse effect on our operating results by requiring us to modify or cease our operations.In addition, the inhalation of respirable crystalline silica is associated with the lung disease silicosis. There is evidence of an association between crystalline silica exposure or silicosis and lung cancer and a possible association with other diseases, including immune system disorders such as scleroderma. These health risks have been, and may continue to be, a significant issue confronting the proppant industry. Concerns over silicosis and other potential adverse health effects, as well as concerns regarding potential liability from the use of raw frac sand, may have the effect of discouraging our customers’ use of our raw frac sand. The actual or perceived health risks of mining, processing and handling proppants could materially and adversely affect proppant producers, including us, through reduced use of frac sand, the threat of product liability or employee lawsuits, increased scrutiny by federal, state and local regulatory authorities of us and our customers or reduced financing sources available to the frac sand industry.We are subject to the Federal Mine Safety and Health Act of 1977, which imposes stringent health and safety standards on numerous aspects of our operations.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.In addition to the regulatory matters described above, we and our customers are subject to extensive governmental regulation on matters such as permitting and licensing requirements, plant and wildlife protection, wetlands protection, reclamation and restoration activities at mining properties after mining is completed, the discharge of materials into the environment, and the effects that mining and hydraulic fracturing have on groundwater quality and availability. Our future30success depends, among other things, on the quantity and quality of our raw frac sand deposits, our ability to extract these deposits profitably, and our customers being able to operate their businesses as they currently do.In order to obtain permits and renewals of permits in the future, we may be required to prepare and present data to governmental authorities pertaining to the potential adverse impact that any proposed excavation or production activities, individually or in the aggregate, may have on the environment. Certain approval procedures may require preparation of archaeological surveys, endangered species studies, and other studies to assess the environmental impact of new sites or the expansion of existing sites. Compliance with these regulatory requirements is expensive and significantly lengthens the time needed to develop a site. Finally, obtaining or renewing required permits is sometimes delayed or prevented due to community opposition and other factors beyond our control. The denial of a permit essential to our operations or the imposition of conditions with which it is not practicable or feasible to comply could impair or prevent our ability to develop or expand a site. Significant opposition to a permit by neighboring property owners, members of the public, or other third parties, or delay in the environmental review and permitting process also could delay or impair our ability to develop or expand a site. New legal requirements, including those related to the protection of the environment, could be adopted that could materially adversely affect our mining operations (including our ability to extract or the pace of extraction of mineral deposits), our cost structure, or our customers’ ability to use our raw frac sand. Such current or future regulations could have a material adverse effect on our business and we may not be able to obtain or renew permits in the future.Our inability to acquire, maintain or renew financial assurances related to the reclamation and restoration of mining property could have a material adverse effect on our business, financial condition and results of operations.We are generally obligated to restore property in accordance with regulatory standards and our approved reclamation plan after it has been mined. We are required under federal, state, and local laws to maintain financial assurances, such as surety bonds, to secure such obligations. The inability to acquire, maintain or renew such assurances, as required by federal, state, and local laws, could subject us to fines and penalties as well as the revocation of our operating permits. Such inability could result from a variety of factors, including:Our inability to acquire, maintain, or renew necessary financial assurances related to the reclamation and restoration of mining property could have a material adverse effect on our business, financial condition, and results of operations.Climate change legislation and regulatory initiatives could result in increased compliance costs for us and our customers.In recent years, the U.S. Congress has considered legislation to reduce emissions of greenhouse gases (“GHGs”),GHGs, including methane, a primary component of natural gas, and carbon dioxide, a byproduct of the burning of natural gas. It presently appears unlikely that comprehensive climate legislation will be passed by either house of Congress in the near future, although energy legislation and other regulatory initiatives are expected to be proposed that may be relevant to GHG emissions issues. In addition, a number of states are addressing GHG emissions, primarily through the development of emission inventories or regional GHG cap and trade programs. Depending on the particular program, we could be required to control GHG emissions or to purchase and surrender allowances for GHG emissions resulting from our operations. Independent of Congress, the EPA has adopted regulations controlling GHG emissions under its existing authority under the federal Clean Air Act (“CAA”).CAA. For example, following its findings that emissions of GHGs present an endangerment to human health and the environment because such emissions contributed to warming of the earth’s atmosphere and other climatic changes, the EPA has adopted regulations under existing provisions of the CAA that, among other things establish construction and operating permit reviews for GHG emissions from certain large stationary sources that are already potential major sources for conventional pollutants. In addition, the EPA has adopted rules requiring the monitoring and reporting of GHG emissions from specified production, processing, transmission and storage facilities in the United States on an annual basis. Additionally,In addition, in December 2015, over 190 countries, including the United States, joinedreached an agreement to reduce global greenhouse gas emissions, also known as the international community at the 21st Conference of the Parties of the United Nations Framework Convention on Climate Change in Paris France that requires member countries to reviewand “represent a progression” in their intended nationally determined contributions, which set GHG emission reduction goals every five years beginning in 2020.Agreement. The agreement was signed by the United States in April 2016, andParis Agreement entered into force in November 2016. The2016 after more than 170 nations, including the United States, is one of over 70 nations having ratified or otherwise consentedindicated their intent to be bound by the agreement; however, this agreement does not create any binding obligations for nations to limit their GHG emissions, but rather includes pledges to voluntarily limit or reduce future emissions. Although it is not possible at this time to predict how new laws or regulationsagreement. However, in June 2017, President Trump announced that the United States intends to withdraw from the Paris Agreement and to seek negotiations either to reenter the Paris Agreement on different terms or any legal requirements imposed followingenter into a separate agreement. In August 2017, the U.S. Department of State officially informed the United Nations of the United States’ agreeingintent to withdraw from the Paris Agreement, and in November 2019 formally initiated the withdrawal process, which would result in an effective exit date of November 2020. The United States’ adherence to the exit process and/or the terms on which the United States may re-enter the Paris Agreement or a separately negotiated agreement are unclear at this time. To the extent that may be adoptedthe United States and other countries implement this agreement or issued to address GHG emissions would impactimpose other climate change31regulations on the oil and natural gas industry, it could have an adverse effect on our business any such future laws, regulations or legal requirements imposing reporting or permitting obligations on, or limiting emissions of GHGs from, our equipment and operations could require us to incur costs to reduce emissions of GHGs associated with our operations as well as delays or restrictions in our ability to permit GHG emissions from new or modified sources. In addition,because substantial limitations on GHG emissions could adversely affect demand for the oil and natural gas that is produced by our customers, which could have an adverse, indirect effect on our operations and financial position.customers. Finally, many scientists have concluded that increasing concentrations of GHGs in the Earth’s atmosphere may produce climate changes that have significant physical effects, such as increased frequency and severity of storms, floods and other climatic events; if any such effects were to occur, they could have an adverse effect on our operations and our customers’ exploration and production operations.Risks Related to Ownership of Our Common StockOur stock price could be volatile, and you may not be able to resell shares of your common stock at or above the price you paid.The stock markets in generalgenerally have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our common stock. Volatility in the market price of our •commoncommon stock may prevent you from being able to sell your common stock at or above the price at which you purchased the stock. As a result, you may suffer a loss on your investment. Securities class action litigation has often been instituted against companies following periods of volatility in the overall market and in the market price of a company'scompany’s securities. Such litigation, if instituted against us, could result in very substantial costs, divert our management'smanagement’s attention and resources and harm our business, operating results and financial condition.In addition to the risks described in this section, the market price of our common stock may fluctuate significantly in response to a number of factors, most of which we cannot control, including:production costs,contribution margin, net income, and net income per share;the Selling Shareholders, or otherour, stockholders, or the perception that such sales may occur;sand basedsand-based products;"Risk Factors"“Risk Factors” section.will beare subject to certain requirements of Section 404 of the Sarbanes-Oxley Act. If we are unable to timely comply with Section 404 or if the costs related to compliance are significant, our profitability, stock price, results of operations and financial condition could be materially adversely affected.We will beare required to comply with certain provisions of Section 404 of the Sarbanes-Oxley Act as early asbeginning December 31, 2017. Section 404 requires that we document and test our internal control over financial reporting and issue management’s assessment of our internal control over financial reporting. This section also requires that our independent registered public accounting firm opine on those internal controls upon becoming a large accelerated filer, as defined in the SEC rules, or32otherwise ceasing to qualify as an emerging growth company under the JOBS Act. We are evaluating our existing controls against the standards adopted by the Committee of Sponsoring Organizations of the Treadway Commission. During the course of our ongoing evaluation and integration of the internal control over financial reporting, we may identify areas requiring improvement, and we may have to design enhanced processes and controls to address issues identified through this review. For example, we anticipate the need to hire additional administrative and accounting personnel to conduct our financial reporting.We believe that the out-of-pocket costs, diversion of management’s attention from running the day-to-day operations and operational changes caused by the need to comply with the requirements of Section 404 of the Sarbanes-Oxley Act could be significant. If the time and costs associated with such compliance exceed our current expectations, our results of operations could be adversely affected.We cannot be certain at this time that we will be able to successfully complete the procedures, certification and attestation requirements of Section 404 or that we or our independent registered public accounting firm will not identify material weaknesses in our internal control over financial reporting. If we fail to comply with the requirements of Section 404 or if we or our independent registered public accounting firm identify and report such material weaknesses, the accuracy and timeliness of the filing of our annual and quarterly reports may be materially adversely affected and could cause investors to lose confidence in our reported financial information, which could have a negative effect on the stock price of our common stock. In addition, a material weakness in the effectiveness of our internal control over financial reporting could result in an increased chance of fraud and the loss of customers, reduce our ability to obtain financing and require additional expenditures to comply with these requirements, each of which could have a material adverse effect on our business, results of operations and financial condition.The concentration of our capital stock ownership among our largest stockholders and their affiliates will limit your ability to influence corporate matters.After our February 2017 equity offering, including the exerciseAs of the underwriters’ option to purchase additional shares from the Selling Shareholders,December 31, 2019, Clearlake beneficially owns approximately 26.6%25.6% of our outstanding common stock and our Chief Executive Officer beneficially owns approximately 15.1%15.6% of our outstanding common stock. Consequently, Clearlake and our Chief Executive Officer (each of whom we sometimes refer to as a “Principal Stockholder”) will continue to have significant influence over all matters that require approval by our stockholders, including the election of directors and approval of significant corporate transactions. Additionally, we are party to a stockholdersstockholders’ agreement pursuant to which, so long as either Principal Stockholder maintains certain beneficial ownership levels of our common stock, each Principal Stockholder will have certain rights, including board of directors and committee designation rights and consent rights, including the right to consent to change in control transactions. For additional information, please read “Certain Relationships and Related Party Transactions—Stockholders Agreement” in the prospectus included in our Registration Statement on Form S-1 (Registration No. 333-215554), initially filed with the SEC on January 13, 2017. This concentration of ownership and the rights of our Principal Stockholders under the stockholders agreement, will limit your ability to influence corporate matters, and as a result, actions may be taken that you may not view as beneficial.Furthermore, conflicts of interest could arise in the future between us on the one hand, and Clearlake and its affiliates, including its portfolio companies, on the other hand, concerning among other things, potential competitive business activities or business opportunities. Clearlake is a private equity firm in the business of making investments in entities in a variety of industries. As a result, Clearlake’s existing and future portfolio companies which it controls may compete with us for investment or business opportunities. These conflicts of interest may not be resolved in our favor.The price of our common stock may fluctuate significantly, and you could lose all or part of your investment.After our February 2017 equity offering,As of December 31, 2019, there are 20,297,500were 21,595,357 publicly traded shares of common stock held by our public common stockholders. Although our common stock is listed on the NASDAQ, we do not know whether an active trading market will continue to develop or how liquid that market might be. You may not be able to resell your common stock at or above the public offering price. Additionally, the lack of liquidity may result in wide bid-ask spreads, contribute to significant fluctuations in the market price of the common stock and limit the number of investors who are able to buy the common stock.Our amended and restated certificate of incorporation provides for the allocation of certain corporate opportunities between us and Clearlake. Under these provisions, neither Clearlake, its affiliates and investment funds, nor any of their respective principals, officers, members, managers and/or employees, including any of the foregoing who serve as our officers or directors, will have any duty to refrain from engaging, directly or indirectly, in the same business activities or similar business activities or lines of business in which we operate. For instance, a director of our company who also serves or is a principal, officer, member, manager and/or employee of Clearlake or any of its affiliates or investment funds may pursue certain acquisitions or other opportunities that may be complementary to our business and, as a result, such acquisition or other opportunities may not be available to us. These potential conflicts of interest could have a material adverse effect on our business, financial condition and results of operations if attractive corporate opportunities are allocated by Clearlake to itself or its affiliates or investment funds instead of to us. The terms of our amended and restated certificate of incorporation are more33fully described in “Description of Capital Stock” in the prospectus included in our Registration Statement on Form S-1 (Registration No. 333-215554), initially filed with the SEC on January 13, 2017.If securities or industry analysts do not publish research or reports or publish unfavorable research about our business, the price and trading volume of our common stock could decline.The trading market for our common stock depends in part on the research and reports that securities or industry analysts publish about us or our business. If one or more of the analysts who covers us downgrades our securities, the price of our securities would likely decline. If one or more of these analysts ceases to cover us or fails to publish regular reports on us, interest in the purchase of our securities could decrease, which could cause the price of our common stock and other securities and their trading volume to decline.Our amended and restated certificate of incorporation and amended and restated bylaws, as well as Delaware law, contain provisions that could discourage acquisition bids or merger proposals, which may adversely affect the market price of our common stock.Our amended and restated certificate of incorporation authorizes our board of directors to issue preferred stock without stockholder approval. If our board of directors elects to issue preferred stock, it could be more difficult for a third party to acquire us. In addition, some provisions of our amended and restated certificate of incorporation and amended and restated bylaws could make it more difficult for a third party to acquire control of us, even if the change of control would be beneficial to our stockholders, including: and do not intend to, pay dividends on our common stock, and our debt agreements place certain restrictions on our ability to do so. Consequently, your only opportunity to achieve a return on your investment is if the price of our common stock appreciates.We do not currently and do not plan to, declarepay dividends on shares of our common stock in the foreseeable future. Additionally, our existing revolving credit facilityABL Credit Facility places certain restrictions on our ability to pay cash dividends. Consequently, unless we revise our dividend policy, your only opportunity to achieve a return on your investment in us will be if you sell your common stock at a price greater than you paid for it. There is no guarantee that the price of our common stock that will prevail in the market will ever exceed the price that you previously paid.34Future sales of our common stock in the public market could reduce our stock price, and the sale or issuance of equity or convertible securities may dilute your ownership in us.We may sell additional shares of common stock in subsequent public offerings. We may also issue additional shares of common stock or convertible securities. After our February 2017 equity offering, including the exerciseAs of the underwriters’ option to purchase additional shares from the selling shareholders,December 31, 2019, we have outstanding 40,589,64142,852,288 shares of common stock. Following the completion of our February 2017 equity offering, Clearlake beneficially owns 10,811,09710,956,160 shares of our common stock, or approximately 26.6%25.6% of our total outstanding shares and our Chief Executive Officer beneficially owns 6,115,8676,670,322 shares of our common stock, or approximately 15.1%15.6% of our total outstanding shares. All of the shares beneficially owned by Clearlake and our Chief Executive Officer are restricted from immediate resale under the federal securities laws and are subject to the lock-up agreements with the underwriters, but may be sold into the market in the future.In connection with our initial public offering, we filed a registration statement with the SEC on Form S-8 providing for the registration of shares of our common stock issued or reserved for issuance under our equity incentive plans. Subject to the satisfaction of vesting conditions the expiration of lock-up agreements and the requirements of Rule 144, shares registered under the registration statement on Form S-8 will be available for resale immediately in the public market without restriction.We have provided certain registration rights for the sale of common stock by certain existing stockholders including the Selling Shareholders, in the future. The sale of these shares could have an adverse impact on the price of our common stock or on any trading market that may develop.We cannot predict the size of future issuances of our common stock or securities convertible into common stock or the effect, if any, that future issuances and sales of shares of our common stock will have on the market price of our common stock. Sales of substantial amounts of our common stock (including shares issued in connection with an acquisition), or the perception that such sales could occur, may adversely affect prevailing market prices of our common stock.We will incur increased costs as a result of operating as a public company, and our management will be required to devote substantial time to compliance efforts.As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. Our management and other personnel will need to devote a substantial amount of time and financial resources to comply with obligations related to being a publicly-traded corporation. We currently estimate that we will incur approximately $1.4 million annually in additional operating expenses as a publicly-traded corporation that we have not previously incurred, including costs associated with compliance under the Exchange Act, annual and quarterly reports to common stockholders, registrar and transfer agent fees, audit fees, incremental director and officer liability insurance costs and director and officer compensation.We are an “emerging growth company” and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.We are an “emerging growth company,” as defined in the JOBS Act and we intend to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We intend to take advantage of these reporting exemptions until we are no longer an emerging growth company. We cannot predict if investors will find our common stock less attractive because we will rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.$1.0$1.07 billion of revenues in a fiscal year, have more than $700 million in market value of our common stock held by non-affiliates as of any June 30 or issue more than $1.0 billion of non-convertible debt over a rolling three-year period.Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.To the extent that we rely on any of the exemptions available to emerging growth companies, you will receive less information about our executive compensation and internal control over financial reporting than issuers that are not emerging growth companies.We may issue preferred stock whose terms could adversely affect the voting power or value of our common stock.Our amended and restated certificate of incorporation authorizes us to issue, without the approval of our stockholders, one or more classes or series of preferred stock having such designations, preferences, limitations and relative rights, including preferences over our common stock respecting dividends and distributions, as our board of directors may determine. The terms of one or more classes or series of preferred stock could adversely impact the voting power or value of our common stock. For example, we might grant holders of preferred stock the right to elect some number of our directors in all events or on the happening of specified events or the right to veto specified transactions. Similarly, the repurchase or redemption rights or liquidation preferences we might assign to holders of preferred stock could affect the residual value of the common stock.A loan previously made to our Chief Executive Officer that was outstanding at the time that we initially filed the Registration Statement may be deemed to be a violation of Section 402 of the Sarbanes-Oxley Act of 2002, which prohibits us from extending or maintaining credit to directors or executive officers in the form of a personal loan.In January 2016, before we filed the Registration Statement, we provided a one-year loan to our Chief Executive Officer in the amount of $61,000. During the third quarter of 2016, this loan was fully forgiven and included as compensation to our Chief Executive Officer. Section 402 of the Sarbanes-Oxley Act of 2002 prohibits “issuers” from extending or maintaining credit to directors or executive officers in the form of a personal loan. As defined under the Sarbanes-Oxley Act of 2002, the term “issuer” includes, in addition to public companies, a company that has filed a registration statement that has not yet become effective under the Securities Act of 1933, as amended (the “Securities Act”) and that has not been withdrawn. Because we became an “issuer” when we filed the registration statement with the SEC and the loan was outstanding at that time, we may be deemed to have violated Section 402 of the Sarbanes-Oxley Act of 2002. Violations of the Sarbanes-Oxley Act of 2002 could result in significant penalties, including censure, cease and desist orders, revocation of registration and fines. It is also possible that the criminal penalties could exist if the violation was willful and not the result of an innocent mistake, negligence or inadvertence.35Our amended and restated certificate of incorporation will designatedesignates the Court of Chancery of the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, employees or agents.Our amended and restated certificate of incorporation will provideprovides that unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware will, to the fullest extent permitted by applicable law, be the sole and exclusive forum for (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers, employees or agents to us or our stockholders, (iii) any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law (the “DGCL”), our amended and restated certificate of incorporation or our bylaws, or (iv) any action asserting a claim against us that is governed by the internal affairs doctrine, in each such case subject to such Court of Chancery having personal jurisdiction over the indispensable parties named as defendants therein. Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock will be deemed to have notice of, and consented to, the provisions of our amended and restated certificate of incorporation described in the preceding sentence. This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, employees or agents, which may discourage such lawsuits against us and such persons. Alternatively, if a court were to find these provisions of our amended and restated certificate of incorporation inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business, financial condition or results of operations.ItemNone.ITEM 2. – PropertiesOur Oakdaleprimary facility is purpose-built to exploit the reserve profile in place and produce high-quality rawour 1,256 acres frac sand. Unlike some of our competitors, our mine, processing plants and primary rail loading facilities are in one location, which eliminates the need for us to truck sand on public roads between the mine and the productionrelated processing facility or between wet and dry processing facilities. Our on-site transportation assets include approximately seven miles of rail track in a double-loop configuration and three rail car loading facilities that are connected to a Class I rail line owned by Canadian Pacific, which enables us to simultaneously accommodate multiple unit trains and significantly increases our efficiency in meeting our customers’ raw frac sand transportation needs. We ship a substantial portion of our sand volumes (approximately 57% in 2016; 76% during the second half of 2016) in unit train shipments through rail cars that our customers own or lease and deliver to our facility. We believe that we are one of the few raw frac sand producers with a facility custom-designed for the specific purpose of delivering raw frac sand to all of the major U.S. oil and natural gas producing basins by an on-site rail facility that can simultaneously accommodate multiple unit trains. Our ability to handle multiple rail car sets allows for the efficient transition of locomotives from empty inbound trains to fully loaded outbound trains at our facility.We believe our customized on-site logistical configuration yields lower overall operating and transportation costs compared to manifest train or single-unit train facilities as a result of our higher rail car utilization, more efficient use of locomotive power and more predictable movement of product between mine and destination. Unit train operations such as ours can double or triple the average number of loads that a rail car carries per year reducing the number of rail cars needed to support our operations thus limiting our exposure to unutilized rail cars and the corresponding storage and lease expense. We believe that ournear Oakdale, facility’s connection to the Canadian Pacific rail network, combined with our unit train logistics capabilities, will provide us enhanced flexibility to serve customers located in shale plays throughout North America.Wisconsin. In addition, we have invested in atwo transloading facility on the Union Pacific rail networkfacilities, one in Byron Township, Wisconsin, approximately 3.5three miles from our Oakdale facility. This facility, is operational and provides us with the ability to ship directly on the Union Pacific network to locationsone in the major operating basins in the Western and Southwestern United States, which should facilitate more competitive pricing among our rail carriers. With the addition of this transload facility, we believe we are the only raw frac sand mine in Wisconsin with dual served railroad shipment capabilities on the Canadian Pacific and Union Pacific, which should provide us more competitive logistics options to the market relative to other Wisconsin based sand mining and production facilities.In addition to the Oakdale facility, our Hixton site consists of approximately 959 acres in Jackson County, Wisconsin. The Hixton site is fully permitted to initiate operations and is available for future development. As of August 2014, our Hixton site had approximately 100 million tons of proven recoverable sand reserves. This location is located on a Class I rail line, the Canadian National.The following tables providetable provides key characteristics of our Oakdale facility and Hixton site:Our Oakdale Facility (asas of December 31, 2016)Facility Characteristic DescriptionFacility CharacteristicDescription Site geography 1,1961,256 contiguous acres, with on-site processing and rail loading facilities.332316 million tons.3.35.5 million tons with plans to expand to 4.4 million tons with anticipated completion of this expansion by year-end 2017.3.5three miles from the Oakdale facility in Byron Township that provides access to the Union Pacific rail network.raw frac sand per year.Our36In addition to these currently operating facilities, we also own approximately 959 acres in Jackson County, Wisconsin (“Hixton”). The Hixton Site (Assite is fully permitted to initiate operations and is available for future development. As of August 2014)December 31, 2019, our Hixton site had approximately 100 million tons of proven recoverable sand reserves. We have no immediate plans to further develop this site.
We have two long-term surface mining leases for properties located in the Permian Basin in Texas that are available for future development. The first site consists of 1,772 acres in Winkler County, Texas. This location is adjacent to the Texas & New Mexico Railway (TXN) short line with direct access to State Highway 18. The second site consists of 2,447 acres in Crane County, Texas. This location has direct access to Interstate Highway 20. Based on our preliminary testing, we believe there are sufficient quantities on these sites to establish reserves in the future. We have no immediate plans to further develop these sites.Facility Characteristic DescriptionSite geographySituated on 959 contiguous acres, with access to a Canadian National Class I rail line.Proven recoverable reserves100 million tons.DepositsSand reserves with an average thickness of 120 feet; grade mesh sizes 20/40, 30/50, 40/70 and 100 mesh.Proven reserve mixApproximately 72% of 70 mesh and coarser substrate and approximately 28% of 100 mesh substrate.Logistics capabilitiesPlanned on-site transportation infrastructure capable of simultaneously accommodating multiple unit trains and connected to the Canadian National rail network.Royalties$0.50 per ton sold of 70 mesh and coarser substrate.We lease a 56,000 square foot facility in Saskatoon, Saskatchewan, Canada where we manufacture our SmartSystems wellsite proppant storage solutions.Our ReservesWe believe that our strategically locatedstrategically-located Oakdale and Hixton sites provide us with a large and high-quality mineral reserves base. Mineral resources and reserves are typically classified by confidence (reliability) levels based on the level of exploration, consistency and assurance of geologic knowledge of the deposit. This classification system considers different levels of geoscientific knowledge and varying degrees of technical and economic evaluation. Mineral reserves are derived from in situ resources through application of modifying factors, such as mining, analytical, economic, marketing, legal, environmental, social and governmental factors, relative to mining methods, processing techniques, economics and markets. In estimating our reserves, John T. Boyd does not classify a resource as a reserve unless that resource can be demonstrated to have reasonable certainty to be recovered economically in accordance with the modifying factors listed above. “Reserves” are defined by SEC Industry Guide 7 as that part of a mineral deposit that could be economically and legally extracted or produced at the time of the reserve determination. Industry Guide 7 defines “proven (measured) reserves” as reserves for which (a) quantity is computed from dimensions revealed in outcrops, trenches, workings or drill holes; grade and/or quality are computed from the results of detailed sampling and (b) the sites for inspection, sampling and measurement are spaced so closely and the geologic character is so well defined that size, shape, depth and mineral content of reserves are well-established.In estimating our reserves, as listed in the table above, John T. Boyd categorizes our reserves as proven recoverable in accordance with these SEC definitions. The quantity and nature of the sand reserves at our Oakdale site are estimated by third-party geologists and mining engineers, and we internally track the depletion rate on an interim basis. The recovery percentage following processing is also an important criterion in determining economic viability of our mineral reserves. We estimated an average processing recovery of approximately 70% at our Oakdale and Hixton locations. Before acquiring new reserves, we perform surveying, drill core analysis and other tests to confirm the quantity and quality of the acquired reserves.Our Oakdale reserves are located on 1,1961,256 contiguous acres in Monroe County, Wisconsin. We own our Monroe County acreage in fee and acquired surface and mineral rights on all of such acreage from multiple landowners in separate transactions. Our mineral rights are subject to an aggregate non-participating royalty interest of $0.50 per ton sold of coarser than 70 mesh, which we believe is significantly lower than many of our competitors.In addition to the Oakdale facility, we own the Hixton site that is on approximately 959 acres in Jackson County, Wisconsin. The Hixton site is fully permitted and available for future development. We own our Jackson County acreage in fee and acquired surface and mineral rights on all of such acreage from multiple landowners in separate transactions. Our mineral rights are subject to an aggregate non-participating royalty interest of $0.50 per ton sold of coarser than 70 mesh, which we believe is significantly lower than many of our competitors.To opine as to the economic viability of our reserves, John T. Boyd reviewed our financial cost and revenue per ton data at the time of the reserve determination. Historical mineral prices are considered in the context of market supply and demand dynamics to further assess the long-term economic viability of the mineral reserve assets that were evaluated over a thirty year measurement period. A range of average sales price assumptions was considered to estimate proven reserves in accordance with the Commission’s definitions. For our Oakdale location, the assumed average sales price was between $26 and $43 per ton over the course of the 30-year measurement period. For our Hixton location, the assumed average sales price was between $23 and $34 per ton over the course of the 30 year measurement period. The reserve estimates are updated annually based on a variety of factors, including sales, changes to mineral properties, changes in mine plan, current pricing forecasts and other business strategies. The recovery percentage following processing is also an important criterion in determining economic viability of our37mineral reserves. An estimated average processing recovery of approximately 68% was used for our Oakdale and Hixton locations.Based on their review of our cost structure and their extensive experience with similar operations, John T. Boyd concluded that it is reasonable to assume that we will operate under a similar cost structure over the remaining life of our reserves. John T. Boyd further assumed that if our revenue per ton remained relatively constant over the life of the reserves, our current operating margins are sufficient to expect continued profitability throughout the life of our reserves.The cutoff grade used by John T. Boyd in estimating our reserves considers sand that falls between 20 and 140 mesh sizes as proven recoverable reserves, meaning that sands within this range are included in John T. Boyd’s estimate of our proven recoverable. In addition, John T. Boyd’s estimate of our reserves adjusts for mining losses of 10% and processing losses through the wet plant and dry plants, for a total yield of the in-place sand resource. Our processing losses are primarily due to minus 140 mesh sand being removed at the wet processing plant, plus 20 mesh sand being removed in the dry plants (including moisture) through normal attrition and all other material discarded as waste (including clay and other contaminants).During wet plant processing operations, the wet plant process water leaving the wet plant is pumped into a settling basin for the ultra-fine (minus 140 mesh) sand to settle. The settling basin allows the wet plant process water to flow back to the fresh water pump pond via a canal system to its original starting point. The fresh water pump pond, wet plant, settling basin and canal system complete an enclosed circuit for continuous recycled wet plant process water.Wet plant process tailings are temporarily piled and/or stored. Tailings are systematically used throughout the mining operation for various purposes such as reclamation, roads and soil stabilization. Dry plant process material discharged during the drying process is temporarily piled and/or stored for various purposes such as reclamation and soil stabilization, and it is commonly recycled through the wet plant process.Our Oakdale reserves are a mineral resource deposited over millions of years. Approximately 500 million years ago, quartz rich Cambrian sands were deposited in the upper Midwest region of the United States. During the Quaternary era, glaciation and erosion caused by the melting of glaciers removed millions of years of bedrock, to expose the Cambrian sandstone deposit, near the surface. Our deposits are located in an ancient marine setting, which is the reason our deposit is well sorted and rounded. The high quartz content of the Cambrian sands and the monocrystalline structure of our deposits are responsible for the extremely high crush strength relative to other types of sand. The deposit found in our open-pit Oakdale mine and our Hixton site is a Cambrian quartz sandstone deposit that produces high-quality Northern White raw frac sand with a silica content of 99%.Although crush strength is one of a number of characteristics that define the quality of raw frac sand, it is a key characteristic for our customers and other purchasers of raw frac sand in determining whether the product will be suitable for its desired application. For example, raw frac sand with exceptionally high crush strength is suitable for use in high pressure downhole conditions that would otherwise require the use of more expensive resin-coated or ceramic proppants.The sand deposit at our formation does not require crushing or extensive processing to eliminate clays or other contaminants, enabling us to cost-effectively produce high-quality raw frac sand meeting API specifications. In addition, the sand deposit is present to a depth of approximately 200 feet, with a generally shallow overburden of less than 10 feet, on average, over the entire property. The shallow depth of the sand deposits allows us to conduct surface mining rather than underground mining, which lowers our production costs and decreases safety risks as compared to underground mining. All of our surface mining is currently conducted utilizing excavators and trucks to deliver sand to the wet plant. We have considered utilizing other mining methods, such as a dredge operation, and may continue evaluating other mining methods from time to time in the future.Our Oakdale FacilityWe began construction of our Oakdale facility in November 2011 and commenced operations in July 2012. Prior to our commencement of operations, we performed surveying, drill core analysis and other tests to confirm the quantity and quality of the reserves. The process was performed with the assistance of John T. Boyd. Before acquiring new acreage in the future, including material additional acreage adjacent to our Oakdale site, we will perform similar procedures.Our Oakdale wet plant facility is comprised of a steel structure and relies primarily on industrial grade aggregate processing equipment to process up to 3.3 million tons per year of wet sand. Our Oakdale dry plants sit inside insulated metal buildings designed to minimize weather-related effects during winter months. Each building contains one 200 ton per hour propane-or natural gas-fired fluid bed dryer as well as four to six high-capacity mineral separators. Each dryer is capable of producing over 1.1 million tons per year of dry Northern White raw frac sand in varying gradations, including 20/40, 30/50, 40/70 and 100 mesh. For the year ended December 31, 2016, we sold approximately 0.8 million tons of raw frac sand and produced approximately 0.9 million tons of raw frac sand. Substantially all of our sales volumes have historically, and are currently, sold FCA our Oakdale facility. Generally, logistics costs can comprise 60-80% of the delivered cost of Northern White raw frac sand, depending on the basin into which the product is delivered. Some of our competitors’ sales volumes, and a small portion of our 2016 sales volumes, are sold FCA basin.The surface excavation operations at our Oakdale site are conducted by our employees with leased or purchased heavy equipment. The mining technique at our Oakdale site is open-pit excavation of our silica deposits. The excavation process involves clearing and grubbing vegetation and trees overlying the proposed mining area. The initial shallow overburden is removed and utilized to construct perimeter berms around the pit and property boundary. No underground mines are operated at our Oakdale site. In situations where the sand-bearing geological formation is tightly cemented, it may be necessary to utilize blasting to make the sand easier to excavate.A track excavator and articulated trucks are utilized for excavating the sand at several different elevation levels of the active pit. The pit is dry mined, and the water elevation is maintained below working level through a dewatering and pumping process. The mined material is loaded and hauled from different areas of the pit and different elevations within the pit to the primary loading facility at our mine’s on-site wet processing facility.Once processed and dried, sand from our Oakdale facility is stored in one of ten on-site silos with a combined storage capacity of 27,000 tons. In addition to the 27,000 tons of silo capacity, we own approximately seven miles of on-site rail track (in a double-loop configuration) that is connected to the Canadian Pacific rail network and that is used to stage and store empty or recently loaded customer rail cars. Our strategic location adjacent to a Canadian Pacific mainline provides our customers with the ability to transport Northern White raw frac sand from our Oakdale facility to all major unconventional oil and natural gas basins currently producing in the United States. For additional information regarding our transportation logistics and infrastructure, please read “—Transportation Logistics and Infrastructure.”Our Oakdale facility undergoes regular maintenance to minimize unscheduled downtime and to ensure that the quality of our raw frac sand meets applicable API and ISO standards and our customers’ specifications. In addition, we make capital investments in our facility as required to support customer demand and our internal performance goals. Because raw sand cannot be wet-processed during extremely cold temperatures, our wet plant typically operates only seven to eight months out of the year. Except for planned and unplanned downtime, our dry plants operate year-round.As of December 31, 2016, we have utilized approximately 135 acres for facilities and mining operations, or only 11% of Oakdale location.Transportation Logistics and InfrastructureHistorically, all of our product has been shipped by rail from our approximately seven-mile on-site rail spur, in a double-loop configuration, that connects our Oakdale facility to a Canadian Pacific mainline. The length of this rail spur and the capacity of the associated product storage silos allow us to accommodate a large number of rail cars. This configuration also enables us to accommodate multiple unit trains simultaneously, which significantly increases our efficiency in meeting our customers’ raw frac sand transportation needs. Unit trains, typically 80 rail cars in length or longer, are dedicated trains chartered for a single delivery destination. Generally, unit trains receive priority scheduling and do not switch cars at various intermediate junctions, which results in a more cost-effective and efficient method of shipping than the standard method of rail shipment. While many of our competitors may be able to handle a single unit train, we believe that our Oakdale facility is one of the few raw frac sand facilities in the industry that is able to simultaneously accommodate multiple unit trains in its rail yard.The ability to handle multiple rail car sets is particularly important in order to allow for the efficient transition of the locomotive from empty inbound trains to fully-loaded outbound trains at the originating mine. For example, in a “hook-and-haul” operation, inbound locomotive power arriving at the mine unhooks from an empty train and hooks up to a fully loaded unit car train waiting at the rail yard with a turnaround time of as little as two hours. We believe that this type of operation typically yields lower operating and transportation costs compared to manifest train traffic movements as a result of higher rail car utilization, more efficient use of locomotive power and more predictable movement of product between mine and destination. We believe that this is a key differentiator as currently rail cars are in high demand in the industry and hook-and-haul operations can increase the average number of turns per year of a rail car from seven to nine turns per year for manifest train shipments to over 20 turns per year while reducing demand variability for locomotive services. We believe that we are one of the few raw frac sand producers with a facility custom-designed for the specific purpose of delivering raw frac sand to all of the major U.S. oil and natural gas producing basins by an on-site rail facility that can simultaneously accommodate multiple unit trains, a capability that requires sufficient acreage, loading facilities and rail spurs.In addition, we recently constructed a transload facility on a rail line owned by the Union Pacific in Byron Township, Wisconsin, approximately 3.5 miles from the Oakdale facility. This transload facility will allow us to ship sand directly to our customers on more than one rail carrier. This facility has been operational since June 2016 and should provide increased delivery options for our customers, greater competition among our rail carriers and potentially lower freight costs. With the addition of this transload facility, we believe we are the only mine in Wisconsin with dual served railroad shipment capabilities on the Canadian Pacific and Union Pacific railroads, which should provide us more competitive logistics options to the market relative to other Wisconsin-based sand mining and production facilities.The logistics capabilities of raw frac sand producers are important to customers, who focus on both the reliability and flexibility of product delivery. Because our customers generally find it impractical to store raw frac sand in large quantities near their job sites, they seek to arrange for product to be delivered where and as needed, which requires predictable and efficient loading and shipping of product. The integrated nature of our logistics operations, our approximate seven-mile on-site rail spur and our ability to ship using unit trains enable us to handle rail cars for multiple customers simultaneously, which:minimizes the time required to successfully load shipments, even at times of peak activity;eliminates the need to truck sand on public roads between the mine and the production facility or between wet and dry processing facilities; andminimizes transloading at our Oakdale site, lowers product movement costs and minimizes the reduction in sand quality due to handling.In addition, with the transload facility now operational at Byron Township, our Oakdale facility is now dual served and capable of shipping sand directly on the Canadian Pacific and Union Pacific rail lines. Together, these advantages provide our customers with a reliable and efficient delivery method from our facility to each of the major U.S. oil and natural gas producing basins, and allow us to take advantage of the increasing demand for such a delivery method.ItemITEM 3. – Legal ProceedingsFrom 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 I, Item 3 regarding our legal proceedings is incorporated by reference herein from Part II, Item 8. Note 17 - Commitments and Contingencies - Litigation of the notes to the consolidated financial statements in this Form 10-K for the year ended December 31, 2019.ITEM 4. — MINE SAFETY DISCLOSURESWe are not currentlycommitted to maintaining a partyculture that prioritizes mine safety. We believe that our commitment to any legal proceedings thatsafety, the environment and the communities in which we believe would have a material adverse effect onoperate is critical to the success of our financial position, resultsbusiness. 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 operations or cash flows and are not awareMSHA is to administer the provisions of any material legal proceedings contemplated by governmental authorities.Item 4. –the Federal Mine Safety DisclosuresWe are also subject to regulations by the U.S. Occupational Safety and Health Administration (“OSHA”) 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. We also adhere to NISA’s respiratory protection program, and ensures that workers are provided with fitted respirators and ongoing radiological monitoring.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.38ITEM 5. – Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity SecuritiesMarket InformationShares of our common stock, traded publicly under the symbol, “SND,” have been publicly traded since November 4, 2016, when our common stock was listed and began trading on the NASDAQ Global Select MarketsMarket (“NASDAQ”). Prior to that date, there was no public market for our stock.The following table sets forth, for the reporting period indicated, the high and low market prices per share of our common stock, as reported on the NASDAQ.Holders of RecordOn March 13, 2017,February 19, 2020, there were 40,589,64142,847,996 shares of our common stock outstanding, which were held by approximately 3329 stockholders of record. Because many of our shares of common stock are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record holders.DividendsOur ability to pay dividends is governed by (i) the provisions of Delaware corporate law, (ii) our Certificate of Incorporation and Bylaws, and (iii) our ABL Credit Facility. To date, we have not paid or declared any dividends on our common stock and there is no assurance that we will pay any cash dividends on our common stock in the future. The future payment of cash dividends on our common stock, if any, is within the discretion of our board of directors and will depend on our earnings, capital requirements, financial condition, and other relevant factors. Smart Sand, Inc. Comparative Stock Performance GraphThe information contained in this Smart Sand, Inc. Comparative Stock Performance Graph section shall not be deemed to be “soliciting material” or “filed” or incorporated by reference in future filings with the SEC, or subject to the liabilities of Section 18 of the Exchange Act, except to the extent that we specifically incorporate it by reference into a document filed under the Securities Act or the Exchange Act.The graph below compares the cumulative total shareholderstockholder return on our common stock, the cumulative total return on the Russell 3000 Index, the Standard and Poor’s Small Cap 600 GICS Oil & Gas Equipment & Services Sub-Industry Index and a composite average of publicly traded proppant peer companies (Fairmount Santrol Holding, Inc., U.S.(U.S. Silica Holding, Inc., Hi-Crush Partners LP, CARBO Ceramics, Inc., Covia Holdings Corporation, and Emerge Energy Services, LP)Solaris Oilfield Infrastructure, Inc.) since November 4, 2016, the first day our stock traded on the NASDAQ.
Recent Sales of Unregistered SecuritiesDuring the past three years, we have issued unregistered securities to a limited number of persons, as described below. None of these transactions involved any underwriters, underwriting discounts or commissions or any public offering, and we believe that each of these transactions was exempt from the registration requirements pursuant to exemptions available under the Securities Act.39
The following table sets forth information on the restricted stock awards issued by us in the three years preceding the filing of this annual report. The Company did not receive any consideration upon the grant of Restricted Stock.DatePerson or Class of PersonRestricted StockApril 29, 2013Employee11,000August 14, 2013Employee5,500June 10, 2014Executive Officers176,000June 10, 2014Employee33,000June 10, 2014Director11,000August 1, 2014Executive Officer33,000August 11, 2014Executive Officer77,000August 11, 2014Employee4,400October 31, 2014Employee4,400February 4, 2015Director22,000February 4, 2015Director22,000March 15, 2016Executive Officers81,400March 15, 2016Employees79,200The issuances of common stock described above represent grants of restricted stock under our compensation plans to our officers, directors and employees in reliance upon an available exemption from the registration requirements of the Securities Act, including those contained in Rule 701 promulgated under Section 3(b) ofthis Smart Sand, Inc. Comparative Stock Performance Graph section shall not be deemed to be “soliciting material” or “filed” or incorporated by reference in future filings with the Securities Act. Among other things, we relied on the fact that, under Rule 701, companies that are notSEC, or subject to the reporting requirementsliabilities of Section 13 or Section 15(d)18 of the Exchange Act, are exempt fromexcept to the extent that we specifically incorporate it by reference into a document filed under the Securities Act or the Exchange Act.Unregistered Sales of Equity Securities and Use of ProceedsDuring the year ended December 31, 2019, no shares were sold by the Company without registration under the Securities Act with respectof 1933.Purchases of Equity Securities by the Issuer and Affiliated PurchasersWe are authorized to certain offersrepurchase shares through open market purchases at prevailing market prices or through privately negotiated transactions as permitted by securities laws and salesother legal requirements. On November 8, 2018, we announced that the board of securities pursuantdirectors had approved the repurchase of up to “compensatory benefit plans” as defined2,000,000 shares of our common stock during the twelve month period following the announcement of the share repurchase program. On September 11, 2019, the board of directors reauthorized the existing share repurchase program for one year. At December 31, 2019, the maximum number of shares that the Company may repurchase under that rule.the current repurchase authority was 1,411,800 shares. There were no share repurchases during the three months ended December 31, 2019.Item40ITEM 6. – Selected Financial DataThe selected historical consolidated financial data presented below should be read in conjunction with “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes and other financial data included elsewhere in this document.(1)Amounts previously reported have been updated to reflect the impacts of the immaterial correction disclosed in Note 1 to the audited financial statements as of and for the years ended December 31, 2016, 2015 and 2014.(2)For our definitions of the non-GAAP financial measures of Adjusted EBITDA and Production costs and reconciliations of Adjusted EBITDA and Production costs to our most directly comparable financial measures calculated and presented in accordance with GAAP, please read “Note Regarding Non-GAAP Financial Measures.”Year Ended December 31, 2019 2018 2017 2016 (4)2015 (in thousands, except per share and per ton amounts) Income Statement Data: Revenues $ 233,073 $ 212,470 $ 137,212 $ 59,231 $ 47,698 Cost of goods sold 152,021 144,903 100,304 26,569 21,003 Gross profit 81,052 67,567 36,908 32,662 26,695 Operating expenses 37,569 41,688 18,203 12,271 10,112 Operating income 43,483 25,879 18,705 20,391 16,583 Net income (1)31,623 18,688 21,526 10,379 4,990 Net income per common share (1): Basic $ 0.79 $ 0.46 $ 0.54 $ 0.43 $ 0.23 Diluted $ 0.78 $ 0.46 $ 0.53 $ 0.42 $ 0.19 Balance Sheet Data (at period end): Property, plant and equipment, net (1)$ 230,461 $ 248,396 $ 171,762 $ 104,096 $ 108,928 Total assets 361,603 320,292 246,802 173,452 132,564 Long-term debt, net 28,240 47,893 — 860 64,583 Total stockholders’ equity (deficit) (1)244,143 209,360 190,022 142,442 3,729 Cash Flow Statement Data: Net cash provided by operating activities $ 44,633 $ 50,909 $ 15,628 $ 26,703 $ 30,703 Net cash used in investing activities (25,425) (125,989) (51,148) (2,470) (29,375) Net cash provided by financing activities (18,035) 41,319 23,213 19,405 1,766 Other Data: Adjusted EBITDA (2)87,071 65,993 30,615 37,839 23,881 Contribution margin (2)106,464 83,864 44,197 38,738 31,625 Contribution margin per ton (2)$ 43.24 $ 28.00 $ 18.05 $ 46.90 $ 42.11 Capital expenditures (3)$ 27,640 $ 110,761 $ 69,378 $ (546) $ 28,102 Tons Sold 2,462 2,995 2,449 826 751
(1)The amounts previously reported have been updated to reflect an immaterial correction as of and for the years ended December 31, 2016 and 2015. The year ended December 31, 2017 includes an immaterial reclassification in Property, plant and equipment, net.(3)Negative capital expenditures for the year ended December 31, 2016 resulted from various deposits received for projects included in construction in progress.
(2)For our definitions of the non-GAAP financial measures of EBITDA, Adjusted EBITDA and contribution margin, and reconciliations of Adjusted EBITDA and contribution margin to our most directly comparable financial measures calculated and presented in accordance with GAAP, please see the section entitled “Non-GAAP Financial Measures” in Item 7 of this Annual Report on Form 10-K.(4)2016 financial data above includes the impact of our initial public offering (“IPO”), including proceeds received and additional charges incurred.
(3)Negative capital expenditures for the year ended December 31, 2016 resulted from return of deposits paid for projects included in construction in progress. The year ended December 31, 2018 includes approximately $30.0 million for the acquisition of Quickthree Solutions, Inc. (“Quickthree”) and $15.5 million for the acquisition of assets at the Van Hook terminal.Item(4)Includes the impact of our IPO, including proceeds received and additional charges incurred._________________________41SMART SAND, INC.MANAGEMENT'S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(UNAUDITED)ITEM 7. – Management’s Discussion and Analysis of Financial Condition and Results of OperationsForward-Looking StatementsThe following discussion and analysis of our financial condition and results of operations should be read together with Item 1, “Business,” Item 6, “Selected Financial Data,” the description of the business appearing in Item 1, “Business,” of this report, and the Consolidated Financial Statements and the related notes in Part II, Item 8 of this Annual Report on Form 10-K and the related notes included elsewhere in this report. 10-K.This discussion contains forward-looking statements as a result of many factors, including those set forth under Item 1, “Business—Forward-Looking Statements” and Item 1A, “Risk Factors,” and elsewhere in this Annual Report on Form 10-K.report. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could differ materially from those discussed in or implied by forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this report, particularly in Item 1A, “Risk Factors.”We use EBITDA, Adjusted EBITDA and contribution margin herein as non-GAAP measures of our financial performance. For further discussion of EBITDA, Adjusted EBITDA and contribution margin, see the section entitled “Non-GAAP Financial Measures.” in Item 7 of this Annual Report on Form 10-K. We define various terms to simplify the presentation of information in this Report. All share amounts are presented in thousands.Factors Impacting Comparability of Our Financial ResultsOur historical results of operations and cash flows are not indicative of results of operations and cash flows to be expected in the future, principally for the following reasons:•Impairment loss. In 2019, we recorded impairment loss of $15.5 million, of which $7.6 million relates to our finite-lived developed technology intangible assets and $7.9 million relates to our Hixton, Wisconsin property. In 2018, we recorded an impairment loss of $17.8 million, which related to our goodwill and indefinite-lived trade name intangible asset. These amounts were recorded as an operating expense on the consolidated income statement. See our discussion in the section entitled “GAAP Results of Operations” for additional information regarding these transactions.•Expansion of our Oakdale facility. In May 2018, we completed an expansion project to increase our nameplate processing capacity at our Oakdale facility from approximately 3.3 million tons per year to approximately 5.5 million tons per year.•We have increased our sand sales delivered in-basin. In 2018 and 2019, a greater portion of the frac sand that we sold was delivered directly to the Bakken formation in the Williston Basin through our Van Hook terminal. This resulted in higher average selling prices along with additional costs related to such delivery.•Shortfall Revenue. In 2019, we recorded shortfall revenue of $49.3 million compared to $6.0 million and $1.2 million in 2018 and 2017, respectively. Shortfall revenue of $24.8 million for year ended December 31, 2019 was from a customer with which we have ongoing litigation.•Market Trends. From early 2017 through the second quarter of 2018, improvements in oil and natural gas prices created a more stable market environment. During the second half of 2018, the demand for Northern White sand decreased, which we believe was due primarily to insufficient takeaway capacity for the incremental oil and natural gas production coming online in the Permian Basin, along with increased availability of regional sand as a source of proppant in the Permian basin. Additionally, oil and natural gas companies reduced their spending in the latter portion of the year due to strong spending in the first half of 2018 and lower oil prices, particularly in the fourth quarter of 2018. Demand briefly recovered during the summer of 2019 before declining toward the end of 2019 as oil and gas companies exhausted their budgets and managed their capital spending to be in line with their expected operating cash flows.We have found that increasingly over the last two years, customers are disinclined to enter into long-term contracts for their frac sand supply and have instead trended toward purchasing their frac sand supply in the spot market at42SMART SAND, INC.MANAGEMENT'S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(UNAUDITED)market prices. Should our customer base continue to limit their exposure to longer term contracts, we intend to increase focus on shorter term contracts to increase sales in the spot market.OverviewWe are a pure-play,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, producer of high-qualityhigh quality Northern White raw frac sand, which is a preferredpremium proppant used to enhance hydrocarbon recovery rates in the hydraulic fracturing of oil and natural gas wells. We sellalso offer proppant logistics solutions to our customers through our in-basin transloading terminal and our SmartSytemsTM wellsite proppant storage capabilities. We currently market our products and services primarily to oil and natural gas exploration and production companies and oilfield service companies, sell our sand under a combination of long-term take-or-pay contracts and spot sales in the open market.market, and provide wellsite proppant storage solutions services and equipment under flexible contract terms custom tailored to meet customers’ needs. We believe that, among other things, the size and favorable geologic characteristics of our sand reserves, the strategic location and logistical advantages of our facilities, our proprietary SmartDepotTM portable wellsite proppant storage silos and the industry experience of our senior management team have positionedmake us as a highly attractive sourceprovider of raw frac sand and proppant logistics services from the mine to the oil and natural gas industry.We own and operate a raw frac sand mine and related processing facility near Oakdale, Wisconsin, at which we have approximately 332316 million tons of proven recoverable sand reserves as of December 31, 2016.2019. We incorporated in Delaware in July 2011 and began operations with 1.1 million tons of annual nameplate processing capacity in July 2012, expanded to 2.22012. After several expansions, our current annual nameplate processing capacity at our Oakdale facility is approximately 5.5 million tons capacity in August 2014, and increased to 3.3 million tons in September 2015.of frac sand. Our integrated Oakdale facility, with on-site rail infrastructure and wet and dry sand processing facilities, has access to two Class I rail lines and enables us to process and cost-effectively deliver products to our customers.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. The Van Hook terminal became operational in April 2018. Since operations commenced, we have been providing Northern White sand in-basin at this terminal to our contracted and spot sales customers. This terminal allows us to offer more efficient delivery options to customers operating in the Bakken Formation in the Williston Basin.We also offer to our customers portable wellsite proppant storage through our SmartSystems storage solutions. The 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, to approximately 3.3 million tonstakedown 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 SmartDepotXLTM silo systems, wellsite transload capabilities, and our rapid deployment trailers. Our SmartDepot silos include passive and active dust suppression technology, along with the capability of raw frac sand per year.On November 9, 2016, we completed our initial public offering (the “IPO”) of 11,700,000 shares of our common stock at a price to the public of $11.00 per share ($10.34 per share, netgravity-fed operation. Our rapid deployment trailers are designed for quick setup, takedown and transportation of the underwriting discount) pursuant to a Registration Statement on Form S-1, as amended (File No. 333-213692), initially filed with the SEC on September 19, 2016 pursuant to the Securities Act. The material provisions of the IPO are described in the IPO prospectus. We granted the underwriters an option for a period of 30 days to purchase up to an additional 877,500 shares of Common Stock at the initial offering price,entire SmartSystem, and the Selling Shareholders granted the underwriters an option for a period of 30 days to purchase up to an aggregate additional 877,500 shares of Common Stock at the initial offering price. On November 23, 2016, the underwriters exercised in full their option to purchase additional shares of common stock from us and the Selling Shareholders.On February 1, 2017, we entered into an Underwriting Agreement providing for the offer and sale of 1,500,000 shares of common stock at a price of $17.50 per share, generating net proceeds to us of $24.3 million before underwriting discounts and expenses. We intend to use the net proceeds from this offering for future capital projects and general corporate services. The offering closed on February 7, 2017. Additionally, the Selling Shareholders sold 4,450,000 shares of common stock at a price of $17.50 per share. We received no proceedsdetach from the sale of common stock by the Selling Shareholders. The Selling Shareholders granted the underwriters an optionwellsite equipment, which allows for a period of 30 days to purchase up to an additional 892,500 shares of common stock. On February 10, 2017, the underwriters exercised in full their option to purchase additional shares of common stockremoval from the Selling Shareholders.wellsite during operation. We received no proceeds fromhave also developed a proprietary software program, the sale of common stockSmartSystem Tracker, which allows our SmartSystems customers to the underwriters by the Selling Shareholders.Our monitor silo-specific information, including location, proppant type and proppant inventory. We are currently developing a new transload technology to complement our existing solutions.Assets and OperationsOakdaleOur sand reserves include a balanced concentration of coarse (20/sand, (19% 20/40 30/50 and coarser), finer sand (41% of 40/70 gradation) sandsmesh) and fine (60/sand (40% 60/140 gradation, which we refer to in this annual report as “100 mesh”) sand. Our reserves contain deposits of approximately 19% of 20/40 and coarser substrate, 41% of 40/70 mesh substrate and approximately 40% of 100 mesh substrate.. Our 30/50 gradation is a derivative of the 20/40 and 40/70 blends. We believe that this mix of coarse and fine sand reserves, combined with contractual demand for our products across a range of mesh sizes, provides us with relatively higher mining yields and lower processing costs than frac sand mines with predominantly coarse sand reserves. In addition, our approximate 332316 million tons of proven recoverable reserves implies a reserve life of approximately 10257 years based on our current annual nameplate processing capacity of 3.35.5 million tons per year.tons. This long reserve life enables us to better serve demand for different types of raw frac sand as compared to mines with shorter reserve lives. We currently have plans to increase our wet and dry plant processing capacity in order to produce up to approximately 4.4 million tons of raw frac sand per year. We currently have one wet plant and one dryer in storage at Oakdale that will utilized as part of this capacity expansion.SMART SAND, INC.MANAGEMENT'S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(UNAUDITED)Our Oakdale facility is purpose-built to exploit the reserve profile in place and produce high-quality raw frac sand. Unlike some of our competitors, our primary processing and rail loading facilities are located in close proximity atto the mine site, which eliminateslimits the need for us to truck sand on public roads between the mine and the production facility or between wet and dry processing facilities. Our on-site transportation assets include approximately sevennine miles of rail track in a double-looptriple-loop configuration and three rail carfour railcar loading facilities that are connected to a Class I rail line owned by Canadian Pacific. This enables us to simultaneously accommodate multiple unit trains and significantly increases our efficiency in meeting our customers’ raw frac sand transportation needs. Our Oakdale facility is dual served with connections to the Canadian Pacific and Union Pacific networks. In addition, we have aunit train capable transload facility approximately 3.5three miles from the Oakdale facility in Byron Township, Wisconsin, that provides us with the ability to ship sand to our customers on the Union Pacific rail network. We believe that we are the only sand facility in Wisconsin that has dual served rail capabilities, which should create competition among our rail carriers and allow us to provide more competitive logistics options for our customers. MostDue to sustained freezing temperatures in our area of operation during winter months, we have historically halted the operation of our product is shipped via unit trains, whichwet plant for approximately three to five months. As a result, we believe should yield lower operatinghave excavated and transportation costs compared to manifest train or single-unit train facilities due to our higher rail car utilization, more efficient use of locomotive power and more predictable movement of products between mine and destination. We believe that the combination of efficient production and processing, our well-designed plant, our dual served rail access and our focus on shippingwashed sand in unit trains offer a considerable economic advantage to our customers.Overall Trends and OutlookIndustry Trends Impacting Our BusinessUnless otherwise indicated, the information set forth under “—Industry Trends Impacting Our Business,” including all statistical data and related forecasts, is derived from The Freedonia Group’s Industry Study #3302, “Proppants in North America,” published in September 2015, Spears & Associates’ “Hydraulic Fracturing Market 2005-2017” published in the fourth quarter 2016, PropTester, Inc. and Kelrik, LLC’s “2015 Proppant Market Report” published in March 2016 and Baker Hughes’ “North America Rotary Rig Count” published July 2016. While we are not awareexcess of any misstatements regarding the proppant industry data presented herein, estimates involve risks and uncertainties and are subject to change based on various factors, including those discussed under the heading “Risk Factors.”Demand TrendsAccording to Spears, the U.S. proppant market, including raw frac sand, ceramic and resin-coated proppant, was approximately 35.5 million tons in 2016. Kelrik estimates that the total raw frac sand market in 2015 represented approximately 92.3% of the total proppant market by weight. Market demand in 2015 dropped by approximately 28% from 2014 record demand levels (and a further estimated decrease of 43% in 2016 from 2015) due to the downturn in commodity prices since late 2014, which led to a corresponding decline in oil and natural gas drilling and production activity. Conversely, according to the Freedonia Group,current delivery requirements during the period from 2009months when the wet plant was operational. This excess sand is placed in stockpiles that feed the dry plants and enable us to 2014, proppant demand by weight increased by 42% annually. Spears estimates from 2016 through 2020 proppant demand is projected to grow by 37.0% perfill customer orders throughout the year from 35.5 million tons per year to 125 million tons per year, representing an increase of approximately 89.5 million tons in annual proppant demand over that time period.
This change in demand has impacted contract discussions and negotiated terms with our customers as existing contracts have been adjusted resulting in a combination of reduced average selling prices per ton, adjustments to take-or-pay volumes, inclusion of monthly reservation charges and length of contract. We believe we have mitigated the short-term negative impact on revenues of some of these adjustments through contractual shortfall and reservation payments. During the market downturn, customers began to purchase more volumes on a spot basis as compared to committing to term contracts, and this trend continued until oil and natural gas drilling and completion activity began to increase beginningwithout interruption. Our second wet plant facility, brought online in the fourth quarter of 2016. However, drilling2017, is enclosed, which allows us to operate at its full capacity during the winter months.LogisticsThrough our transloading terminal in Van Hook, North Dakota, we provide one of the most efficient and completion activity has begunlowest-cost sources of Northern White sand in-basin to return to higher levels, and we believe customers will begin to more actively consider contracting proppant volumes under term contracts rather than continuing to rely on buying proppant on a spot basisoperating in the market.While demandBakken Formation in the Williston Basin.Through our SmartSystems offering, we have the technology, production capacity and management team to compete further in the frac sand supply chain for our customers by offering logistics services from the mine all the way to the wellsite. Our SmartSystems consist of our SmartDepot proppant has declined since late 2014storage silos, transload technology, and rapid deployment trailer system.We believe our patented SmartDepot silos will outperform our competitors in connection withthat they can be set up or taken down rapidly, they include industry-leading passive and active dust suppression technology, they have the downturncapability of gravity-fed operation and they can be filled by both pneumatic and gravity dump trailers. Our trailers detach, which reduces their footprint on the wellsite. We are currently developing a new transload technology to complement our existing solutions.Through the expansion of our SmartSystems fleet and other logistics options, we continue evaluating ways to reduce the landed cost of our products in-basin and to the wellsite for our customers while increasing our customized service offerings to provide additional delivery and pricing alternatives, including selling product on an “as-delivered” basis to the wellsite.We intend to continue expanding our footprint in-basin through the expansion of our SmartSystems wellsite storage solutions fleets and potentially through the addition of one or more terminals in commodity prices and the corresponding decline inother oil and natural gas drilling and production activity, we believe that the demandoperating basins. Benefits of our long-term growth strategy for proppant will increase over the medium and long term as commodity prices rise from their recent lows, which will lead producers to resume completionin-basin delivery of their inventory of drilled but uncompleted wells and undertakesand include new drilling activities. Further, we believe that demandcontracted customers by marketing through our own terminal, more opportunity for proppant will be amplifiedspot sales by the following factors:improved drilling rig productivity, resulting in more wells drilled per rig per year;completion of exploration and production companies’ inventory of drilled but uncompleted wells;increases in the percentage of rigs that are drilling horizontal wells;increases in the length of the typical horizontal wellbore;increases in the number of fracture stages per foot in the typical completed horizontal wellbore;increases in the volume of proppant used per fracturing stage;renewed focus of exploration and production companies to maximize ultimate recovery in active reservoirs through downspacing; andincreasing secondary hydraulic fracturing of existing wells as early shale wells age.Recent growth in demand for raw fracforward deploying sand has outpaced growth in demand for other proppants, and industry analysts predict that this trend will continue. As well completion costs have increased as a proportion of total well costs, operators have increasingly looked for ways to improve per well economics by lowering costs without sacrificing production performance. To this end, the oil and natural gas industry is shifting away from the use of higher-cost proppants towards more cost-effective proppants, such as raw frac sand. Evolution of completion techniques and the substantial increase in activity in U.S. oil and liquids-rich resource plays has further acceleratedopportunity to capture incremental margin on the demand growth for raw frac sand.Demand growth for raw frac sand and other proppants is primarily driven by advancements in oil and natural gas drilling and well completion technology and techniques, such as horizontal drilling and hydraulic fracturing. These advancements have made the extraction of oil and natural gas increasingly cost-effective in formations that historically would have been uneconomic to develop. While current horizontal rig counts have fallen significantly from their peak of approximately 1,370 in 2014, rig count grew at an annual rate of 18.7% from 2009 to 2014. Additionally, the percentage of active drilling rigs used to drill horizontal wells, which require greater volumes of proppant than vertical wells, has increased from 42.2% in 2009 to 68.4% in 2014, and as of July 2016 the percentage of rigs drilling horizontal wells is 77% according to the Baker Hughes Rig Count. Moreover, the increase of pad drilling has led to a more efficient use of rigs, allowing more wells to be drilled per rig. As a result of these factors, well count, and hence proppant demand, has grown at a greater rate than overall rig count. Spears estimates that in 2018, proppant demand will exceed the 2014 peak (of approximately 74.0 million tons) and reach 85 million tons even though the projection assumes approximately 10,000 fewer wells will be drilled. Spears estimates that average proppant usage per well will be approximately 5,000 tons per well by 2020. Kelrik notes that current sand-based slickwater completions use in excess of 7,500 tons per well of proppant.In general, oil and liquids-rich wells use a higher proportion of coarser proppant while dry gas wells typically use finer grades of sand. In the past, with the majority of U.S. exploration and production spending focused on oil and liquids-rich plays, demand for coarser gradessale of sand exceeded demand for finer grades; however, due to innovations in completion techniques, demand for finer grade sands has also shown a considerable resurgence. According to Kelrik, a notable driver impacting demand for fine mesh sand is increased proppant loadings, specifically, larger volumes of proppant placed per frac stage. Kelrik expects the trend of using larger volumes of finer mesh materials such as 100 mesh sand and 40/70 sand, to continue.According to The Freedonia Group, development of unconventional resources such as shale oil and natural gas has been the driving force behind growth in proppant demand over the past decade. While significant demand began with drilling in the Barnett Shale, more recent growth has been in liquids-rich plays such as the Permian and Eagle Ford Shales. Demand in these and similar formations had been driven by high oil prices, which spurred drilling activity, and by the depth and challenging geology of these wells, which require larger amounts of proppant to complete as they involve more fracturing stages. However, the drop in oil prices that began in June 2014 slowed drilling activity in liquids-rich plays and, therefore, adversely affected proppant demand. A recovery of both oil and natural gas prices should renew demand in most liquid and gas shale fields.In recent years, customer demand for high-quality raw frac sand outpaced supply. Several factors contributed to this supply shortage, including:the difficulty of finding frac sand reserves that meet API specifications and satisfy the demands of customers who increasingly favor high-quality Northern White raw frac sand;the difficulty of securing contiguous raw frac sand reserves large enough to justify the capital investment required to develop a processing facility;the challenges of identifying reserves with the above characteristics that have rail access needed for low-cost transportation to major shale basins;the hurdles to securing mining, production, water, air, refuse and other federal, state and local operating permits from the proper authorities;local opposition to development of certain facilities, especially those that require the use of on-road transportation, including moratoria on raw frac sand facilities in multiple counties in Wisconsin and Minnesota that hold potential sand reserves; andthe long lead time required to design and construct sand processing facilities that can efficiently process large quantities of high-quality raw frac sand.Supplies of high-quality Northern White frac sand are limited to select areas, predominantly in western Wisconsin and limited areas of Minnesota and Illinois. The ability to obtain large contiguous reserves in these areas is a key constraint and can be an important supply consideration when assessing the economic viability of a potential raw frac sand facility. Further constrainingfarther down the supply and throughput of Northern White raw frac sand, is that not all of the large reserve mines have onsite excavation and processing capability. Additionally, much of the recent capital investment in Northern White raw frac sand mines was used to develop coarser deposits in western Wisconsin. With the shift to finer sands in the liquid and oil plays, many mines may not be economically viable as their ability to produce finer grades of sand may be limited.PricingWe generally expect the price of raw frac sand to correlate with the level of drilling activity for oil and natural gas. The willingness of exploration and production companies to engage in new drilling is determinedchain by a number of factors, the most important of which are the prevailing and projected prices of oil and natural gas,managing the cost of rail and terminal operations. Additionally, having a presence in-basin gives us an opportunity to drillhave a base of operations from which to market our SmartSystems wellsite proppant storage solutions. 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 operate a well, the availability and cost of capital and environmental and government regulations. We generally expect the level of drilling to correlate with long-term trends in commodity prices. Similarly, oil and natural gas production levels nationally and regionally generally tend to correlate with drilling activity.Sand is sold on a contract basis or through spot market pricing. Long-term take-or-pay contracts reduce exposure to fluctuations in price and provide predictability of volumes and price over the contract term. By contrast, the spot market provides direct access to immediate prices, with accompanying exposure to price volatility and uncertainty. For sand producers operating under stable long-term contract structures, the spot market can offer an outlet to sell excess production at opportunistic times or during favorable market conditions.How We Generate RevenueWe generate revenue by excavating and processing frac sand, which we sell to our customers under long-term price agreements or as spot sales at prevailing market rates. In some instances, revenues also include a charge for transportation services provided to customers. Our transportation revenue fluctuates based on a number of factors, including the volume of product transported and the distance between the plant and our customers.As of December 31, 2016, our facility had the capacity to produce 3.3 million tons of raw frac sand per year. When market conditions are favorable, we look to enter into long-term take-or-pay contracts with our customers that are intended to mitigate our exposure to the potential price volatility of the spot market for raw frac sand and to enhance the stability of our cash flows. As of March 13, 2017, we have approximately 63.3% of our current annual production capacity contracted under five long-term take-or-pay contracts. Each contract defines, among other commitments, the minimum volume of product that the customer is required to purchase per contract year and the minimum tonnage per grade, the volume of product that we are required to provide, the price that we will charge and that our customers will pay for each ton of contracted product, and certain remedies in the event either we or the customer fails to meet minimum requirements.Our current contracts include agreed price ranges indexed to the price of crude oil (based upon the average WTI as listed on www.eia.doe.gov). Our contracts contain mechanisms for upward adjustment including: (i) annual percentage price escalators, or (ii) market factor increases, including a natural gas surcharge and/or a propane surcharge which are applied if the Average Natural Gas Price or the Average Quarterly Mont Belvieu TX Propane Spot Price, respectively, as listed by the U.S. Energy Information Administration, are above the benchmark set in the contract for the preceding calendar quarter.Our contracts generally provide that, if we are unable to deliver the contracted minimum volume of raw frac sand, the customer has the right to purchase replacement raw frac sand from alternative sources, provided that our inability to supply is not the result of an excusable delay. In the event that the price of replacement raw frac sand exceeds the contract price and our inability to supply the contracted minimum volume is not the result of an excusable delay, we are responsible for the price difference. At December 31, 2016, we had significant levels of raw frac sand inventory on hand; therefore, the likelihood of any such penalties was considered remote.Each of our contracts contains a minimum volume purchase requirement and providesprovide for delivery of raw frac sand FCA at our Oakdale facility. The mesh size specificationsfacility, our Van Hook transloading terminal in the Bakken, or another location specified by our contracts vary and include a mixcustomers. Revenue is generally recognized as products are delivered in accordance with the contract.We generate revenue on our SmartSystems by renting equipment to our customers under contract terms tailored to meet the short-term or long-term needs with any number of 20/40, 30/50, 40/70 and 100 mesh raw frac sand. Certain of our contracts allowSmartDepot silos they require. We recognize rental revenue when the equipment is made available for the customer to defer a portion of the annual minimum volume to future contract years, subject to a maximum deferral amount.With respect to the take-or-pay contracts, if the customer is not allowed to make up deficiencies, we recognize revenues to the extent of the minimum contracted quantity, assuming payment is reasonably assured. If deficiencies can be made up, receiptsuse or other obligations in excess of actual sales are recognized as deferred revenues until production is actually taken or the right to make up deficiencies expires. These agreements generally provide that, if the Company is unable to deliver the contracted minimum volumes, the customer has the right to purchase replacement product from alternative sources, provided that the inability to supply is not the result of an excusable delay, as defined in these agreements. In the event that the price of the replacement product exceeds the contract priceare met. Our first SmartDepot silos44SMART SAND, INC.MANAGEMENT'S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(UNAUDITED)became available in the third quarter of 2018 and the inability to supply thefirst set was contracted minimum volume is not the result of an excusable delay, the Company is responsible for the difference. For the year ended December 31, 2016, 2015 and 2014 we recognized $20.9 million, $10.1million and $0 million in contractual minimum payments, respectively.January 2019. As of December 31, 2016 and 2015, $1.6 million and $0 million of contractual minimum payments were recognized as deferred revenue, respectively.Revenue is generally recognized FCA, payment made at the origination point at our facility, and title passes as the product is loaded into rail cars hired by the customer. Certain spot-rate customers have shipping terms of FCA, payment made at the destination, for which2019, we recognize revenue when the sand is received at the destination.Costs of Conducting Our BusinessThe principal direct costs involved in operating our business are freight charges, which consist of transportation, railcar rental and storage, labor, maintenance, utility costs, equipment, excavation labor and utility costs.We incurred excavation costsdepreciation of $1.9 million, $1.4 millionour property, plant and $5.4 million during the years ended December 31, 2016, 2015 and 2014, respectively.excavationlabor costs associated with respectemployees at our processing facility represent the most significant cost of converting frac sand to finished product. Our Oakdale facility undergoes maintenance to minimize unscheduled downtime and ensure the ongoing quality of our frac sand. We incur utility costs in connection with the operation of our processing facility, primarily electricity and natural gas, which are both susceptible to market fluctuations. We lease equipment in many areas of our operations including our mining and hauling equipment and logistics services. Excavation costs relate to the blasting and excavation of sand and other materials from which we ultimately do not derive revenue. However, the ratio of rejected materials to total amounts excavated has been, and we believe will continue to be, in line with our expectations, given the extensive core sampling and other testing we undertook at the Oakdale facility. For more information regarding our reserves testing procedures, please read “Business—Our Assets and Operations—Our Reserves.”LaborIn addition, other costs associated with employees at our processing facility represent the most significant cost of converting raw frac sand to finished product. We incurred labor costs of $5.2 million, $4.8 million and $5.2 million for the years ended December 31, 2016, 2015 and 2014, respectively.We incur utility costs in connection with the operation of our processing facility, primarily electricity and natural gas, which are both susceptible to market fluctuations. We incurred utility costs of $2.5 million, $2.6 million and $5.6 million for the years ended December 31, 2016, 2015 and 2014, respectively. Our facilities require periodic scheduled maintenance to ensure efficient operation and to minimize downtime, which historically has not resulted in significant costs to us.Direct excavation costs,include processing costs, overhead allocation, depreciation and depletion are capitalized as a component of inventory and are reflected in cost of goods sold when inventory is sold.On August 1, 2010, we entered intoOverall Trends and OutlookDemand TrendsAccording to Spears, the North American proppant market, including frac sand, ceramic and resin-coated proppant, was approximately 111 million tons in 2019, which is a consulting agreement related5% increase over the 105 million tons Spears reported for 2018. Spears estimates that 2020 demand will be flat with 111 million tons of proppant demand. 
2014 2015 2016 2017 2018 2019 2020E New U.S. Horizontal Wells 20,906 14,500 8,638 13,166 15,686 14,615 12,607 Proppant Demand (Mil Tons) 69 55 44 80 105 111 111 Although the horizontal rig count is expected to decrease in 2020, frac sand demand is projected to be consistent with 2019 levels due to longer laterals, an increase in the purchasenumber of landfrac stages per well and an increase in the amount of proppant used in each stage. Demand growth for frac sand and other proppants is primarily driven by advancements in oil and natural gas45SMART SAND, INC.MANAGEMENT'S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(UNAUDITED)drilling and well completion technology and techniques, such as horizontal drilling and hydraulic fracturing. These advancements have made the extraction of oil and natural gas increasingly cost-effective in formations that historically would have been uneconomic to develop. More proppant is being used per well, which is supporting proppant demand despite horizontal drilling activity stabilizing. Spears estimates that proppant demand in 2020 will be consistent with 2019 as new wells will decrease while the average proppant used per well is expected to increase from 6,600 tons per well in 2019 to approximately 7,600 tons per well by the end of 2020.Supply TrendsThere has been consolidation activity including mergers, acquisitions, closures of mines and bankruptcy filings among our peers. Additional consolidation activity is expected in 2020 in the mining, transloading and logistics businesses. Many large oil and natural gas exploration and production companies have continued to integrate vertically by sourcing their own proppant and some own their own sand mines. Spears identifies a third party, whereby he acted as an agent for usgrowing trend in this direction and estimates 50% of the North American proppant demand is currently direct-sourced. In-basin demand in the Permian basin more than tripled from 2017 through 2019. Sand supply is expected to peak in late 2019 or early 2020 with few additional suppliers entering the field.Supplies of high-quality Northern White frac sand are limited to select areas, predominantly in western Wisconsin and limited areas of Minnesota and Illinois. We believe the ability to obtain optionslarge contiguous reserves in these areas is a key constraint and can be an important supply consideration when assessing the economic viability of a potential frac sand facility. Further constraining the supply and throughput of Northern White frac sand is that not all of the large reserve mines have on-site excavation, processing or logistics capabilities. Historically, much of the capital investment in Northern White frac sand mines was used for the development of coarser deposits in western Wisconsin, which is inconsistent with the increasing demand for finer mesh frac sand in recent years. As such, we’ve seen competitors in the Northern White frac sand market reduce their capacity by shuttering or idling operations as the shift to purchase certain identified real propertyfiner sands in Wisconsin,hydraulic fracturing of oil and natural gas wells erodes the ongoing economic viability of producing coarser grades of sand.Management’s OutlookWe expect the demand for frac sand in 2020 to be consistent with the demand during 2019. Demand for both frac sand and our SmartSystems is influenced by the volume of oil and natural gas well drilling and completion activity, as well as obtain permits and approvals necessary to open, construct and operate a sand mining and processing facility on such real property. In connection with this agreement, our mineral rights are subject to an aggregate non-participating royalty interestthe types of $0.50 per ton sold of 70 mesh and coarser substrate.Due to sustained freezing temperatures in our area of operation during winter months, we halt the operation of our wet plant for up to five months. As a result, we excavate and wash sand in excess of current delivery requirements during the months when the wet plant is operational. This excess sand is placed in stockpiles that feed the dry plants and enable us to fill customer orders throughout the year without interruption.How We Evaluate Our OperationsGross Profit and Production CostsWe market our raw frac sand production under long-term take-or-pay contracts that either have fixed prices for our production or market based prices for our production that fluctuate with the price of crude oil. Additionally, we sell sand on a spot basis at current prevailing spot market prices. When market conditions are favorable, we look to enter into long-term take-or-pay contracts with our customerswells that are intendedcompleted. The industry is trending towards drilling and completing wells with longer laterals and more frac stages per lateral foot drilled. This trend is leading to mitigate our exposurehigher volumes of sand per well and the need for oil and natural gas exploration companies to manage larger volumes of sand at the potential price volatility of the spot marketwellsite. We believe these trends support continued demand for raw frac sand and increased demand for SmartSystems as customers look to enhancecreate synergies in the stabilitytime and cost of our cash flows. As of March 13, 2017, we have approximately 63.3% of our current annual production capacity contracted under five long-term take-or-pay contracts. Our revenues are generated from a combinationmanaging their sand needs at the wellsite.We generally expect the price of raw frac sand to correlate with the level of drilling activity for oil and natural gas, although the increasing supply of sand could keep the price depressed. The willingness of exploration and production companies to engage in new drilling is determined by a number of factors, the most important of which are the prevailing and projected prices of oil and natural gas, the cost to drill, complete and operate a well, the availability and cost of capital and environmental and government regulations, as well as their ability to acquire the sand at the wellsite. We generally expect the level of drilling to correlate with long-term trends in commodity prices. Similarly, oil and natural gas production levels nationally and regionally generally tend to correlate with drilling activity.46SMART SAND, INC.MANAGEMENT'S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(UNAUDITED)GAAP Results of OperationsYear Ended December 31, 2019 compared to the Year Ended December 31, 2018: Year Ended December 31, Change 2019 2018 Dollars Percentage (in thousands, except percentage change) Revenues $ 233,073 $ 212,470 $ 20,603 10 % Cost of goods sold 152,021 144,903 7,118 5 % Gross profit 81,052 67,567 13,485 20 % Operating expenses: Salaries, benefits and payroll taxes 11,560 11,043 517 5 % Depreciation and amortization 2,411 1,843 568 31 % Selling, general and administrative 11,328 12,825 (1,497) (12) % Change in estimated fair value of contingent consideration (3,272) (1,858) (1,414) 76 % Impairment loss 15,542 17,835 (2,293) (13) % Total operating expenses 37,569 41,688 (4,119) (10) % Operating income 43,483 25,879 17,604 68 % Other income (expenses): Interest expense, net (3,621) (2,266) (1,355) 60 % Loss on extinguishment of debt (561) — (561) Not meaningful Other income 131 197 (66) (34) % Total other income (expenses), net (4,051) (2,069) (1,982) 96 % Income before income tax expense 39,432 23,810 15,622 66 % Income tax expense 7,809 5,122 2,687 52 % Net income $ 31,623 $ 18,688 $ 12,935 69 % RevenueRevenue was $233.1 million for the year ended December 31, 2019, during which we sold approximately 2,462,000 tons of sand. Revenue for the year ended December 31, 2018 was $212.5 million, during which we sold approximately 2,995,000 tons of sand. The key factors contributing to the increase in revenues for the year ended December 31, 2019 as compared to the year ended December 31, 2018 were as follows:•We had $49.3 million in contractual shortfall revenue for the year ended December 31, 2019 and $6.0 million for the year ended December 31, 2018, respectively. Our contracts with customers 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. In 2019, shortfall revenue of $24.8 million was from a customer with which we have pending litigation.•Logistics revenue, which includes freight for certain mine gate sand sales, railcar usage, logistics services and SmartSystems rentals, was $74.2 million for the year ended December 31, 2019, an increase of $11.3 million when compared to logistics revenue of $62.9 million for the year ended December 31, 2018. The increase in logistics revenue was due to higher in-basin sales and minimum contractual paymentsrentals of our SmartSystems equipment. At December 31, 2019, we receive from our customers. Gross profit will primarily be affected byhad four fleets of SmartSystems in the price we are ablefield.•Sand sales revenue decreased to receive$109.6 million for the saleyear ended December 31, 2019 compared to $143.1 million for the year ended December 31, 2018, primarily due to decreased sales volumes.47SMART SAND, INC.MANAGEMENT'S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(UNAUDITED)Cost of our raw frac sand along with our minimum contractual payments made by our customers and our ability to control other direct and indirect costs associated with processing raw frac sand.We also use production costs, which we define as costsGoods SoldCost of goods sold excludingwas $152.0 million and $144.9 million, for the years ended December 31, 2019 and December 31, 2018, respectively. Cost of goods sold increased in December 31, 2019 compared to December 31, 2018 primarily due to higher transportation costs as a result of increased in-basin sales volumes and increased depreciation and amortization due to our Oakdale expansion project being operational for the full year, partially offset by decreases in labor and equipment costs on lower total volumes sold.Gross ProfitGross profit was $81.1 million and $67.6 million for the years ended December 31, 2019 and December 31, 2018, respectively. The increase in gross profit for the year ended December 31, 2019 was primarily due to higher shortfall and logistics revenue, partially offset by increased transportation costs as a result of increased in-basin sales volumes and lower total sales volumes.Operating ExpensesOperating expenses were $37.6 million and $41.7 million for the years ended December 31, 2019 and December 31, 2018, respectively. Operating expenses are primarily comprised of wages and benefits, professional services fees and other administrative expenses, all of which were relatively consistent year over year. Salaries, benefits and payroll taxes were $11.6 million and $11.0 million for the years ended December 31, 2019 and December 31, 2018, respectively. Selling, general and administrative expenses decreased from $12.8 million for the year ended December 31, 2018 to $11.3 million for the year ended December 31, 2019, primarily as a result of wellsite storage solution acquisition-related costs in the prior year. We recorded a decrease in the estimated fair value of contingent consideration related to our acquisition of Quickthree, which resulted in an offset to operating expenses in the amount of $3.3 million for the year ended December 31, 2019 and $1.9 million for the year ended December 31, 2018. In 2019, we recorded an impairment charge of $15.5 million of which $7.6 million related to our finite-lived developed technology intangible assets in intangible assets, net on the balance sheet and $7.9 million related to our Hixton, Wisconsin property in property, plant and equipment, net on the balance sheet. The impairment of the finite-lived intangible assets is from our developed technology allocated to the Quickload acquired in connection with the acquisition of Quickthree in 2018. We are developing and testing a new transload technology and no longer plan to actively market the Quickload and as such, all developed technology intangible assets related to the Quickload were fully impaired during the third quarter of 2019. In the fourth quarter of 2019, we determined that the carrying amount of the Hixton, Wisconsin property may not be fully recoverable as we have no current plans to further develop the site. In the fourth quarter of 2018, we recorded an impairment charge of $17.8 million related to goodwill and an other indefinite-lived intangible asset. The impairment charge was primarily due to the decline in our stock price in 2018 and the relationship between the resulting market capitalization and the equity recorded on our balance sheet.Other Income (Expense)We incurred $3.6 million and $2.3 million of net interest expense for the years ended December 31, 2019 and 2018, respectively. The increase in net interest expense for the year ended December 31, 2019 was primarily due to higher average borrowings under the Former Credit Facility to fund acquisition activities in 2018. In 2019, we also recognized $0.6 million of costs due to the extinguishment of the Former Credit Facility. Our borrowings and total debt were reduced late in 2019 as a result of the payment in full and termination of the Former Credit Facility and our entry into the ABL Credit Facility.Income Tax Expense (Benefit)Income tax expense was $7.8 million for the year ended December 31, 2019 compared to income tax expense of $5.1 million for the year ended December 31, 2018. For the years ended December 31, 2019 and 2018, our effective tax rate was approximately 19.8% and 21.5%, respectively, based on the statutory federal rate net of discrete federal and state taxes. The computation of the effective tax rate for the years ended December 31, 2019 and December 31, 2018 included modifications for income tax credits, among other items.For the year ended December 31, 2018, we recorded a net operating loss for tax purposes due to the significant amount of capital expenditures we incurred, which were eligible for 100% expensing available under the Tax Reform Act. There are additional provisions in the Tax Reform Act that could impact us that will continue to be monitored as additional guidance is released and any necessary adjustments will be recorded in the period that the guidance is released. 48SMART SAND, INC.MANAGEMENT'S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(UNAUDITED)Net IncomeNet income was $31.6 million for year ended December 31, 2019 compared to $18.7 million for the year ended December 31, 2018. The increase in net income was primarily due to higher shortfall revenue from customers that did not take their contractual minimum volumes of sand, higher logistics revenue from increased volumes shipped through our Van Hook terminal and rented SmartSystems equipment and lower impairment charges in 2019 compared to 2018.Year Ended December 31, 2018 Compared to the Year Ended December 31, 2017: Year Ended December 31, Change 2018 2017 Dollars Percentage (in thousands, except percentage change) Revenues $ 212,470 $ 137,212 $ 75,258 55 % Cost of goods sold 144,903 100,304 44,599 44 % Gross profit 67,567 36,908 30,659 83 % Operating expenses: Salaries, benefits and payroll taxes 11,043 8,219 2,824 34 % Depreciation and amortization 1,843 525 1,318 251 % Selling, general and administrative 12,825 9,459 3,366 36 % Change in estimated fair value of contingent consideration (1,858) — (1,858) Not meaningful Impairment loss 17,835 — 17,835 Not meaningful Total operating expenses 41,688 18,203 23,485 129 % Operating income 25,879 18,705 7,174 38 % Other income (expenses): Interest expense, net (2,266) (450) (1,816) 404 % Other income 197 462 (265) (57) % Total other income (expenses), net (2,069) 12 (2,081) Not meaningful Income before income tax (benefit) expense 23,810 18,717 5,093 27 % Income tax (benefit) expense 5,122 (2,809) 7,931 (282) % Net income $ 18,688 $ 21,526 $ (2,838) (13) % RevenueRevenue was $212.5 million for the year ended December 31, 2018, during which we sold approximately 2,995,000 tons of sand. Revenue for the year ended December 31, 2017 was $137.2 million, during which we sold approximately 2,449,000 tons of sand. Revenues increased for the year ended December 31, 2018 as compared to the year ended December 31, 2017 as a result of higher sales volumes and higher average selling prices.The key factors contributing to the increase in revenues for the year ended December 31, 2018 as compared to the year ended December 31, 2017 were as follows:•Sand sales revenue increased to $143.1 million for the year ended December 31, 2018 compared to $80.2 million for the year ended December 31, 2017 due to increased sales volumes and higher average selling prices. Tons sold increased by 22.3% as exploration and production activity in the oil and natural gas industry improved in 2018 compared to 2017.•Average selling price per ton increased to $47.76 for the year ended December 31, 2018 from $32.74 for the year ended December 31, 2017 due to increased volumes and higher average selling prices related to increased in-basin sand sales volumes, which are sold at a higher price than sand sold at the mine gate and favorable price adjustments under certain of our take-or-pay contracts based upon the Average Cushing Oklahoma WTI Spot Prices.49SMART SAND, INC.MANAGEMENT'S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(UNAUDITED)•We had $6.0 million in contractual shortfall revenue for the year ended December 31, 2018 and $1.2 million for the year ended December 31, 2017, respectively. Our contracts with customers 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.•Transportation revenue, which includes freight for certain mine gate sand sales and railcar usage, increased approximately $7.1 million for the year ended December 31, 2018 when compared to the year ended December 31, 2017, increasing from $55.8 million to $62.9 million. The increase in transportation revenue was due to the increased sales volumes in 2018 compared to 2017 as a result of increased exploration and production activity in the oil and natural gas industry as well as our increased in-basin sales activity generated from our Van Hook terminal which began operations in April 2018.Cost of Goods SoldCost of goods sold was $144.9 million and $100.3 million, or $48.38 and $40.96 per ton sold, for the years ended December 31, 2018 and December 31, 2017, respectively. Cost of goods sold and per ton cost of goods sold increased in 2018 compared to 2017 due to higher sales volumes, which led to increased staffing, utilities and equipment expenses, and increased freight charges. Freight charges, which consist of transportation costs and railcar rental and storage expense, were higher primarily due to increased volumes sold and increased in-basin activities. Additionally, we incurred an increase in operating labor costs for the year ended December 31, 2018 due to additional staffing to support the expansion of the Oakdale facility.Gross ProfitGross profit was $67.6 million and $36.9 million for the years ended December 31, 2018 and 2017, respectively. The increase in gross profit for the year ended December 31, 2018 was primarily due to higher sales volumes, including in-basin and spot sales, and higher average selling prices, partially offset by increased staffing, utilities and equipment expenses, along with increased transportation charges.Operating ExpensesOperating expenses were $41.7 million and $18.2 million for the years ended December 31, 2018 and 2017, respectively. Operating expenses are primarily comprised of wages and benefits, professional services fees and other administrative expenses. An impairment charge of $17.8 million related to goodwill and an other indefinite-lived intangible asset was recorded in the fourth quarter of 2018. The impairment charge relates primarily to the decline in our stock price in 2018 and the relationship between the resulting market capitalization and the equity recorded on our balance sheet. Additionally, salaries, benefits and payroll taxes were $11.0 million and $8.2 million for the years ended December 31, 2018 and 2017, respectively. The approximate $2.8 million increase was primarily due to additional headcount in 2018 as compared to 2017. Selling, general and administrative expenses increased from $9.5 million for the year ended December 31, 2017 to $12.8 million for the year ended December 31, 2018, primarily as a result of well-site storage solution acquisition-related costs and royalty payments relating to our Texas land leases. We recorded a decrease in the estimated fair value of contingent consideration, which resulted in an offset to operating expenses in the amount of $1.9 million for the year ended December 31, 2018, for our acquisition of Quickthree.Other Income (Expense)We incurred $2.3 million and $0.5 million of net interest expense for the years ended December 31, 2018 and 2017, respectively. The increase in interest expense for the year ended December 31, 2018 was primarily due to borrowings under the Former Credit Facility to fund acquisition activity. Interest expense in 2017 was derived primarily from deferred finance fees and unused line fees for the Former Credit Facility.Income Tax (Benefit) ExpenseIncome tax expense was $5.1 million for the year ended December 31, 2018 compared to a benefit of $2.8 million for the year ended December 31, 2017. We recorded a tax benefit of approximately $8.5 million due to a re-measurement of deferred tax assets and liabilities in the fourth quarter of 2017, as a result of the Tax Reform Act that was enacted on December 22, 2017. For the years ended December 31, 2018 and 2017, our effective tax rate was approximately 21.5% and (15.0)%, respectively, based on the statutory federal rate net of discrete federal and state taxes. Our effective tax rate for the year ended December 31, 2018 benefited from the decrease in the U.S. statutory tax rate from 35.0% in 2017 to 21.0% in 2018. The50SMART SAND, INC.MANAGEMENT'S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(UNAUDITED)computation of the effective tax rate for the year ended December 31, 2018 included modifications for income tax credits, among other items. The computation for the year ended December 31, 2017 also included a benefit related to share-based compensation and the domestic production activities deduction (“DPAD”). The DPAD was repealed for tax years beginning after January 1, 2018 under the Tax Reform Act. The computation for 2017 also included the impact of depletion accretionmethod change for tax purposes on our prior year returns.The Tax Reform Act significantly revised the U.S. corporate income tax regime by, among other things, lowering the U.S. corporate tax rate from 35% to 21% effective January 1, 2018, repealing the deduction for domestic production activities and implementing 100% direct expensing of certain non-residential property. U.S. GAAP requires that the impact of tax legislation be recognized in the period in which the law was enacted.For the year of 2018, we recorded a net operating loss for tax purposes due to the significant amount of capital expenditures, which are eligible for 100% expensing available under the Tax Reform Act. There are additional provisions in the Tax Reform Act that could impact us that will continue to be monitored as additional guidance is released and any necessary adjustments will be recorded in the period that the guidance is released.Net IncomeNet income was $18.7 million for year ended December 31, 2018 compared to $21.5 million for the year ended December 31, 2017. The decrease in net income was primarily due to an impairment charge of $17.8 million related to goodwill and an other indefinite-lived intangible asset retirement obligationswas recorded in the fourth quarter of 2018. The impairment charge relates primarily to the decline in our stock price in 2018 and freight charges,the relationship between the resulting market capitalization and the equity recorded on our balance sheet. Increased sales volumes during 2018 and favorable pricing trends in the first half of the year led to measure our financial performance. We believe production costs is a meaningful measure because it provides a measure of operating performance that is unaffected by historical cost basis. For a reconciliation of production costs to its most directly comparable financial measure calculated and presented in accordance with GAAP, please read “Note Regarding Non-GAAP Financial Measures.”Note Regarding higher gross profit which partially offset the impairment charge.Non-GAAP Financial MeasuresProduction costs,EBITDA, Adjusted EBITDA and Adjusted EBITDAcontribution margin 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. Costs of goods sold is the GAAP measure most directly comparable to production costs and netNet income is the GAAP measure most directly comparable to EBITDA and Adjusted EBITDA.EBITDA and gross profit is the GAAP measure most directly comparable to contribution margin. Our non-GAAP financial measures should not be considered as alternatives to the most directly comparable GAAP financial measure.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 production costs,EBITDA, Adjusted EBITDA or Adjusted EBITDAcontribution margin in isolation or as substitutes for an analysis of our results as reported under GAAP. Because production costs,EBITDA, Adjusted EBITDA and Adjusted EBITDAcontribution margin 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.EBITDA and Adjusted EBITDAWe define EBITDA as our net income, plusplus: (i) depreciation, depletion and amortization expense; (ii) income tax expense (benefit); (iii) interest expenseexpense; and (iv) franchise taxes. We define Adjusted EBITDA as EBITDA, plusplus: (i) gain or loss on sale of fixed assets or discontinued operations,operations; (ii) integration and transition costs associated with specified transactions, including our IPO,transactions; (iii) restricted stockequity compensation; (iv) acquisition and development costs; (v) non-recurring cash charges related to restructuring, retention and other similar actions,actions; (vi), earn-out, and 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:opportunities;opportunities; andexpenditures; and expenditures;51SMART SAND, INC.MANAGEMENT'S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(UNAUDITED)•our operating performance as compared to those of other companies in our industry without regard to the impact of financing methods structure; andandor capital structure.
•our debt covenant compliance, as Adjusted EBITDA is a key component of critical covenants to the ABL Credit Facility.We believe that our presentation of EBITDA and Adjusted EBITDA will provide useful information to investors in assessing our financial condition and results of operations. Net income is the GAAP measure most directly comparable to EBITDA and Adjusted EBITDA. EBITDA and Adjusted EBITDA should not be considered alternatives to net income presented in accordance with GAAP. Because EBITDA and Adjusted EBITDA may be defined differently by other companies in our industry, our definitions of EBITDA and Adjusted EBITDA may not be comparable to similarly titled measures of other companies, thereby diminishing their utility. The following table presents a reconciliation of EBITDA and Adjusted EBITDA to net income (loss) for each of the periods indicated.(1)Includes losses related to the sale and disposal of certain assets in property, plant and equipment.(2)For the year ended December 31, 2016, represents IPO related bonuses. For the years ended December 31, 2015 and 2014, the Company incurred $221 and $2,687 of expenses related to previous IPO activities, respectively. Year Ended December 31, 2019 2018 2017 (in thousands) Net income $ 31,623 $ 18,688 $ 21,526 Depreciation, depletion and amortization 27,135 18,165 7,300 Income tax (benefit) expense 7,809 5,122 (2,809) Interest expense 3,626 2,320 700 Franchise taxes 285 442 339 EBITDA $ 70,478 $ 44,737 $ 27,056 (Gain) loss on sale of fixed assets (42) 321 253 Integration and transition costs — — 16 Equity compensation (1)2,755 2,670 1,652 Acquisition and development costs (2)(3,047) (218) 845 Non-cash impairment loss 15,542 17,835 — Cash charges related to retention and employee relocation 137 674 279 Accretion of asset retirement obligations 687 (26) 514 Loss on extinguishment of debt 561 — — Adjusted EBITDA $ 87,071 $ 65,993 $ 30,615
(1) Represents the non-cash expenses for stock-based awards issued to our employees and employee stock purchase plan compensation expense.(3)Represents the non-cash expenses for stock-based awards issued to our employees and outside directors.
(2) Represents costs incurred related to the business combinations and current development project activities. The year ended December 31, 2019 includes $3,272 decrease in the estimated fair value of our contingent consideration related to the acquisition of Quickthree and $225 of development project activities. The year ended December 31, 2018 includes $1,858 decrease in the estimated fair value of our contingent consideration related to the acquisition of Quickthree, partially offset by $1,146 of costs related to the acquisition of Quickthree and $494 related to development project activities. The year ended December 31, 2017 includes costs related to development project activities.(4)Represents costs incurred with the development of certain Company assets.
_________________________(5)Represents accretion of asset retirement obligations and loss on derivatives. For the years ended December 31, 2016 and 2015, the Company incurred a loss of $5 and $445 related to a propane derivative contract, respectively.(6)Reflects the loss on extinguishment of debt related to our November 2016 and March 2014 financing transactions, respectively.
Adjusted EBITDA was $87.1 million for the year ended December 31, 2019 compared to $66.0 million for the year ended December 31, 2018. The increase in Adjusted EBITDA for the year ended December 31, 2019, as compared to the prior year, was primarily due to higher shortfall and logistics revenue, partially offset by increased transportation charges and lower overall volumes of sand sold.Adjusted EBITDA was $66.0 million for the year ended December 31, 2018 compared to $30.6 million for the year ended December 31, 2017. The increase in Adjusted EBITDA for the year ended December 31, 2018, as compared to the prior year, was primarily due to higher sales volumes, including in-basin sales, and higher average selling prices, partially offset by increased staffing, utilities and equipment expenses, along with increased transportation charges.52SMART SAND, INC.MANAGEMENT'S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(UNAUDITED)Contribution MarginWe also use production costs,contribution margin, which we define as total revenues less costs of goods sold excluding depreciation, depletion and accretion of asset retirement obligations, and freight charges to measure our financial and operating performance. Freight charges consist of shippingContribution margin excludes other operating expenses and income, including costs and rail car rental and storage expenses. Shipping costs consist of railway transportation costs to deliver products to customers. A portion of these freight charges are passed through to our customers and are, therefore, included in revenue. Rail car rental and storage expenses arenot directly associated with our long-term rail car operating agreements with certain customers. We believe production costs is a meaningful measure to management and external usersthe operations of our financial statements,business such as investorsaccounting, human resources, information technology, legal, sales and commercial banks because it provides a measure of operating performance that is unaffected by historical cost basis. Cost of goods soldother administrative activities. Gross profit is the GAAP measure most directly comparable to production costs. Production costscontribution margin. Contribution margin should not be considered an alternative to cost of goods soldgross profit presented in accordance with GAAP. Because production costscontribution margin may be defined differently by other companies in our industry, our definition of production costscontribution margin may not be comparable to similarly titled measures of other companies, thereby diminishing its utility. The following table presents a reconciliation of production costscontribution margin to cost of goods sold.gross profit. Year Ended December 31, 2019 2018 2017 (in thousands) Revenue $ 233,073 $ 212,470 $ 137,212 Cost of goods sold 152,021 144,903 100,304 Gross profit 81,052 67,567 36,908 Depreciation, depletion, and accretion of asset retirement obligations included in cost of goods sold 25,412 16,297 7,289 Contribution margin $ 106,464 $ 83,864 $ 44,197 Contribution margin per ton $ 43.24 $ 28.00 $ 18.05 Total tons sold 2,462 2,995 2,449 Factors Impacting Comparability of Our Financial ResultsOur historical results of operations and cash flows are not indicative of results of operations and cash flows to be expected in the future, principally for the following reasons:We completed an expansion of our Oakdale facility in September 2015. In September 2015, we completed an expansion project to increase our processing capacity at our Oakdale facility from 2.2Contribution margin was $106.5 million, tonsor $43.24 per year to approximately 3.3 million tons per year.We will incur additional operating expenses as a publicly traded corporation. We expect we will incur approximately $1.4 million annually in additional operating expenses as a publicly traded corporation that we have not previously incurred, including costs associated with compliance under the Exchange Act, annual and quarterly reports to common stockholders, registrar and transfer agent fees, audit fees, incremental director and officer liability insurance costs and director and officer compensation. We additionally expect to incur $1.0 million in non-recurring costs related to our transition to a publicly traded corporation. These incremental expenses exclude the costs of our IPO, as well as the costs associated with the initial implementation of our Sarbanes-Oxley Section 404 internal control reviews and testing.We fully redeemed the Series A Preferred Stock on November 9, 2016. On November 9, 2016, our Series A redeemable preferred stock (the “Series A Preferred Stock”) was fully redeemed at a total redemption value of $40.3 million using a portion of the proceeds from our IPO. Therefore, we will no longer incur the interest expense associated with the Series A Preferred Stock. For the year ended December 31, 2016, 2015 and 2014, we incurred $5.6 million, $5.1 million and $5.6 million of interest expense, respectively.Market Trends. Beginning in late 2014, the market prices for crude oil and refined products began a steep and protracted decline which continued into 2016. This greatly impacted the demand for frac sand as drilling and completion of new oil and natural gas wells was significantly curtailed in North America. As a result, we experienced significant downward pressure on pricing. However, commodity prices stabilized in the middle of 2016, leading to an improvement in drilling activity beginning in the third quarter. While the oil and gas market recovery remains in the early stages, we expect market conditions to continue to improve into 2017.The following table summarizes our revenue and expenses for the periods indicated.Year Ended December 31, 2016 compared to the Year Ended December 31, 2015RevenueRevenue was $59.2 millionton sold, for the year ended December 31, 2016, during which we2019 compared to $83.9 million, or $28.00 per ton sold, approximately 826,000 tons of sand. Revenue for the year ended December 31, 2015 was $47.7 million, during which we2018. The increase in contribution margin and contribution margin per ton sold approximately 751,000 tons of sand. Total revenue increased for the year ended December 31, 20162019, as compared to the prior year, ended December 31, 2015,was primarily due to higher in-basin sales volumes through our Van Hook terminal and higher average revenueshortfall revenue.Contribution margin was $83.9 million, or $28.00 per ton sold, which increased by approximately $8 as a result of other contractual terms, such as required reservation and shortfall payments.The key factors contributing to the increase in revenues and decrease in average revenue per ton for the year ended December 31, 2016 as2018 compared to the year ended December 31, 2015 were as follows:Sand sales revenue decreased to $31.6$44.2 million, or $18.05 per ton sold, for the year ended December 31, 2016 compared to $31.8 million2017. The increase in contribution margin and contribution margin per ton sold for the year ended December 31, 2015. Tons sold increased by 10%2018, as exploration and production activity in the oil and natural gas industry improved in the second half of 2016. The increase in volumes were offset by lower average selling price;Average selling price per ton, which includes reservation charges, decreased to $38.28 for the year ended December 31, 2016 from $42.32 for the year ended December 31, 2015 due to increased volumes, which led to reservation charges being allocated to a greater number of tons sold; andTransportation revenue was approximately $0.9 million more for the year ended December 31, 2016 compared to the prior year, ended December 31, 2015, increasing from $5.8 million to $6.7 million. Rail car rental revenue was $5.7 million for the year ended December 31, 2016, increasing by approximately $2.2 million compared to the year ended December 31, 2015 due to an increase in the number of rail cars rented to our customers under long-term contracts. We incur transportation costs and recurring rail car rental expenses under our long-term rail car operating agreements. Our transportation and rail car rental revenues currently represent the pass through of these costs to our customers; therefore, these revenues do not have a material impact on our gross profit.Cost of Goods Sold and Production CostsCost of goods sold was $26.6 million and $21.0 million, or $32.30 and $27.97 per ton sold, for the years ended December 31, 2016 and 2015, respectively. Of this amount, production costs comprised $12.7 million and $10.1 million, or $15.38 and $13.47 per ton sold, and freight charges, which consist of shipping costs and rail car rental and storage expense, comprised $7.8 million and $6.0 million for the years ended December 31, 2016 and 2015, respectively. Cost of goods sold was approximately $5.6 million higher in 2016 compared to 2015 due to higher sales volumes which led to higher production costs and higher rail car rental expenses associated with this increased sales activity and additional depreciation expense. Depreciation and depletion included in cost of goods sold account for $6.1 million and $4.9 million, respectively, for the years ended December 31, 2016 and 2015. For the definition of production costs and a reconciliation to its most directly comparable financial measure calculated and presented in accordance with GAAP, please read “Note Regarding Non-GAAP Financial Measures.”Gross ProfitGross profit equals revenues less cost of goods sold. Gross profit was $32.7 million and $26.7 million for the years ended December 31, 2016 and 2015, respectively.Operating ExpensesOperating expenses were $12.3 million and $10.1 million for the years ended December 31, 2016 and 2015, respectively. Salaries, benefits and payroll taxes were $7.4 million and $5.1 million for the years ended December 31, 2016 and 2015, respectively due to higher bonuses paid in 2016. Selling, general and administrative expenses decreased by $0.2 million in 2016 compared to 2015 due to higher costs incurred operating as a public company, offset by a decrease in development activity and professional costs incurred in 2015 related to our previous uncompleted initial public offering process.Series A Preferred Stock and Other Interest ExpenseWe incurred $8.4 and $7.8 million of interest expense during each of the years ended December 31, 2016 and 2015, respectively. Interest expense in 2016 and 2015 was derived primarily from paid-in-kind interest on the Series A Preferred Stock as well as interest on our former revolving credit facility. Interest on the Series A Preferred Stock accounted for $5.6 million and $5.1 million of the expense for the years ended December 31, 2016 and 2015, respectively. Interest on our former revolving credit facility accounted for $2.7 million and $2.6 million, respectively, for the years ended December 31, 2016 and 2015. Additional items included in interest expense include the accretion of common stock issued and transaction costs incurred in conjunction with the September 2011 Securities Purchase Agreement, deferred financing fees, and interest incurred on capital leases. The paid-in-kind interest is added to the outstanding balance of the Series A Preferred Stock. The Series A Preferred Stock was fully redeemed and our former revolving credit facility was fully repaid with proceeds of the IPO. No borrowings have been drawn against our existing revolving credit facility in 2016.Other income was $8.9 million and $0.4 million for the years ended December 31, 2016 and 2015, respectively. In 2016, we recognized other income of approximately $1.9 million related to the settlement of our unsecured bankruptcy claim with a former customer and $6.6 million related to the sale of our unsecured bankruptcy claim with the same customer. Other income in 2015 primarily related to approximately $0.7 million railcar shortage fees offset by approximately $0.4 million loss on derivative.Income Tax ExpenseIncome tax expense was $9.4 million for the year ended December 31, 2016 compared to $4.1 million for the year ended December 31, 2015. For the year ended December 31, 2016, our statutory tax rate and effective tax rate were approximately 35% and 48%, respectively. For the year ended December 31, 2015, our statutory tax rate and effective tax rate were approximately 35% and 45%, respectively. The difference in these tax rates for both 2016 and 2015 was primarily due to state income tax, non-deductible interest expense on the Preferred Stock, and costs associated with our initial public offering process.Net Income and Adjusted EBITDANet income was $10.4 million for year ended December 31, 2016 compared to $5.0 million for the year ended December 31, 2015. Adjusted EBITDA was $37.8 million for the year ended December 31, 2016 compared to $23.9 million for the year ended December 31, 2015. The increase in net income and Adjusted EBITDA resulted from the increase in revenue and gross profit primarily due to higherincreased sales volumes from increased exploration and production activity in the oil and natural gas industry in the second half of 2016 and higher contractual revenue in 2016 in comparison to 2015,overall as well as increased in-basin sales volumes through our Van Hook terminal, which began operations in April 2018, coupled with favorable pricing trends in the first half of 2018.Liquidity and Capital ResourcesCurrently, our primary sources of liquidity are cash flow generated from operations and availability under our ABL Credit Facility and other income relatedequipment financing sources. Based on our balance sheet, cash flows, current market conditions and information available to the settlement of a former customer’s bankruptcy claims. For the definition of Adjusted EBITDAus at this time, we believe that we have sufficient liquidity and a reconciliationother available capital resources, to its most directly comparable financial measure calculated and presented in accordance with GAAP, please read “Note Regarding Non-GAAP Financial Measures.”Year Ended December 31, 2015 Compared to the Year Ended December 31, 2014RevenueRevenue was $47.7 millionmeet our cash needs for the year ended December 31, 2015, during which we sold approximately 751,000 tons of sand. Revenue for the year ended December 31, 2014 was $68.2 million, during which we sold approximately 1,255,000 tons of sand. Although total revenue decreased for the year ended December 31, 2015 as compared to the year ended December 31, 2014, average revenue per ton sold increased by approximately $9 as a result ofnext twelve months, including continued investment in our SmartSystems wellsite proppant storage solutions and other contractual terms, such as required reservation and shortfall payments.The key factors contributing to the decrease in revenues and increase in average revenue per ton for the year ended December 31, 2015 as compared to the year ended December 31, 2014 were as follows:Sand sales revenue decreased to $31.8 million for the year ended December 31, 2015 compared to $62.6 million for the year ended December 31, 2014. Tons sold decreased by 40% due to the decrease in exploration and production activity in the oil and natural gas industry;53SMART SAND, INC.MANAGEMENT'S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(UNAUDITED)Average selling price per ton, which includes reservation charges, decreased to $42.32 for the year ended December 31, 2015 from $49.89 for the year ended December 31, 2014 due to lower pricing resulting from the decrease in exploration and production activity in the oil and natural gas industry; andTransportation revenue was approximately $0.2 million more for the year ended December 31, 2015 compared to the year ended December 31, 2014 increasing from $5.6 to $5.8 million. Rail car rental revenue was $3.5 million for the year ended December 31, 2015, increasing by approximately $1.9 million compared to the year ended December 31, 2014 due to an increase in the number of rail cars rented to our customers under long-term contracts. We incur transportation costs and recurring rail car rental expenses under our long-term rail car operating agreements. Our transportation and rail car rental revenues currently represent the pass through of these costs to our customers; therefore, these revenues do not have a material impact on our gross profit.Cost of Goods Sold and Production CostsCost of goods sold was $21.0 million and $29.9 million, or $27.97 and $23.85 per ton sold, for the years ended December 31, 2015 and 2014, respectively. Of this amount, production costs comprised $10.1 million and $20.7 million, or $13.47 and $16.48 per ton sold, and freight charges, which consist of shipping costs and rail car rental and storage expense, comprised $6.0 million and $5.7 million for the years ended December 31, 2015 and 2014, respectively. Cost of goods sold was approximately $8.9 million lower in 2015 compared to 2014 due to lower sales volumes and reduced excavation expenses. For the year ended December 31, 2015, we performed excavation activities in-house resulting in cost savings of approximately $0.50 per ton excavated. For the year ended December 31, 2014, we outsourced excavation activities to an independent third party, with primarily fixed terms of $2.01 per ton excavated and delivered. Depreciation and depletion included in cost of goods sold account for $4.9 million and $3.5 million, respectively, for the years ended December 31, 2015 and 2014. For the definition of production costs and a reconciliation to its most directly comparable financial measure calculated and presented in accordance with GAAP, please read “Note Regarding Non-GAAP Financial Measures.”Gross ProfitGross profit equals revenues less cost of goods sold. Gross profit was $26.7 million and $38.2 million for the years ended December 31, 2015 and 2014, respectively.Operating ExpensesOperating expenses were $10.1 million and $12.5 million for the years ended December 31, 2015 and 2014, respectively. Salaries, benefits and payroll taxes remained consistent at $5.0 million for the years ended December 31, 2015 and 2014. Selling, general and administrative expenses decreased by $2.6 million in 2015 compared to 2014 due to higher professional costs incurred in 2014 related to our previous uncompleted initial public offering process.Series A Preferred Stock and Other Interest ExpenseWe incurred $7.8 million of interest expense during each of the years ended December 31, 2015 and 2014. Interest expense in 2015 and 2014 was derived primarily from paid-in-kind interest on the Series A Preferred Stock as well as interest on our former revolving credit facility. Interest on the Series A Preferred Stock accounted for $5.1 million and $5.6 million of the expense for the years ended December 31, 2015 and 2014, respectively. Interest on our former revolving credit facility accounted for $2.6 million and $2.1 million, respectively, for the years ended December 31, 2015 and 2014. Additional items included in interest expense include the accretion of common stock issued and transaction costs incurred in conjunction with the September 2011 Securities Purchase Agreement, deferred financing fees, and interest incurred on capital leases. The paid-in-kind interest is added to the outstanding balance of the Preferred Stock.Income tax expense was $4.1 million for the year ended December 31, 2015 compared to $9.5 million for the year ended December 31, 2014. For the year ended December 31, 2015, our statutory tax rate and effective tax rate were approximately 35% and 45%, respectively. For the year ended December 31, 2014, our statutory tax rate and effective tax rate were approximately 35% and 56%, respectively. The difference in these tax rates for both 2015 and 2014 was primarily due to state income tax, non-deductible interest expense on the Preferred Stock costs associated with our initial public offering process and changes in the applicable tax rate.Net Income and Adjusted EBITDANet income was $5.0 million for year ended December 31, 2015 compared to $7.6 million for the year ended December 31, 2014. Adjusted EBITDA was $23.9 million for the year ended December 31, 2015 compared to $33.3 million for the year ended December 31, 2014. The decrease in net income and Adjusted EBITDA resulted from the decrease in revenue and gross profit primarily due to lower volumes and pricing compression resulting primarily from reduced exploration and production activity in the oil and natural gas industry. For the definition of Adjusted EBITDA and a reconciliation to its most directly comparable financial measure calculated and presented in accordance with GAAP, please read “Note Regarding Non-GAAP Financial Measures.”Working capital is the amount by which current assets exceed current liabilities and is a measure of our ability to pay our liabilities as they become due.20162019 compared to December 31, 2015. Year Ended December 31, 2019 2018 (in thousands) Total current assets $ 90,377 $ 50,096 Total current liabilities 40,018 24,652 Working capital Working capital $ 50,359 $ 25,444 Our working capital surplus was $51.3$50.4 million at December 31, 20162019 compared to a working capital deficit of $32.1$25.4 million at December 31, 2015. On November 9, 2016,2018. The increase in working capital was primarily due to a net increase in accounts and unbilled receivables of $38.0 million, partially offset by $13.1 million new short-term operating lease liabilities as a result of adopting the Series A Preferred Stock, which was previously includednew lease accounting standard on January 1, 2019 and a $5.3 million increase in the current liabilities, was fully redeemed at a total redemption value of $40.3 million using a portion of our amortizing long-term debt under the proceeds from our IPO.LiquidityOakdale Equipment Financing and Capital ResourcesSourcesnotes payable. As of LiquidityPriorDecember 31, 2019 and 2018, $37.4 million and $3.2 million of accounts and unbilled receivables is attributable to the IPO, our primary sources of liquidity were from funds generated through operations and our former revolving credit facility.On November 9, 2016,a customer with which we consummated the IPO of 11,700,000 shares of common stock at a price of $11.00 per share, generating net proceeds to us of $128.7 million before underwriting discounts and expenses. We used a portion of the net proceeds from the IPO to redeem all of our outstanding Series A Preferred Stock and to repay the outstanding indebtedness under our former revolving credit facility, which was terminated. We intend to use the remaining net proceeds for general corporate purposes.On November 23, 2016, the underwriters exercised in full their option to purchase additional shares of common stock from us and the Selling Shareholders. On November 29, 2016, we consummated the sale of 877,500 shares of common stock to the underwriters pursuant to the underwriters’ exercise of their over-allotment option at a price of $11.00 per share, generating proceeds to us of $9.7 million before underwriting discounts and expenses. We received no proceeds from the sale of common stock to the underwriters by the Selling Shareholders. We intend to use the net proceeds of the IPO for general corporate purposes.On February 1, 2017 we entered into an Underwriting Agreement providing for the offer and sale of 1,500,000 shares of common stock at a price of $17.50 per share, generating net proceeds to us of $24.3 million before underwriting discounts and expenses. We intend to use the net proceeds from this offering for future capital projects and general corporate services. The offering closed on February, 7, 2017. Additionally, the Selling Shareholders sold 4,450,000 shares of common stock at a price of $17.50 per share. We received no proceeds from the sale of common stock by the Selling Shareholders.On February 10, 2017, the underwriters exercised in full their option to purchase additional shares of common stock from the Selling Shareholders. On February 15, 2017, the Selling Shareholders consummated the sale of 892,500 shares of common stock to the underwriters pursuant to the underwriters’ exercise of their over-allotment option at a price of $17.50 per share. We received no proceeds from the sale of common stock to the underwriters by the Selling Shareholders. LiquiditySummary Cash FlowsThe following table sets forth a summary of our cash flows for the periods indicated:Summary Cash Flows for the Years Ended December 31, 2016, 2015 and 2014: Year Ended December 31, 2019 2018 2017 (in thousands) Net cash provided by operating activities $ 44,633 $ 50,909 $ 15,628 Net cash used in investing activities $ (25,425) $ (125,989) $ (51,148) Net cash (used in) provided by financing activities Net cash (used in) provided by financing activities $ (18,035) $ 41,319 $ 23,213 Net Cash Provided by Operating ActivitiesYear Ended December 31, 2016 Compared to the Year Ended December 31, 2015Net cash provided by operating activities was $26.7$44.6 million and $30.7 million for the years ended December 31, 2016 and 2015, respectively. Operating cash flows include net income of $10.4 million and $5.0 million in net earnings generated from the sale of frac sand to our customers in the year ended December 31, 2016 and December 31, 2015, respectively,2019, which included income of $31.6 million, non-cash expenses of $47.8 million, partially offset by production costs, general and administrative expenses and cash interest expense, adjusted for$34.8 million in changes in working capital to the extent they are positive or negative.Year Ended December 31, 2015 Compared to the Year Ended December 31, 2014Net cash provided by operating activities was $30.7$50.9 million and $22.1 million for the years ended December 31, 2015 and 2014, respectively. Operating cash flows include net income of $5.0 million and $7.6 million in net earnings generated from the sale of frac sand to our customers in the year ended December 31, 20152018, which included net income of $18.7 million and net non-cash expenses of $39.5 million, partially offset by $7.3 million in changes in operating assets and liabilities.Net cash provided by operating activities was $15.6 million for the year ended December 31, 2014, respectively,2017, which included net income of $21.5 million and net non-cash expenses of $8.8 million, partially offset by production costs, general and administrative expenses and cash interest expense, adjusted for$14.7 million in changes in working capital to the extent they are positive or negative.Net Cash Used In Investing ActivitiesYear Ended December 31, 2016 Compared to the Year Ended December 31, 2015Net cash used in investing activities was $2.5$25.4 million for the year ended December 31, 2016 compared with $29.42019, of which $12.8 million was used to expand our SmartSystems operations and $12.7 million was used to expand our Van Hook terminal and capital improvements at our Oakdale facility.54SMART SAND, INC.MANAGEMENT'S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(UNAUDITED)Net cash used in investing activities was $126.0 million for the year ended December 31, 2015. The $26.92018, of which approximately $45.5 million decrease was primarilyused for our acquisitions of the resultVan Hook terminal and Quickthree, and the remainder of a decreasewhich was used for the completion of the Oakdale expansion project which began in capital expenditures.Year Ended December 31, 2015 Compared to the Year Ended December 31, 2014Net cash used in investing activities was $29.4$51.1 million for the year ended December 31, 2015 compared2017, which was primarily used in connection with $30.9the Oakdale expansion project.Net Cash (Used in) Provided by Financing ActivitiesNet cash used by financing activities was $18.0 million for the year ended December 31, 2014. The $1.52019. In 2019, we repaid a net $42.0 million decrease was primarilyon our revolving credit facilities, paid $2.3 million of deferred financing and debt issuance costs and paid $2.0 million of contingent consideration, partially offset by receipt of $23.0 million in proceeds from the resultOakdale Equipment Financing and $5.4 million of a decrease in capital expenditures.Cash Provided by Financing ActivitiesYear Ended December 31, 2016 Compared to the Year Ended December 31, 2015Net cash provided by financing activities was $19.4$41.3 million for the year ended December 31, 2016,2018, which was primarily related to net draws on our Former Credit Facility of $44.5 million, partially offset by repurchases of our common shares of $2.2 million and repayments of notes payable of $0.6 million.Net cash provided by financing activities was $23.2 million for the year ended December 31, 2017, which included net proceeds from equity issuance of $127.3 million, offset by net repayments of $64.2 million under our former revolving credit facility, $40.3 million of Series A Preferred Stock, $1.3 million of repayments on long-term debt, $0.4 million in payments on equipment financing obligations, $1.2 million on loan amendment fees and $0.4 million in treasury stock purchases.Net cash provided by financing activities was $1.8 million for the year ended$24.2 million.IndebtednessABL Credit FacilityOn December 31, 2015, which included net borrowings of $3.2 million under our existing revolving credit facility, offset by $0.5 million of repayments on long-term debt, $0.4 million in payments on equipment financing obligations, $0.4 million on loan amendment fees and $0.1 million in treasury stock purchases.Year Ended December 31, 2015 Compared to the Year Ended December 31, 2014Net cash provided by financing activities was $1.8 million for the year ended December 31, 2015, which included net borrowings of $3.2 million under our existing revolving credit facility, offset by $0.5 million of repayments on long-term debt, $0.4 million in payments on equipment financing obligations, $0.4 million on loan amendment fees and $0.1 million in treasury stock purchases.Net cash provided by financing activities was $7.4 million for the year ended December 31, 2014, which included net borrowings of $57.7 million under our existing revolving credit facility, offset by a $40.0 million partial redemption of the Preferred Stock, a $9.2 million pay down of the line of credit, and $0.7 million of loan origination and amendment costs.Credit FacilitiesOur Credit Facility and Other ArrangementsBelow is a description of our former and existing revolving credit facilities and other financing arrangements.Former Revolving Credit AgreementOn March 28, 2014,13, 2019, we entered into a $72.5$20.0 million revolvingfive-year senior secured asset-based credit facility with Jefferies Finance LLC. The available borrowing amount under the ABL Credit Facility is based upon our eligible accounts receivable and security agreement (“inventory. The ABL Credit Agreement”)Facility contains various reporting requirements, negative covenants and restrictive provisions and requires maintenance of specified financial covenants under certain conditions, including a fixed charge coverage ratio, as defined in the ABL Credit Agreement. As of December 31, 2019, the Company was in compliance with PNC Bank, National Association, as administrative agentall covenants under the ABL Credit Facility. As of December 31, 2019, the outstanding balance on the ABL Credit Facility was $2.5 million and collateral agent (the “Credit Agreement”)the amount of undrawn availability was $17.5 million.Oakdale Equipment FinancingOn December 13, 2019, we entered into an equipment financing arrangement with Nexseer, secured by substantially all of the assets at our Oakdale facility. We received $23.0 million of net proceeds, of which we used $19.3 million to repay in full and terminate our Former Credit Facility, $3.0 million for general working capital purposes and $0.7 million to pay transaction fees associated with the debt refinancing. The Oakdale Equipment Financing amortizes over 5 years, maturing on December 13, 2024, and bears interest at 5.79%. The balance of the Oakdale Equipment Financing as of December 31, 2019 was $22.4 million.Former Credit FacilityOn December 8, 2016, the Company entered into a three-year senior secured revolving credit facility under the Credit Agreement had a maturity date of March 28, 2019. We refer to this facility as the former revolving credit facility.On December 18, 2015, we entered into the fourth amendment to the Credit Agreement (“Fourth Amendment”). Under the Fourth Amendment, the event of default related to the September 30, 2015 leverage ratio was waived, the total commitment was reduced to $75.0 million, required quarterly paydowns were implemented and certain covenants were amended.On November 9, 2016, the former revolving credit facility was paid in full and terminated using a portion of the proceeds from the IPO.Existing Revolving Credit FacilityOn December 8, 2016, we entered into a $45 million 3-year senior secured Revolving Credit Facility (the “Facility”)agreement with Jefferies Finance LLC, as administrative and collateral agent. Substantially allThe Former Credit Facility was paid in full and terminated with proceeds from the Oakdale Equipment Financing.Notes PayableWe have entered into various financing arrangements to support the manufacturing of our assets are pledgedwellsite proppant storage solutions equipment with interest rates between 6.48% and 7.49%. 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. Total notes payable outstanding at December 31, 2019 was $9.8 million.55SMART SAND, INC.MANAGEMENT'S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(UNAUDITED)Capital RequirementsWe expect full year 2020 capital expenditures to be between $20 million and $30 million, which are anticipated to primarily support incremental growth in our SmartSystems. 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 Agreement. The Facility expires on DecemberFacility.Share RepurchasesWe are authorized to repurchase shares through open market purchases at prevailing market prices or through privately negotiated transactions as permitted by securities laws and other legal requirements. On November 8, 2019 and has2018, we announced that our board of directors authorized the following terms and conditions (the “New Credit Agreement”):Letters of Credit: A portionrepurchase up to 2,000,000 shares of the Facility, not in excessCompany’s common stock during the twelve-month period following the announcement of $10 million, is availablethe share repurchase program. On September 11, 2019, our board of directors reauthorized the existing share repurchase program for one year. At December 31, 2019, the issuancemaximum number of letters of credit to be issued by the administrative agent or any other lender approved by the administrative agent and usshares that is willing to become a letter of credit issuer. A per annum fee equal to the interest rate margin for LIBOR loanswe may repurchase under the Facilityrepurchase authority was 1,411,800 shares. There were no share repurchases during the year ended December 31, 2019.The program allows us to repurchase shares at our discretion. Market conditions, price, corporate and regulatory requirements, alternative investment opportunities, and other economic conditions will influence the timing of the repurchase and the number of shares repurchased, if any. The program does not obligate us to repurchase any specific number of shares and, subject to compliance with applicable securities laws and other legal requirements, may be payable to the lenders (other than a defaulting lender ( as defined in the New Credit Agreement) which has not provided cash collateral for its pro rata share ofsuspended or terminated at any letter of credit exposure)time without prior notice.Off-Balance Sheet ArrangementsWe had $7.9 million and accrue on the aggregate undrawn face amount$8.6 million of outstanding letters of credit under the facility, payable in arrears at the endperformance bonds as of each quarter and on the date the commitments under the Facility are terminated, calculated based upon the actual number of days elapsed over a 360-day year. Additionally, a fronting fee equal to 0.25% per annum will be payable to the applicable letter of credit issuer payable on the aggregate undrawn face amount of outstanding letters of credit issued by such issuer under the facility, payable in arrears at the end of each quarter and on the date the commitments under the Facility are terminated, calculated based upon the actual numbers of days elapsed over a 360-day year.Commitment Fees: We will pay each lender under the Facility (other than a defaulting lender (as defined in the New Credit Agreement)) a commitment fee of 0.375% per annum on the average daily unused portion of the Facility, payable in arrears at the end of each quarter and on the date the commitments under the Facility are terminated, calculated based upon the actual number of days elapsed over a 360-day year.Interest Rates: The interest rates under the Facility will be based on the leverage ratio (as defined in the New Credit Agreement) for the most recently ended fiscal quarter. Interest will be payable in arrears (a) for loans accruing interest at a rate based on LIBOR (plus an applicable margin ranging from 3.00% - 4.00%, depending on the leverage ratio), at the end of each interest period and, for interest periods of greater than three months, every three months, and on the maturity date of the Facility and (b) for loans accruing interest based on the ABR (plus an applicable margin ranging from 2.00% - 3.00%, depending on the leverage ratio), quarterly in arrears and on the maturity date of the Facility.Default Rate: Upon the occurrence and during the continuance of any payment event of default, with respect to overdue principal and interest, the applicable interest rate plus 2.00% per annum, and with respect to overdue fees, the interest rate applicable to ABR loans plus 2.00% per annum and in each case will be payable on demand.The Facility contains various reporting requirements, negative covenants, restrictive provisions and requires maintenance of financial covenants, including a fixed charge coverage ratio and a leverage ratio (each as defined in the New Credit Agreement).Mandatorily Redeemable Series A Preferred StockOn September 13, 2011, we entered into a financing agreement with Clearlake. The agreement provides for the sale of Series A Preferred Stock to Clearlake in three tranches. For the years ended December 31, 20152019 and 2014, we incurred $5.7 million2018, respectively. These performance bonds assure our performance under our reclamation plan, maintenance and $6.0 millionrestoration of interest expense related to the Series A Preferred Stock, respectively. We capitalized $0.6 millionpublic roadways and $0.4 million of interest expense related to the Series A Preferred Stock in the consolidated balance sheetsan agreement with a pipeline common carrier.Contractual ObligationsThe following table presents our contractual obligations as of December 31, 2015 and 2014, respectively. On March 28, 2014, in connection with entering into our existing revolving credit facility, approximately $40.3 million of Series A Preferred Stock was redeemed.The Series A Preferred Stock was mandatorily redeemable on September 13, 2016 only if certain defined pro forma covenants of the Credit Agreement were met. The redemption price was the original issuance price per share of all outstanding shares of Series A Preferred Stock plus any unpaid accrued dividends. The shares of Series A Preferred Stock were not convertible into common stock or any other security issued by us. As a result of the Series A Preferred Stock’s stated mandatory redemption feature, we classified these securities as current liabilities in the consolidated balance sheets as of September 30, 2016 and December 31, 2015.On November 9, 2016, we fully redeemed the Series A Preferred Stock as a total redemption value of $40.3 million using a portion of the proceeds from the initial public offering.Capital RequirementsAs of December 31, 2016, we had commitments related to certain of our Oakdale drying facilities as well as future expansion projects of approximately $0.6 million. We expect to incur approximately $55 million during 2017 in expansion and replacement capital expenditures. Expansion capital expenditures are anticipated to support incremental growth and efficiency initiatives. These projects are expected to provide efficiencies in our plant operations and improve our logistics capabilities to further position us to capitalize upon growth opportunities that we anticipate will continue to develop with both current and potential new customers. We expect to fund these expansion capital expenditures with cash flow from operations and proceeds from our IPO and February 2017 equity offering.Total Less than1 year1-3years3-5yearsMore than5 years (in thousands) Debt service $ 40,417 $ 7,959 $ 15,636 $ 16,822 $ — Operating leases 30,613 14,292 14,039 2,282 — Asset retirement obligations 6,142 477 144 — 5,521 Land rights obligations 40,950 2,275 4,550 4,550 29,575 Total $ 118,122 $ 25,003 $ 34,369 $ 23,654 $ 35,096 Environmental MattersWe 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.Off-Balance Sheet ArrangementsAt December 31, 2016 and December 31, 2015, we had outstanding letters of credit in the amount of $0 million and $4.2 million, respectively. At December 31, 2016 and 2015, we had outstanding performance bonds of $8.3 million and $5.6 million, respectively.56SMART SAND, INC.MANAGEMENT'S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(UNAUDITED)SeasonalityOur business is affected to some extent by seasonal fluctuations in weather that impact the production levels at our wet processing plant. While our dry plants are able to process finished product volumes evenly throughout the year, our excavation and our wet sand processing activities arehave historically been limited to primarily non-winter months. As a consequence, we experiencehave experienced lower cash operating costs in the first and fourth quarter of each calendar year.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. During the fourth quarter of 2017, we finished construction of a new wet plant, which is an indoor facility that allows 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 raw 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 ConcentrationFor the year ended December 31, 2016, sales to EOG Resources, Weatherford, US2019, Liberty, Rice Energy (a subsidiary of EQT Corporation), Hess Corporation, and U.S. Well Services and C&J Energy Services accounted for 37.5%23.8%, 25.2%19.0%, 22.4%15.5%, and 10.8%14.7%, respectively, of total revenue. For the year ended December 31, 2015, sales to EOG Resources, US Well Services, Weatherford2018, Liberty, EQT, WPX Energy, and Archer Pressure PumpingHess accounted for 35.0%22.8%, 24.6%21.4%, 18.4%11.6%, and 15.8%10.6%, respectively, of total revenue. For the year ended December 31, 2014, sales to EOG Resources,2017, Rice Energy, Liberty, Weatherford, and USU.S. Well Services accounted for 32.1%27.1%, 30.6%20.6%, 13.7%, and 16.0%10.2%, respectively, of total revenue.Contractual ObligationsThe following table presents our contractual obligations and other commitments as of December 31, 2016.(1)Through December 31, 2016, we entered into various lease arrangements to lease operational equipment. Interest rates on these lease arrangements ranged from 0% to 5% and maturities range from 2017 through 2018; such interest is included in these amounts.(2)We have financed certain equipment, automobile and land purchases by entering into various debt agreements. Interest rates on these notes ranged from 0% to 4.75% and maturities range from 2017 through 2018; such interest is included in these amounts.(3)As part of our Oakdale plant expansion, we were committed to capital expenditures of approximately $613 as of December 31, 2016.(4)The asset retirement obligation represents the fair value of post closure reclamation and site restoration commitments for the Oakdale property and processing facility and Hixton property.(5)We have entered into long-term operating leases for certain operational equipment, rail equipment and office space.(6)The former revolving credit facility had a maturity date of March 28, 2019. On November 9, 2016, we fully repaid and terminated the former revolving credit facility with a portion of the proceeds from our IPO in November 2016. The existing revolving credit facility has a maturity date of December 8, 2019. As of December 31, 2016, no amounts were outstanding under the existing revolving credit facility.Recent Accounting PronouncementsIn August 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-15, Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”). ASU 2016-15 eliminates the diversity in practice related to the classification of certain cash receipts and payments for debt prepayment or extinguishment costs, the maturing of a zero coupon bond, the settlement of contingent liabilities arising from a business combination, proceeds from insurance settlements, distributions from certain equity method investees and beneficial interests obtained in a financial asset securitization. ASU 2016-15 designates the appropriate cash flow classification, including requirements to allocate certain components of these cash receipts and payments among operating, investing and financing activities. The guidance is effective for the Company beginning after December 15, 2017, although early adoption is permitted. We are currently evaluating the effects of ASU 2016-15 on our consolidated financial statements.In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients (“ASU 2016-12”). The amendments in ASU 2016-12 provide clarifying guidance in certain narrow areas and add some practical expedients. Specifically, the amendments in this update (1) clarify the objective of the collectability criterion in step 1, and provides additional clarification for when to recognize revenue for a contract that fails step 1, (2) permit an entity, as an accounting policy election, to exclude amounts collected from customers for all sales (and other similar) taxes from the transaction price (3) specify that the measurement date for noncash consideration is contract inception, and clarifies that the variable consideration guidance applies only to variability resulting from reasons other than the form of the consideration, (4) provide a practical expedient that permits an entity to reflect the aggregate effect of all modifications that occur before the beginning of the earliest period presented when identifying the satisfied and unsatisfied performance obligations, determining the transaction price, andallocating the transaction price to the satisfied and unsatisfied performance obligations, (5) clarifies that a completed contract for purposes of transition is a contract for which all (or substantially all) of the revenue was recognized under legacy GAAP before the date of initial application. Further, accounting for elements of a contract that do not affect revenue under legacy GAAP are irrelevant to the assessment of whether a contract is complete. In addition, the amendments permit an entity to apply the modified retrospective transition method either to all contracts or only to contracts that are not completed contracts, and (6) clarifies that an entity that retrospectively applies the guidance in Topic 606 to each prior reporting period is not required to disclose the effect of the accounting change for the period of adoption. However, an entity is still required to disclose the effect of the changes on any prior periods retrospectively adjusted. The effective date and transition requirements for the amendments are the same as the effective date and transition requirements in Topic 606: The guidance is effective for the Company beginning January 1, 2018, although early adoption is permitted beginning January 1, 2017. Although we are still in the process of assessing the impact of the adoption of ASU 2016-12, we do not currently anticipate a material impact on our revenue recognition practices.In May 2016, the FASB issued ASU 2016-11, Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815): Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting. ASU 2016-11 rescinds several SEC Staff Announcements that are codified in Topic 605, including, among other items, guidance relating to accounting for shipping and handling fees and freight services. The effective date and transition requirements for the amendments are the same as the effective date and transition requirements in Topic 606: The guidance is effective for the Company beginning January 1, 2018, although early adoption is permitted beginning January 1, 2017. We are currently evaluating the effects of ASU 2016-11 on its consolidated financial statements.In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing (“ASU 2016-10”). The amendments in ASU 2016-10 clarify the following two aspects of Topic 606: (a) identifying performance obligations; and (b) the licensing implementation guidance. The amendments do not change the core principle of the guidance in Topic 606. The effective date and transition requirements for the amendments are the same as the effective date and transition requirements in Topic 606. The guidance is effective for the Company beginning January 1, 2018, although early adoption is permitted beginning January 1, 2017. We are currently evaluating the effects of ASU 2016-10 on our consolidated financial statements.In March 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2016-09, “Stock Compensation (ASC 718)—Improvements to Employee Share-Based Payment Accounting”, which is intended to simplify the tax accounting impacts of stock compensation. Additionally, the new standard provides accounting policy elections regarding vesting and forfeiture accounting. The new standard is effective for annual periods beginning after December 15, 2016 and interim periods within those annual periods. We elected to early adopt this standard. We elected to account for forfeitures when they occur.In February 2016, the FASB issued ASU No. 2016-02, “Leases” (ASC 842), which replaces the existing guidance in ASC 840, “Leases.” ASC 842 requires lessees to recognize most leases on their balance sheets as lease liabilities with corresponding right-of-use assets. The new lease standard does not substantially change lessor accounting. The new standard is effective for interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted. We are currently in the process of evaluating the impact of the adoption on our consolidated financial statements.In November 2015, the FASB issued ASU No. 2015-17, “Income Taxes—Balance Sheet Classification of Deferred Taxes”, which requires the presentation of deferred tax liabilities and assets be classified as non-current on balance sheets. The amendments in this ASU are effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted for all entities as of the beginning of an interim or annual reporting period. We have elected to early adopt this guidance prospectively as of December 31, 2015. The adoption only impacted deferred tax presentation on the consolidated balance sheet and related disclosure. No prior periods were retrospectively adjusted.In July 2015, the FASB issued ASU No. 2015-11, “Simplifying the Measurement of Inventory”, which requires an entity to measure most inventory at the lower of cost and net realizable value, thereby simplifying the current guidance under which an entity must measure inventory at the lower of cost or market. The new standard is effective for public entities for financial statements issued for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. We have elected to prospectively early adopt this standard effective December 31, 2016 and have measured our inventory at the lower of cost and net realizable value. The impacts of early adoption of ASU 2015-11 are not significant.In April 2015, the FASB issued ASU No. 2015-15, “Interest-Imputation of Interest”, which simplifies presentation of debt issuance costs. The new standard requires that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of the debt liability, consistent with debt discounts or premiums. The new standard is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within fiscal years beginning after December 15, 2016.In August 2014, the FASB issued ASU No. 2014-15, “Going Concern”, which provides guidance on determining when and how to disclose going-concern uncertainties in the financial statements. The new standard requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued. An entity must provide certain disclosures if “conditions or events raise substantial doubt about the entity’s ability to continue as a going concern.” The ASU applies to all entities and is effective for annual periods ending after December 15, 2016, and interim periods thereafter, with early adoption permitted. Accordingly, we incorporated this guidance into our internal control over financial reporting beginning with the Annual Report on Form 10-K for the year ended December 31, 2016.In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers”. The objective of ASU 2014-19 is to establish a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and will supersede most of the existing revenue recognition guidance, including industry-specific guidance. The core principle of ASU 2014-09 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In applying the new guidance, an entity will (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the contract’s performance obligations; and (5) recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 applies to all contracts with customers except those that are within the scope of other topics in the FASB Accounting Standards Codification. The new guidance is effective for annual reporting periods (including interim periods within those periods) beginning after December 15, 2017 for public companies. Early adoption is only permitted as of annual reporting periods beginning after December 15, 2016. Entities have the option of using either a full retrospective or modified approach to adopt ASU 2014-09. Although we are still in the process of assessing the impact of the adoption of ASU 2016-12, we do not currently anticipate a material impact on our revenue recognition practices.New and Revised Financial Accounting StandardsWe qualify as an “emerging growth company” pursuant to the provisions of the JOBS Act, enacted on April 5, 2012. Section 102 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. However, we are choosing to “opt out” of such extended transition period, and as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Our election to “opt-out” of the extended transition period is irrevocable.The discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally acceptable in the United States of America.GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported revenues and expenses during the reporting periods. We evaluate these estimates and assumptions on an ongoing basis and base our estimates on historical experience, current conditions and various other assumptions that we believe to be reasonable under the circumstances. The results of these estimates form the basis for making judgments about the carrying values of assets and liabilities as well as identifying and assessing the accounting treatment with respect to commitments and contingencies. Our actual results may materially differ from these estimates.Listed below are the accounting policies we believe are critical to our financial statements due to the degree of uncertainty regarding the estimates or assumptions involved, and that we believe are critical to the understanding of our operations.Revenue RecognitionWe recognizeOn January 1, 2018, we adopted ASC 606, “Revenue from Contracts with Customers” and all the related amendments thereto, using the modified retrospective method. There was no adjustment made to the opening balance of retained earnings as a result of applying ASC 606. Results for reporting periods beginning January 1, 2018 are presented under ASC 606, while the comparative information is not restated and will continue to be reported under the accounting standards in effect for those periods. Under ASC 606, revenues are recognized when control of the promised goods or services is transferred to our customers, the amount of which reflects the consideration the Company expects to be entitled to in exchange for those goods or services. Prior to January 1, 2018, we recognized revenue when persuasive evidence of an arrangement exists, delivery of products has occurred, the sales price charged is fixed or determinable, collectability is reasonably assured, and the risk of loss is transferred to the customer. ThisUnder current and former revenue standards, this generally means that sales are FCA, payment made at the origination point at our facility, and title passes as the product is loaded into rail carsrailcars hired by the customer. Certain spot-rate customerscustomer or provided by us. Deliveries of57SMART SAND, INC.MANAGEMENT'S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(UNAUDITED)in-basin sand have shipping terms of FCA, payment made at the destination;DAT or DAP; and we recognize this revenue when the sand is received at the destination.We derive our revenue by mining and processing sand that our customers purchase for various uses. Our revenues are primarily a function of the price per ton realized and the volumes sold. In some instances, our revenues also include transportation costs we charge to our customers, a monthly charge to reserve sand capacity and shortfall payments due from customers for minimum volume commitments. Our transportation revenue fluctuates based on a number of factors, including the volume of product we transport and the distance between our plant and our customers. Our reservation and shortfall revenue fluctuates based on negotiated contract terms.a limited amount of product undersand through short-term price agreements, or at prevailing market rates. The majority of our revenues are realized throughrates, and long-term take-or-pay contracts. The expiration dates of these contracts range from 20192020 through 2020.2023. These agreements define, among other commitments, the volume of product that our customers must purchase, the volume of product that we must provide and the price that we will charge and that our customers will pay for each ton of contracted product. Prices under these agreements are generally indexed to WTI and subject to upward adjustment, based upon: (i) annual percentage price increases; or (ii) market factor increases, including a natural gas surcharge and a propane surcharge which are applied if the Average Natural Gas Price or the Average Quarterly Mont Belvieu TX Propane Spot Price, respectively, as listed by the U.S. Energy Information Administration, are above the benchmark set in the contract for the preceding calendar quarter. As a result, our realized prices may not grow at rates consistent with broader industry pricing. For example, during periods of rapid price growth, our realized prices may grow more slowly than those of competitors, and during periods of price decline, our realized prices may outperform industry averages. With respect to the take-or-pay arrangements, if the customer is not allowed to make up deficiencies, we recognizeSmartSystems revenues to the extentconsist primarily of the minimum contracted quantity, assuming paymentrental of our patented SmartSystems equipment to customers, which is reasonably assured. Such revenue is generally recognized either quarterly or attypically earned under fixed monthly fees, services related to delivery, proppant management and maintenance on the end of a customer contract year rather than ratably over the respective contract year. If deficiencies can be made up, receipts in excess of actual salesequipment. Revenues are recognized as deferred revenues until production is actually takenthe performance obligations are satisfied under the terms of the customer contract.Accounts and Unbilled ReceivablesAccounts receivable represents customer transactions that have been invoiced as of the balance sheet date; unbilled receivables represent customer transactions that have not yet been invoiced as of the balance sheet date. Accounts receivable are due within 30 days, or in accordance with terms agreed upon with customers, and are stated at amounts due from customers net of any allowance for doubtful accounts. We consider accounts outstanding longer than the rightpayment terms past due. We determine the allowance by considering a number of factors, including the length of time trade accounts receivable are past due, previous loss history, the customer’s current ability to make up deficiencies expires.Asset Retirement ObligationWe estimate the future cost of dismantling, restoring and reclaiming operating excavation sites and related facilities in accordance with federal, state and local regulatory requirements and recognize reclamation obligations when extraction occurs and record them as liabilities at estimated fair value. In addition, a corresponding increase in the carrying amount of the related asset is recorded and depreciated over such asset’s useful life or the estimated number of years of extraction. The reclamation liability is accreted to expense over the estimated productive life of the related asset and is subject to adjustments to reflect changes in value resulting from the passage of time and revisions to the estimates of either the timing or amount of the reclamation costs. Changes in estimates at inactive mines or mining areas are reflected in earnings in the period an estimate is revised. If the asset retirement obligation is settled for more or less than the carrying amount of the liability, a loss or gain will be recognized, respectively.At December 31, 2019, we updated our reclamation plan for certain of our asset retirement obligations which resulted in a reduction to the asset retirement obligation by $9.8 million. There was no effect on the income statement in the current period for this change in estimate but there will be a reduction to the amount of depreciation and accretion expense recorded in future periods as a result of this change in estimate.Inventory ValuationSand inventory is stated at the lower of cost or net realizable value using the average cost method. Costs applied to inventory include direct excavation costs, processing costs, overhead allocation, depreciation and depletion. Stockpile tonnages are calculated by measuring the number of tons added and removed from the stockpile. Tonnages are verified periodically by an independenta surveyor. Costs are calculated on a per ton basis and are applied to the stockpiles based on the number of tons in the stockpile.Spare parts inventory includes critical spare parts. We account for spare parts on a first in first outfirst-in first-out basis, and value the inventory at the lower of cost or net realizable value.58SMART SAND, INC.MANAGEMENT'S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(UNAUDITED)LeasesOn January 1, 2019 we adopted ASU 2016-02, Leases (Topic 842), and related amendments, which replaced the existing guidance in ASC 840, Leases. ASU 2016-02 requires lessees to recognize most leases on their balance sheets as lease liabilities with corresponding right-of-use assets. The new lease standard does not substantially change lessor accounting. We adopted ASU 2016-02 and its related updates using the transition practical expedients, which allows us to use the existing lease population, classification and determination of initial direct costs when calculating the lease liability and right-of-use asset balances. We also used the optional transition method, which allows us to initially apply the new standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings. There was no adjustment made to the opening balance of retained earnings. We have implemented new accounting policies and software to facilitate the recording and reporting of lease transactions and balances. We recorded initial operating right-of-use assets of $35.9 million and related lease liabilities of $36.5 million on our consolidated balance sheet on January 1, 2019. Operating leases were not recorded on the balance sheet as of December 31, 2018.Leases - LesseeWe use leases primarily to procure certain office space, railcars and heavy equipment as part of our operations. The majority of our lease payments are fixed and determinable with certain lease payments containing immaterial variable payments based on the number of hours the equipment is used. Certain of our leases have options that allow for renewal at market rates, purchase at fair market value or termination of the lease. We must determine that it is reasonably certain that a lease option will be exercised for such an option to be included in the right-of-use asset or lease liability. We are not reasonably certain that any of our lease options will be exercised and, as such, have not included those options in our right-of-use assets or lease liabilities. Certain of our equipment leases contain residual value guarantees which guarantee various parts of heavy equipment will have a remaining life when the equipment is returned to the lessor. It is possible that we could owe additional amounts to the lessor upon return of equipment. There are no restrictions or covenants imposed by any of our leases.We evaluate contracts during the negotiation process and when they are executed to determine the existence of leases. A contract contains a lease when it conveys the right to use property, plant or equipment for a stated period of time in exchange for consideration. Leases with an initial term of twelve months or less are not recorded on the balance sheet. We recognize lease expense on a straight-line basis over the term of the lease. We evaluate the classification of our leases at the commencement date and include both lease and non-lease components in our calculation of consideration in the contract for all classes of operating leases.We apply a single discount rate to all operating leases. We determined our incremental borrowing rate based on an average of collateralized borrowing rates offered by various lenders. We considered the nature of the assets and the life of the leases and determined that there is no significant difference in the incremental borrowing rate.We are 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. See “Contractual Obligations” above for additional information.Leases - LessorWe manufacture and offer for lease our SmartSystems wellsite proppant storage solutions. We negotiate the terms of our lease agreements on a case-by-case basis. There are no significant options that are reasonably certain to be exercised, residual value guarantees or restrictions or covenants in our lease contracts and, therefore, no such terms have been included in our accounting for the leases. All of our SmartSystems are leased under operating leases.DepletionWe amortize the cost to acquire land and mineral rights using a units-of-production method, based on the total estimated reserves and tonnage extracted each period.Impairment of Indefinite-Lived and Long-Lived AssetsIn applying the acquisition method of accounting for business combinations, amounts assigned to identifiable assets and liabilities acquired were based on estimated fair values as of the date of acquisition, with the remainder recorded as goodwill. Intangible assets are initially valued at fair value using generally accepted valuation methods appropriate for the type of intangible asset. Intangible assets with definite lives are amortized over their estimated useful lives and are reviewed for59SMART SAND, INC.MANAGEMENT'S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(UNAUDITED)impairment if indicators of impairment arise. Intangible assets with indefinite lives are tested for impairment annually as of December 31, and whenever indicators of impairment arise. The fair value of the intangible assets is compared with their carrying value and an impairment loss would be recognized for the amount by which the carrying amount exceeds the fair value. Goodwill is tested for impairment annually as of December 31, and whenever indicators of impairment arise.We periodically evaluate whether current events or circumstances indicate that the carrying value of our long-lived assets may not be recoverable. If circumstances indicate that the carrying value may not be recoverable, we estimate future undiscounted net cash (without interest charges), estimated future sales prices (considering historical and current prices, price trends and related factors) and anticipated operating costs and capital expenditures. We record a reduction inIf the carrying value of our long-lived assets ifis less than the undiscounted cash flows, the assets are measured at fair value and an impairment is recorded if that fair value is less than the carrying value.During the year ended December 31, 2019, we recorded impairment loss of $15.5 million, of which $7.6 million relates to our finite-lived developed technology intangible assets and $7.9 million relates to our Hixton, Wisconsin property. The impairment of the finite-lived intangible assets is from our developed technology allocated to the Quickload acquired in connection with the acquisition of Quickthree in 2018. We are developing and testing a new transload technology and no longer plan to actively market the Quickload and as such, all developed technology intangible assets related to the Quickload were fully impaired during the third quarter of 2019. In the fourth quarter of 2019, we determined that the full amount recorded on the balance sheet related to the Hixton, Wisconsin property may not be recoverable as we have no current plans to further develop the site.For the year ended December 31, 2018, we performed both a qualitative and quantitative analysis of its goodwill and the estimated fair value of the assets.Our estimates of prices, recoverable proven reserves and operating and capital costs are subject to certain risks and uncertainties which may affect the recoverability of our long-lived assets. Although we have made our best estimate of these factors based on current conditions, it is reasonably possible that changes could occur, which could adversely affect our estimate of the net cash flows expected to be generated from our operating property. NoWe recorded an impairment charges were recorded duringcharge of $17.8 million related to goodwill and an other indefinite-lived intangible asset for the yearsyear ended December 31, 2016, 20152018. The impairment charge relates primarily to the decline in our stock price in 2018 and 2014.the relationship between the resulting market capitalization and the equity recorded on our balance sheet.
There were no impairment losses in 2017.Income TaxesUnder the balance sheet approach to provide for income taxes, we recognize deferred tax assets and liabilities for the expected future tax consequences of net operating loss carryforwards and temporary differences between the carrying amounts and the tax bases of assets and liabilities. In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the period in which those temporary differences become deductible. If we determine it is more likely than not that we will not be able to realize the benefits of the deductible temporary differences, we would record a valuation allowance against the net deferred tax asset.60SMART SAND, INC.MANAGEMENT'S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(UNAUDITED)We recognize the impact of uncertain tax positions at the largest amount that, in our judgment, is more-likely-than-not to be required to be recognized upon examination by a taxing authority.Stock-Based CompensationStock-based compensation expense is recorded based upon the fair value of the award at grant date. Such costs are recognized as expense over the corresponding requisite service period. The fair value of the awards granted was calculated based on a weighted analysis of (i) publicly-traded companies in a similar line of business to us (market comparable method) and (ii) our discounted cash flows. The application of this valuation model involves inputs and assumptions that are judgmental and highly sensitive in the valuation of incentive awards, which affects compensation expense related to these awards. These inputs and assumptions include the value of a share of our common stock.Prior to our initial public offering, we used a combination of the guideline company approach and a discounted cash flow analysis to determine the fair value of our stock. The key assumptions in this estimate includeincluded our projections of future cash flows, company-specific cost of capital used as a discount rate, lack of marketability discount, and qualitative factors to compare us to comparable guideline companies. During 2016, factors that contributed to changes in the underlying value of our stock included the continued market challenges and corresponding decline in oil and natural gas drilling activity, changes to future cash flows projected from the recent expansion of capacity, product mix, including mix of finer grade versus coarser grade sand, and other factors. As our operations are highly dependent on sales to the oil and natural gas industry, the market conditions for this industry havehad a high degree of impact on the company’s value.Once our shares became publicly traded, we began using the actual market price of our 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 as the grant date fair value for restricted stock awards, and we no longer estimate the value of the shares underlying these stock-based awards.The following is a summary of the restricted stock awards granted and the related grant date fair value in the years ended December 31, 2019, 2018 and 2017. Number ofShares Granted(in thousands)Weighted AverageGrant DateFair ValueFor the year ended December 31, 2019 1,884 $ 2.58 For the year ended December 31, 2018 746 $ 6.61 For the year ended December 31, 2017 352 $ 14.77 Emerging Growth CompanyWe qualify as an “emerging growth company” pursuant to the provisions of the JOBS Act, enacted on April 5, 2012. Section 102 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. However, we are choosing to “opt out” of such extended transition period, and as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Our election to “opt-out” of the extended transition period is irrevocable.Recent Accounting PronouncementsIn August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820), which modifies disclosure requirements for fair value measurements by removing the disclosure of the valuation process for Level 3 fair value measurements, among other disclosure modifications. The guidance is effective for the financial statements periods beginning after December 15, 2019, although early adoption is permitted. We early adopted ASU 2018-13 on December 31, 2019 and fair value disclosures in these financial statements have been updated accordingly. The changes in disclosures are immaterial.In February 2016, 2015the FASB issued ASU 2016-02, Leases (Topic 842), and 2014During Marchrelated amendments, which replaced the existing guidance in ASC 840, Leases. ASU 2016-02 requires lessees to recognize most leases on their balance sheets as lease liabilities with corresponding right-of-use assets. We adopted ASU 2016 we issued 160,600 shares underand its related amendments on January 1, 2019. See our 2012 Equity Incentive Plan. These restricted stock awards consistdiscussion of 50% service-based vesting over 4 years and 50% performance-based vesting upon the achievement of certain performance conditions. The performance-based shares vested in December 2016 in connection with our common stock being actively traded on a national securities exchange at an aggregate market value in excess of $300 million over 20 consecutive trading days.In connection with our initial public offering, we adopted a 2016 Omnibus Incentive Plan. We have not made any grants under our 2016 Omnibus Incentive Plan.Item61ITEM 7A. – Quantitative and Qualitative Disclosures About Market RiskMarket risk is the risk of loss arising from adverse changes in market rates and prices. Historically, our risks have been predominantly related to potential changes in the fair value of our long-term debt due to fluctuations in applicable market interest rates. Going forward our market risk exposure generally will be limited to those risks that arise in the normal course of business, as we do not engage in speculative, non-operating transactions, nor do we utilize financial instruments or derivative instruments for trading purposes. We do not believe that inflation has a material impact on our financial position or results of operations during periods covered by the financial statements included in this filing.Commodity Price RiskThe market for proppant and proppant storage equipment is indirectly exposed to fluctuations in the prices of crude oil and natural gas to the extent such fluctuations impact drilling and completion activity levels and thus impact the activity levels of our customers in the oilfield services and exploration and production industries. However, because we generate the substantial majority of our revenues under long-term take-or-pay contracts, we believe we have limited direct exposure to short-term fluctuations in the prices of crude oil and natural gas. We do not currently intend to hedge our indirect exposure to commodity price risk.Interest Rate RiskAsThe majority of December 31, 2016, we had $0 outstandingour debt is financed under our existing revolving credit facility, which bearsfixed interest at our option at either:ABR (as defined inrates. Borrowings under the revolving credit facility), plus an applicable margin of 2.00% - 3.00%, depending on the leverage ratio; orLIBOR plus an applicable margin of 3.00% - 4.00%, depending on the leverage ratio.On November 9, 2016, the former revolving credit facility was paid in full and terminated using a portion of the proceeds from the IPO, and was replaced with a facility with similar interest rate risk.On December 8, 2016, the Company entered into a $45 million three-year senior secured RevolvingABL Credit Facility (the “Facility”) with Jefferies Finance LLC as administrative and collateral agent. The Facility expires on December 8, 2019 and has the following terms and conditions (the “New Credit Agreement”): Letters of Credit: A portion of the Facility, not in excess of $10 million, is available for the issuance of letters of credit to be issued by the administrative agent or any other lender approved by the administrative agent and the Company that is willing to become a letter of credit issuer. A per annum fee equal to the interest rate margin for LIBOR loans under the Facility will be payable to the lenders (other than a defaulting lender ( as defined in the New Credit Agreement) which has not provided cash collateral for its pro rata share of any letter of credit exposure) and accrue on the aggregate undrawn face amount of outstanding letters of credit under the facility, payable in arrears at the end of each quarter and on the date the commitments under the Facility are terminated, calculated based upon the actual number of days elapsed over a 360-day year. Additionally, a fronting fee equal to 0.25% per annum will be payable to the applicable letter of credit issuer payable on the aggregate undrawn face amount of outstanding letters of credit issued by such issuer under the facility, payable in arrears at the end of each quarter and on the date the commitments under the Facility are terminated, calculated based upon the actual numbers of days elapsed over a 360-day year.Commitment Fees: The Company will pay each lender under the Facility (other than a defaulting lender (as defined in the New Credit Agreement)) a commitment fee of 0.375% per annum on the average daily unused portion of the Facility, payable in arrears at the end of each quarter and on the date the commitments under the Facility are terminated, calculated based upon the actual number of days elapsed over a 360-day year.Interest Rates: The interest rates under the Facility will be based on the leverage ratio (as defined in the New Credit Agreement) for the most recently ended fiscal quarter. Interest will be payable in arrears (a) for loans accruingbear interest at a rate based on LIBOR (plusper annum equal to an applicable margin, ranging from 3.00% - 4.00%, depending on the leverage ratio),plus, at the end of each interest period and, for interest periods of greater than three months, every three months, and on the maturity date of the Facility and (b) for loans accruing interest based on the ABR (plusour option, either a LIBOR rate or an alternate base rate (“ABR”). The applicable margin ranging fromis 2.00% - 3.00%, dependingfor LIBOR loans and 1.00% for ABR loans. The balance on the leverage ratio), quarterly in arrears and on the maturity date of the Facility.Default Rate: Upon the occurrence and during the continuance of any payment event of default, with respect to overdue principal and interest, the applicable interest rate plus 2.00% per annum, and with respect to overdue fees, the interest rate applicable to ABR loans plus 2.00% per annum and in each case will be payable on demand.Theour ABL Credit Facility contains various reporting requirements, negative covenants, restrictive provisions and requires maintenance of financial covenants, including a fixed charge coverage ratio and a leverage ratio (eachwas $2.5 million as defined in the New Credit Agreement). As of December 31, 2016, there were no amounts outstanding under the Facility.Credit RiskSubstantially all of our revenue for the year ended December 31, 20162019 was generated through long-term take-or-pay contracts with foursix customers. Our customers are oil and natural gas producers and oilfield service providers, all of which have been negatively impacted by the recent downturn in activity in the oil and natural gas industry.industry beginning in the latter part of 2018 and continuing through much of 2019. This concentration of counterparties operating in a single industry may increase our overall exposure to credit risk, in that the counterparties may be similarly affected by changes in economic, regulatory or other conditions. If a customer defaults or if any of our contracts expiresexpire in accordance with its terms, and we are unable to renew or replace these contracts, our gross profit and cash flows may be adversely affected. For example,Additionally, as of December 31, 2019, $37.4 million of accounts and unbilled receivables is attributable U.S. Well, a customer with which we have pending litigation. We are unable to express an opinion as to the likely outcome of the matter, and even if we are successful, we can make no assurances that U.S. Well would be able to pay.Foreign Currency RiskOur revenues and expenses are primarily in July 2016, oneUnited States dollars; however, as a result of our contracted customers, C&J Energy Services filed for bankruptcyacquisition of Quickthree on June 1, 2018, certain transactions are transacted in Canadian dollars. Thus, revenues, operating expenses, the results of operations, assets and rejected our contract, which had 2.3 yearsliabilities may be impacted to the extent that they are not hedged by the rise and 0.7 million tons contracted remaining under the contract. C&J Energy Services also demanded a refundfall of the remaining balance of prepayments it claimed to have made pursuant to its contract with us. As of September 30, 2016, the balance of this prepayment was approximately $5 million and was presented as deferred revenue in the consolidated balance sheet. We pursued a claim for damages through the bankruptcy courts. In November 2016, this claim was settled favorably for us; accordingly, the full amountrelative value of the prepayment has been recognized as revenue. As partUnited States dollar to the Canadian dollar. During the years ended December 31, 2019 and 2018, revenue, expenses, assets and liabilities transacted in Canadian dollars were immaterial to the results of this settlement, we were granted an unsecured bankruptcy claim of approximately $12 million; in December 2016, a third party purchased our unsecured claim for approximately $6.6 million, which has been recognized in other income in the fourth quarter.operations.Item62ITEM 8. – Financial Statements and Supplementary DataThe following Consolidated Financial Statements are filed as part of this Annual Report on Form 10-K:Smart Sand, Inc.PAGEPAGE 66676869707163Report of Independent RegisteredRegistered Public Accounting FirmBoard of Directors and ShareholdersSmart Sand, Inc.Opinion on the financial statementsWe have audited the accompanying consolidated balance sheets of Smart Sand, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 20162019 and 2015, and2018, the related consolidated income statements, and statements of operations,comprehensive income, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2016. 2019, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Companyas of December 31, 2019 and 2018, and the results of itsoperations and itscash flows for each of the three years in the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.Basis for opinionThese financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on thesethe Company’s financial statements based on our audits.We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. Wemisstatement, whether due to error or fraud. The Company is not required to have, nor were notwe engaged to perform, an audit of the Company’sits internal control over financial reporting. OurAs part of our audits included considerationwe are required to obtain an understanding of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includesOur audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessingstatements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statement presentation.statements. We believe that our audits provide a reasonable basis for our opinion.In our opinion,Change in accounting principleAs discussed in Notes 2 and 9 to the consolidated financial statements, referredthe Company has changed its method of accounting for leases in 2019 due to above present fairly, in all material respects, the financial positionadoption of Smart Sand, Inc. and subsidiaries as of December 31, 2016 and 2015, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2016 in conformity with accounting principles generally accepted in the United States of America./s/ GRANT THORNTON LLPPhiladelphia, PennsylvaniaMarch 16, 2017
We have served as the Company’s auditor since 2014.New York, New YorkFebruary 26, 202064CONSOLIDATED BALANCE SHEETS December 31, 2019 2018 (in thousands, except share amounts) Assets Current assets: Cash and cash equivalents Cash and cash equivalents $ 2,639 $ 1,466 Accounts receivable, net Accounts receivable, net 60,052 18,989 Unbilled receivables Unbilled receivables 4,765 7,823 Inventories 21,415 18,575 Prepaid expenses and other current assets 1,506 3,243 Total current assets 90,377 50,096 Property, plant and equipment, net 230,461 248,396 Operating lease right-of-use assets Operating lease right-of-use assets 28,178 — Intangible assets, net Intangible assets, net 9,046 18,068 Other assets 3,541 3,732 Total assets $ 361,603 $ 320,292 Liabilities and Stockholders’ Equity Current liabilities: Accounts payable $ 3,961 $ 11,336 Accrued and other expenses 8,578 8,392 Deferred revenue, current Deferred revenue, current 7,654 4,095 Income taxes payable 542 — Long-term debt, net, current Long-term debt, net, current 6,175 829 Operating lease liabilities, current Operating lease liabilities, current 13,108 — Total current liabilities 40,018 24,652 Deferred revenue, net Deferred revenue, net 1,670 — Long-term debt, net Long-term debt, net 28,240 47,893 Operating lease liabilities, long-term Operating lease liabilities, long-term 15,469 — Deferred tax liabilities, long-term, net 24,021 17,898 Asset retirement obligation 6,142 13,322 Contingent consideration Contingent consideration 1,900 7,167 Total liabilities 117,460 110,932 Commitments and contingencies (Note 17) Commitments and contingencies (Note 17) Stockholders’ equity Common stock, $0.001 par value, 350,000,000 shares authorized; 40,975,408
issued and 40,234,451 outstanding at December 31, 2019; 40,673,513
issued and 39,974,478 outstanding at December 31, 2018Common stock, $0.001 par value, 350,000,000 shares authorized; 40,975,408
issued and 40,234,451 outstanding at December 31, 2019; 40,673,513
issued and 39,974,478 outstanding at December 31, 201840 40 Treasury stock, at cost, 740,957 and 699,035 shares at
December 31, 2019 and 2018, respectivelyTreasury stock, at cost, 740,957 and 699,035 shares at
December 31, 2019 and 2018, respectively(2,979) (2,839) Additional paid-in capital 165,223 162,195 Retained earnings Retained earnings 81,900 50,277 Accumulated other comprehensive loss Accumulated other comprehensive loss (41) (313) Total stockholders’ equity 244,143 209,360 Total liabilities and stockholders’ equity $ 361,603 $ 320,292 The accompanying notes are an integral part of these consolidated financial statements.65CONSOLIDATED INCOME STATEMENTS OF OPERATIONS Year Ended December 31, 2019 2018 2017 (in thousands, except per share amounts) Revenues $ 233,073 $ 212,470 $ 137,212 Cost of goods sold 152,021 144,903 100,304 Gross profit 81,052 67,567 36,908 Operating expenses: Salaries, benefits and payroll taxes 11,560 11,043 8,219 Depreciation and amortization 2,411 1,843 525 Selling, general and administrative 11,328 12,825 9,459 Change in the estimated fair value of contingent consideration Change in the estimated fair value of contingent consideration (3,272) (1,858) — Impairment loss Impairment loss 15,542 17,835 — Total operating expenses 37,569 41,688 18,203 Operating income 43,483 25,879 18,705 Other income (expenses): Interest expense, net Interest expense, net (3,621) (2,266) (450) Loss on extinguishment of debt Loss on extinguishment of debt (561) — — Other income 131 197 462 Total other income (expenses), net (4,051) (2,069) 12 Income before income tax expense (benefit) Income before income tax expense (benefit) 39,432 23,810 18,717 Income tax expense (benefit) Income tax expense (benefit) 7,809 5,122 (2,809) Net income $ 31,623 $ 18,688 $ 21,526 Net income per common share: Basic $ 0.79 $ 0.46 $ 0.54 Diluted $ 0.78 $ 0.46 $ 0.53 Weighted-average number of common shares: Basic 40,135 40,427 40,208 Diluted 40,337 40,449 40,304 The accompanying notes are an integral part of these consolidated financial statements.66CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)COMPREHENSIVE INCOMEYear Ended December 31, 2019 2018 2017 (in thousands) Net income $ 31,623 $ 18,688 $ 21,526 Other comprehensive income: Foreign currency translation adjustment 272 (313) — Comprehensive income $ 31,895 $ 18,375 $ 21,526 The accompanying notes are an integral part of these consolidated financial statements.67CONSOLIDATED STATEMENTS OF CASH FLOWSCHANGES IN STOCKHOLDERS’ EQUITY Common Stock Treasury Stock AdditionalPaid-InCapitalRetainedEarnings(AccumulatedDeficit)Accumulated Other Comprehensive Loss TotalStockholders’Equity OutstandingSharesPar Value Shares Amount (in thousands, except share amounts) Balance at December 31, 2016 38,816,474 $ 39 67,594 $ (539) $ 132,879 $ 10,063 $ — $ 142,442 Vesting of restricted stock 90,017 — — — — — — — Stock-based compensation — — — — 1,973 — — 1,973 Employee stock purchase plan compensation — — — — 39 — — 39 Proceeds from equity issuance, net of
transaction costs1,500,000 1 — — 24,168 — — 24,169 Restricted stock buy back (13,458) — 13,458 (127) — — — (127) Net income — — — — — 21,526 — 21,526 Balance at December 31, 2017 40,393,033 $ 40 81,052 $ (666) $ 159,059 $ 31,589 $ — $ 190,022 Foreign currency translation adjustment — — — — — — (313) (313) Vesting of restricted stock 177,464 — — — — — — — Stock-based compensation — — — — 2,937 — — 2,937 Employee stock purchase plan compensation — — — — 72 — — 72 Employee stock purchase plan issuance 21,964 — — — 127 — 127 Restricted stock buy back (29,783) — 29,783 (174) — — — (174) Shares repurchased (588,200) — 588,200 (1,999) — — (1,999) Net income — — — — — 18,688 — 18,688 Balance at December 31, 2018 39,974,478 $ 40 699,035 $ (2,839) $ 162,195 $ 50,277 $ (313) $ 209,360 Foreign currency translation adjustment — — — — — — 272 272 Vesting of restricted stock 260,820 — — — — — — — Stock-based compensation — — — — 2,909 — — 2,909 Employee stock purchase plan compensation — — — — 41 — — 41 Employee stock purchase plan issuance 41,075 — — — 78 — — 78 Restricted stock buy back (41,922) — 41,922 (140) — — — (140) Net income — — — — — 31,623 — 31,623 Balance at December 31, 2019 40,234,451 $ 40 740,957 $ (2,979) $ 165,223 $ 81,900 $ (41) $ 244,143 The accompanying notes are an integral part of these consolidated financial statements.68CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31, 2019 2018 2017 (in thousands) Operating activities: Net income $ 31,623 $ 18,688 $ 21,526 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, depletion and accretion of asset retirement obligation 26,425 17,159 7,926 Impairment loss 15,542 17,835 — Amortization of intangible assets 1,398 1,002 — Asset retirement obligation settlement (2,753) (3,180) — (Gain) loss on disposal of assets (42) 321 253 Loss on extinguishment of debt 561 — — Provision for bad debt — 42 — Amortization of deferred financing cost 212 300 455 Accretion of debt discount 649 246 — Deferred income taxes 6,123 4,659 (1,805) Stock-based compensation, net 2,909 2,937 2,012 Employee stock purchase plan compensation 41 72 — Change in contingent consideration fair value (3,272) (1,858) — Changes in assets and liabilities: Accounts receivable (41,063) 4,457 (18,038) Unbilled receivables 3,058 (6,631) (788) Inventories (1,021) (7,343) 4,407 Prepaid expenses and other assets 1,875 (1,761) (3,394) Deferred revenue 5,229 4,095 (1,615) Accounts payable (4,680) (2,271) 9,356 Accrued and other expenses 1,277 2,140 2,391 Income taxes payable 542 — (7,058) Net cash provided by operating activities 44,633 50,909 15,628 Investing activities: Acquisition of businesses, net of cash acquired — (29,921) — Purchases of property, plant and equipment (25,525) (96,090) (51,162) Proceeds from disposal of assets 100 22 14 Net cash used in investing activities (25,425) (125,989) (51,148) Financing activities: Proceeds from the issuance of notes payable 31,202 — — Repayments of notes payable (2,808) (559) (282) Payments under equipment financing obligations (103) (168) (353) Payment of deferred financing and debt issuance costs (2,262) (233) (193) Proceeds from revolving credit facility 52,750 84,000 — Repayment of revolving credit facility (94,750) (39,500) — Payment of contingent consideration (1,995) (175) — Proceeds from equity issuance 71 127 26,251 Payment of equity transaction costs — — (2,083) Purchase of treasury stock (140) (2,173) (127) Net cash (used in) provided by financing activities (18,035) 41,319 23,213 Net increase (decrease) in cash and cash equivalents 1,173 (33,761) (12,307) Cash and cash equivalents at beginning of year 1,466 35,227 47,534 Cash and cash equivalents at end of year $ 2,639 $ 1,466 $ 35,227 The accompanying notes are an integral part of these consolidated financial statements.69SMART SAND, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(IN THOUSANDS, EXCEPT PER SHARE DATA)1.NOTE 1 — Organization and Nature of BusinessSmart Sand, Inc.The Company was incorporated in July 2011 and its subsidiaries (collectively, the “Company”) areis headquartered in The Woodlands, Texas,Texas. The Company is a fully integrated frac sand supply and was incorporated in July 2011.services company, offering complete mine to wellsite logistics solutions. The Company is engaged in the excavation, processing and sale of industrial sand, or proppant, for use in hydraulic fracturing operations for the oil and natural gas industry. Its integrated Oakdale facility, with on-site rail infrastructure and wet and dry sand processing facilities, has access to two Class I rail lines and enables the Company to process and cost effectively deliver products to its customers. The Company also offers proppant logistics solutions to its customers through, among other things, its in-basin transloading terminal and its SmartSystemsTM wellsite proppant storage solution capabilities.The Company completed construction of the first phase of its primarymine and processing facility innear Oakdale, Wisconsin and commenced operations in July 2012.Immaterial CorrectionIn March 2018, the Company acquired the rights to operate a unit train capable transloading terminal in Van Hook, North Dakota to service the Bakken Formation in the Williston Basin and began providing Northern White Sand in-basin in April 2018.In June 2018, the Company acquired substantially all of the assets of Quickthree Solutions, Inc., (“Quickthree”) a manufacturer of portable vertical proppant storage solution systems. Quickthree formed the basis for the Company's SmartSystems under which it offers various proppant storage solutions that create efficiencies, flexibility, enhanced safety and reliability for customers by providing the capability to unload, store and deliver proppant at the wellsite, as well as the ability to rapidly set up, takedown and transport the entire system. The Company discovered that an immaterial correction should be made relating to the amortization of deferred transaction costs associatedSmartDepotTM silo includes passive and active dust suppression technology, along with the issuancecapability of sharesa gravity-fed operation.NOTE 2 — Summary of the Company’s outstanding Redeemable Series A preferred stock (the “Series A Preferred Stock”). The Company has been amortizing the deferred costs into interest expense from the date of issuance to the mandatory redemption date of the Series A Preferred Stock, which was September 13, 2016. In March 2014, the Company redeemed certain Series A Preferred Stock prior to the mandatory redemption date and wrote off a portion of the transaction costs as part of the early redemption. The Company never adjusted the quarterly amortization amount for the portion previously written off. The Company concluded the amounts were immaterial to its 2016 and 2015 interim financial statements in accordance with the guidance in U.S. Securities and Exchange Commission (“SEC”) StaffSignificant Accounting Bulletin (SAB) No. 99 “Materiality” and SAB No. 108 “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in the Current Year Financial Statements.” The correction resulted in a decrease to current liabilities by $861 as of December 31, 2015. The correction also resulted in a decrease in interest expense and corresponding increase in net income by $492 and $369 for the years ended December 31, 2015 and 2014, respectively.2. PoliciesBasis of PresentationThe accompanying consolidated financial statements (“financial statements”) of the Company have been prepared in accordance with accounting principles generally accepted inGAAP and pursuant to the United States (“GAAP”).rules and regulations of the SEC. The accompanying financial statements include those of our controlled subsidiaries. The intercompany accounts and transactions have been eliminated. In the opinion of management, all adjustments and disclosures necessary for a fair presentation of these financial statements have been included.On November 9, 2016, in connection with its Initial Public Offering (“IPO”), the Company’s Second Amended and Restated Certificate of Incorporation became effective to provide for a stock split of all issued and outstanding shares of common stock at a ratio of 2,200 for 1 (the “Stock Split”) and increased the authorized number of shares of common stock to 350,000,000 shares. Owners of fractional shares outstanding after the Stock Split were paid cash for such fractional interests. The effective date of the Stock Split was November 9, 2016. All common stock share amounts disclosed in this Form 10-K reflect the Stock Split.3. Summary of Significant Accounting PoliciesUse of EstimatesThe preparation of financial statements in accordance with generally accepted accounting principles in the United States of AmericaGAAP 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,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 those assets;assets (including impairment of identified intangible assets, goodwill and other long-lived assets); estimated cost of future asset retirement obligations; stock-based compensation; recoverability of deferred tax assets; inventory reserve; collectability of receivablesreceivables; 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.Revenue RecognitionTheGoing ConcernManagement evaluates at each annual and interim period whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the consolidated financial statements are issued. Management’s evaluation is based on relevant conditions and events that are known and reasonably knowable at the date that the consolidated financial statements are issued. In the September 30, 2019 interim financial statements, the Company recognizes revenue when persuasive evidence of an arrangement exists, delivery of products has occurred,reported that there was a substantial doubt raised regarding the sales price charged is fixed or determinable, collectability is reasonably assured, and the risk of loss is transferredCompany's ability to continue as a going concern due to the customer.short-term maturity of its Former Credit Facility. The Company’s salesFormer Credit Facility has been paid in full and terminated using proceeds from the Oakdale Equipment Financing. See Note 8 - Debt, for additional information. Management has concluded that there are generally FCA, payment made atno conditions or events, considered in the origination point at the Company’s facility, and title passes as the product is loaded into rail cars hired by the customer. Certain spot-rate customers have shipping terms of FCA, payment made at the destination; the Company recognizes this revenue when the sand is received at the destination.7170substantial doubt about the Company’s ability to continue as a going concern within one year after the date of these financial statements.Revenue RecognitionOn January 1, 2018, the Company adopted ASC 606, “Revenue from Contracts with Customers” and all the related amendments thereto, using the modified retrospective method. There was no adjustment made to the opening balance of retained earnings as a result of applying ASC 606. Results for reporting periods beginning January 1, 2018 are presented under ASC 606, while the comparative information is not restated and will continue to be reported under the accounting standards in effect for those periods.Revenue RecognitionRevenues are recognized when control of the promised goods or services is transferred to our customers, the amount of which reflects the consideration the Company expects to be entitled to in exchange for those goods or services.Sand Sales RevenueThe Company derives its sand sales revenue by mining and processing sand that its customers purchase.sand. Its revenues are primarily a function of the price per ton realized and the volumes sold. In some instances, its revenues also include transportation costs it charges its customers, a monthly charge to reserveFor sand capacitydelivered FCA at the origination point at the Company’s facility, title passes as the product is loaded into railcars hired by the customer or provided by the Company and shortfall payments due from customers for minimum volume commitments. The Company’s transportation revenue fluctuates based on a number of factors, including the volume of product it transports and the distance between its plant and customers. The Company’s reservation and shortfall revenues are based on negotiated contract terms and areis recognized when rights of use are expired.The Company sells a limited amount of its products under short-term price agreements ortitle transfers at prevailing market rates. The majority of the Company’s revenues are realized through take-or-pay supplyfacility. For sand delivered in-basin, the Company recognizes the revenue when title passes at the destination. The amount invoiced reflects product, transportation and any other additional handling services, such as storage or transloading the product from railcar to truck.Prices under the Company’s long-term agreements with four customers. The expiration dates of these contracts range from 2019 through 2020.These agreements define, among other commitments, the volume of product that its customers must purchase, the volume of product that the Company must provide, and the price that the Company will charge and that its customers will pay for each ton of contracted product. Prices under these agreements are generally indexed to the Average Cushing Oklahoma WTI Spot Prices and contain provisions allowing for upward adjustmentadjustments including: (i) annual percentage price increases; increases; and/or (ii) market factor increases,adjustments, including a natural gas surchargesurcharge/reduction and a propane surchargesurcharge/reduction which are applied if the Average Natural Gas Price or the Average Quarterly Mont Belvieu TX Propane Spot Price, respectively, as listed by the U.S. Energy Information Administration, are above or below the applicable benchmark set forth in the contract for the preceding calendar quarter. AsThe Company requires certain customers to pay a result,fixed-price monthly reservation charge based on a minimum contractual volume over the Company’s realized pricesremaining life of their contract, which may not grow at rates consistent with broader industry pricing. For example, during periods of rapid price growth, its realized prices may grow more slowly than those of competitors, and during periods of price decline, its realized prices may outperform industry averages. With respectbe applied as a per ton credit to the take-or-pay arrangements, ifsales price up to a certain contractually specified monthly volume or credited against any applicable shortfall payments. The Company recognizes revenue when the customer is not allowed to make up deficiencies, the Company recognizes revenues of the minimum contracted quantity and minimum contract price, assuming payment has been received or is reasonably assured. If deficiencies can be made up, amounts billed and collected in excess of actual sales are recognized as deferred revenues until production is actually taken by the customer or the right to make up deficiencies expires. These agreements generally provide that, if the Company is unable to deliver the contracted minimum volumes, the customerno longer has the right to purchase replacement product from alternative sources, provided thatuse the inabilityreservation charge towards sand sales or shortfall payments.Shortfall RevenueThe Company’s shortfall revenues are related to supply is notminimum commitments under take-or-pay contracts and based on negotiated contract terms and are recognized when rights of use are expired. The Company recognizes revenue to the result of an excusable delay, as defined in these agreements. In the event that the priceextent of the replacement product exceedsunfulfilled minimum contracted quantity at the contractshortfall price per ton as stated in the contract.Logistics RevenueLogistics revenue includes railcar usage revenue, transportation revenue and SmartSystems revenue.Railcar usage revenue consists of revenue derived from the inability to supplyusage of the contracted minimum volume is not the result of an excusable delay, the Company is responsible for the difference.The Company also recognizes revenue on the rental of its leased rail car fleet toCompany’s railcars by customers either under long-term contracts or on an as-used basis. Based on the customer contract, the Company either recognizes revenue on the usage of railcars based on when the terms of the agreement state that the railcar is available to the customer for use, or based on a specified price per ton shipped.Transportation revenue consists primarily of railway transportation and transload services to deliver products to customers. The Company’s transportation revenue fluctuates based on many factors, including the volume of product it transports and the distance between its plant and customers.SmartSystems revenues consists primarily from the rental of our patented SmartSystems equipment to customers, which is typically earned under fixed monthly fees and services related to delivery, proppant management and maintenance on the equipment. Revenues are recognized as the performance obligations are satisfied under the terms of the customer contract.71SMART SAND, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(IN THOUSANDS, EXCEPT PER SHARE DATA)Contract BalancesThe timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled receivables and deferred revenue on the consolidated balance sheet. For the years ended December 31, 2016, 2015Company’s sand sales, amounts are billed as sand is loaded on the railcars to fill customer orders for FCA origination point sales or when sand is received at the destination for DAP or DAT destination point sales and 2014,recorded as accounts receivable. For the Company recognized $5,732, $3,543Company’s freight revenue, amounts billed depend on the shipping terms and $1,563 of rail car revenue, respectively.At December 31, 2016, 2015 and 2014, the Company recognized $20,902, $10,095 and $0 of revenue relating to minimum required payments under take-or-pay contracts, respectively.At December 31, 2016, 2015 and 2014, the Company recognized $15,041, $1,000 and $0 in reservation revenue, respectively.At December 31, 2016, 2015 and 2014, the Company determined that no amounts related to minimum commitments under customer contracts were due or payable to the Company.Amounts invoiced or received from customers in advance of sand deliveries are recorded as receivables accordingly. Generally, billing occurs subsequent to revenue recognition, though certain billing occurs in advance, resulting in unbilled receivables and deferred revenue.Deferred RevenuesThe Company receives advance payments from certain customers in order to secure and procure a reliable provision and delivery of product. The Company classifies such advances as current or noncurrent liabilities depending upon the anticipated timing of delivery of the supplied product. Deferred revenue is recognized as revenue when performance obligations are met in accordance with the contract.Performance ObligationsA performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in accordance with ASC 606. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, each performance obligation is satisfied. The Company’s contracts may include a single performance obligation in a single contract whereby the allocation of transaction price is not necessary. The Company's contracts may also contain multiple elements in a single contract or multiple contracts. For contracts with multiple performance obligations, the transaction price is allocated to each performance obligation identified in the contract based on relative standalone selling prices, or estimates of such prices, and recognize the related revenue as control of each individual product or service is transferred to the customer, in satisfaction of the corresponding performance obligations. The Company expects to recognize approximately 67% of its remaining performance obligations under existing contracts as revenue in 2020 and expects to recognize the remaining 33% as revenue by 2023.Significant JudgmentsAccounting for long-term contracts involves the use of various techniques to estimate total contract revenue, costs and satisfaction of performance obligations. The Company satisfies its performance obligation and subsequently recognizes revenue, at a point in time, upon shipment of the products as the customer obtains control over the goods once the sand is loaded into the railcars or sand is delivered to the customer’s destination. In the case of sand being delivered to customers, the transaction price is variable in nature and is directly tied to the Average Cushing Oklahoma WTI Spot Prices per barrel. There were no changes to the significant judgments used by the Company to determine the timing of satisfaction of the performance obligation under ASC 606.Cash, Cash Equivalents and Restricted CashThe Company considers all short-term, highly liquid investments with an original maturity of three months or less to be cash equivalents. The Company had no restricted cash as of December 31, 2019 or 2018. Cash is maintained at financial institutions and, at times, balances may exceed federally insured limits.Accounts and Unbilled ReceivablesAccounts receivable represents customer transactions that have been invoiced as of the balance sheet date; unbilled receivables represent customer transactions that have not yet been invoiced as of the balance sheet date. Accounts receivable are due within 30 days, or in accordance with terms agreed upon with customers, and are stated at amounts due from customers net of any allowance for doubtful accounts. The Company considers accounts outstanding longer than the payment terms past due. The Company determines the allowance by considering a number of factors, including the length of time trade accounts receivable are past due, previous loss history, thea customer’s current ability to pay its obligation, and the condition of the general economy and the industry as a whole. Accounts receivablesreceivable are written off when they are deemed uncollectible, and payments subsequently received on such receivables are credited to bad debt expense. As of December 31, 20162019 and 2015,2018, the Company determined norecorded an allowance for doubtful accounts was necessary.of $0 and $42, respectively. As of December 31, 20162019 and 2015, $0 and $3,8752018, the amount of unbilled revenue represent transactionsreceivables included in deferred revenue was $2,282 and $578, respectively.72SMART SAND, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(IN THOUSANDS, EXCEPT PER SHARE DATA)The Company receives advance payments from certain customers in order to securerespectively, $37,422 and procure a reliable provision$3,237 of accounts and delivery of product. The Company classifies such advances as current or noncurrent liabilities depending upon the anticipated timing of delivery of the supplied product. Revenue is recognized upon the delivery of the product.The Company may receive an advance paymentunbilled receivables were from a customer based on the terms of the customer’s long-term contract,with which we have pending litigation. See Note 17 - Commitments and Contingencies for a certain volume of product to be delivered. Revenue is recognized as product is delivered and the deferred revenue is reduced. The deferred revenue balance at December 31, 2016 and 2015 was $1,615 and $7,133, respectively and classified as a current liability in the accompanying consolidated balance sheets.ShippingShipping revenue is classified as revenue. Revenue generated from shipping was $480, $2,294 and $3,972, respectively, for the years ended December 31, 2016, 2015 and 2014. Shippingadditional information.TransportationTransportation costs are classified as cost of goods sold. ShippingTransportation costs consist of railway transportation and transload costs to deliver products to customers. Cost of sales generated from shipping was $1,172, $2,257$76,643, $70,532 and $4,246$50,313 for the years ended December 31, 2016, 20152019, 2018 and 2014,2017, respectively.InventoriesThe Company’s sand inventory consists of raw material (sand that has been excavated but not processed), work-in-progress (sand that has undergone some but not all processing) and finished goods (sand that has been completely processed and is ready for sale). The spare parts inventory consists of critical spare parts.Sand inventory is stated at the lower of cost or net realizable value using the average cost method. For the year ended December 31, 2016 and 2015, respectively, the Company had no write-down of inventory as a result of any lower of cost or market assessment. Costs applied to thesand inventory include direct excavation costs, processing costs, overhead allocation, depreciation and depletion.depletion, transportation and additional service costs, as applicable. Stockpile tonnages are calculated by measuring the number of tons added and removed from the stockpile. Costs are calculated on a per ton basis and are applied to the stockpiles based on the number of tons in the stockpile. The Company performs quarterlymonthly physical inventory measurements to verify the quantity of sand inventory on hand. Due to variation in sand density and moisture content and production processes utilized to manufacture the Company’s products, physical inventories will not necessarily detect all variances. To mitigate this risk, the Company recognizes a yield adjustment on its inventories.The spare parts inventory consists of critical spare parts. Spare parts inventory is accounted for on a first-in, first-out basis at the lower of cost or net realizable value.Deferred Financing ChargesDirect costs incurred in connection with the revolving credit facility have beenCompany's debt are capitalized and are being amortized using the straight-line method, which approximates the effective interest method, over the lifeterm of the debt. Fees attributable to the lender and third parties of $1,178 are presented as components of deferred financing charges since there is no outstanding balance on the revolving credit facility as of December 31, 2016. Deferred financing fees attributable to the lender of $486 are presented as a reduction to the revolving credit facility, net in the non-current liabilities section of the balance sheet as of December 31, 2015.$159, $251$861, $546, and $86, and accretion expense of debt discount of $263, $519 and $183$455 are included in interest expense as of December 31, 2016, 20152019, 2018 and 2014,2017, respectively.As part Costs related to the Oakdale Equipment Financing are presented net of the December 2015 amendmentrelated debt and costs related to the revolving credit facility, the Company was required to calculate quarterly permanent reductions to the maximum commitment available under the revolving credit facility. During the year ended December 31, 2016, the Company accelerated amortization of $18 representing a portion of the remaining unamortized balance of debt issuance costs. Refer to Note 9 –ABL Credit Facilities for additional disclosureFacility are presented in other assets on the Company’s revolving credit agreement.Financial InstrumentsThe carrying value of the Company’s financial instruments, consisting of cash, accounts receivable, accounts payable and accrued expenses, approximates their fair value due to the short maturity of such instruments. Financial instruments also consist of debt for which fair value approximates carrying values as the debt bears interest at afixed or variable raterates which isare reflective of current rates otherwise available to the Company. Unless otherwise noted, it is management’s opinion that the Company is not exposed to significant interest, currency or credit risks arising from these financial instruments.73Property, Plant and EquipmentProperty, plant and equipment are recorded at cost. Costs related to researching, surveying, drilling, and related activities are recorded at cost and capitalized once a determination has been made that the Company’s property has proven and probable reserves. Capitalized mining costs are depleted using the units-of-production method. Construction in progress is primarily comprised of machinery and equipment which has not been placed in service and is not depreciated until the related assets or improvements are ready to be placed in service. Depreciation is calculated using the straight-line method over the estimated useful lives of the property, plant and equipment, which are:10 10Rail spur30 305-15 Furniture and fixtures 3 3Expenditures for maintenance and repairs are charged against income as incurred; betterments that increase the value or materially extend the life of the related assets are capitalized. Upon sale or disposition of property and equipment, the cost and related accumulated depreciation and amortization are removed from the accounts and any resulting gain or loss is recognized in the consolidated income statements.AcquisitionsThe Company determines whether a transaction or other event is a business combination, which requires that the assets acquired and liabilities assumed constitute a business. Each business combination is then accounted for by applying the acquisition method. If the assets acquired are not a business, the Company accounts for the transaction or other event as an asset acquisition. Under both methods, the Company recognizes the identifiable assets acquired, the liabilities assumed, contingent considerations and any non-controlling interest in the acquired entity. In addition, for transactions that are business combinations, the Company evaluates the existence of goodwill or a gain from a bargain purchase. The Company capitalizes acquisition-related costs and fees associated with asset acquisitions and expenses acquisition-related costs and fees associated with business combinations in the period in which they are incurred.Long-Lived Assets, Including Definite-Lived Intangible AssetsLong-lived assets, other than goodwill and other indefinite-lived intangibles, are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable through the estimated undiscounted future cash flows derived from such assets. Definite-lived intangible assets primarily consist of developed technology and customer relationships. For long-lived assets used in operations, impairment losses are only recorded if the asset’s carrying amount is not recoverable through its undiscounted, probability-weighted future cash flows. The Company measures the impairment loss based on the difference between the carrying amount and the estimated fair value. When an impairment exists, the related assets are written down to fair value.Acquired finite-lived intangible assets are amortized on a straight-line basis over the following periods:Estimated Useful Life (Years) Developed technology 13 Customer relationships 1 In 2019, the Company recorded impairment losses of $15,542 of which $7,628 related to finite-lived developed technology intangible assets in intangible assets, net on the balance sheet and $7,914 related to its Hixton, Wisconsin property in property. plant and equipment, net on the balance sheet. The impairment of the finite-lived intangible assets is from developed technology allocated to the Quickload acquired in connection with the acquisition of Quickthree in 2018. The74SMART SAND, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(IN THOUSANDS, EXCEPT PER SHARE DATA)Company is developing and testing a new transload technology and no longer plans to actively market the Quickload and as such, all developed technology intangible assets related to the Quickload were fully impaired during the third quarter of 2019. In the fourth quarter of 2019, the Company determined that the carrying amount of the Hixton, Wisconsin property may not be fully recoverable as the Company has no immediate plans to further develop the site. The Company determined the fair value of the Hixton, Wisconsin property based on market prices for similar properties sold in the area and recorded an impairment loss for the amount which the carrying value exceeded the fair value.Goodwill and Other Indefinite-Lived Intangible Assets The Company conducts its evaluation of goodwill and other indefinite-lived intangible assets at the reporting unit level on an annual basis as of December 31 and more frequently if events or circumstances indicate that the carrying value of a reporting unit exceeds its fair value. Prior to performing an impairment test, the Company assesses qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the qualitative assessment determines that an impairment is more likely than not, the Company performs a quantitative comparison of the fair value with the carrying amount, including goodwill. If this comparison reflects impairment, then the loss would be measured as the excess of recorded goodwill, or other intangible assets with indefinite lives, over its fair value. See Note 6 - Intangible Assets, net for additional information.In 2018 the Company fully impaired its goodwill and other indefinite-lived intangible assets. During the second half of 2018, the Company saw a decline in demand for frac sand, consistent with the industry as a whole, which resulted in a decline in the Company’s stock price near the measurement date. The decline in the Company’s stock price near the measurement date and the relationship between the resulting market capitalization and the equity recorded on the Company’s balance sheet resulted in a full impairment of goodwill and other indefinite-lived intangible assets in 2018.LeasesLesseeThe Company uses leases primarily to procure certain office space, railcars and heavy equipment as part of its operations. The majority of its lease payments are fixed and determinable with certain of its lease payments containing immaterial variable payments based on the number of hours the equipment is used. Certain of its leases have options that allow for renewal at market rates, purchase at fair market value or termination of the lease. The Company must determine that it is reasonably certain that a lease option will be exercised for such an option to be included in the right-of-use asset or lease liability. The Company is not reasonably certain that any of its lease options will be exercised and, as such, has not included those options in its right-of-use assets or lease liabilities. Certain of its equipment leases contain residual value guarantees which guarantee various parts of heavy equipment will have a remaining life when the equipment is returned to the lessor. It is possible that the Company could owe additional amounts to the lessor upon return of equipment. There are no restrictions or covenants imposed by any of the Company’s leases.The Company evaluates contracts during the negotiation process and when they are executed to determine the existence of leases. A contract contains a lease when it conveys the right to use property, plant or equipment for a stated period of time in exchange for consideration. Leases with an initial term of twelve months or less are not recorded on the balance sheet. The Company recognizes lease expense on a straight-line basis over the term of the lease. The Company evaluates the classification of its leases at the commencement date and includes both lease and non-lease components in its calculation of consideration in the contract for all classes of operating leases.The Company applies a single discount rate to all operating leases, which is its incremental borrowing rate. The Company determined its incremental borrowing rate based on an average of collateralized borrowing rates offered by various lenders. The Company considered the nature of the assets and the life of the leases and determined that there is no significant difference in the incremental borrowing rate among its classes of assets. See Note 9 — Leases for additional disclosures regarding the Company’s leasing activity.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. See Note 17 — Commitments and Contingencies for additional disclosures regarding these obligations.75SMART SAND, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(IN THOUSANDS, EXCEPT PER SHARE DATA)LessorThe Company manufactures SmartSystems and offers the equipment for lease. The Company negotiates the terms of its leases on a case-by-case basis. There are no significant options that are reasonably certain to be exercised, residual value guarantees, restrictions or covenants in its lease contracts and have, therefore, not been included in its accounting for the leases. All of our SmartSystems are leased under operating leases.Fair Value MeasurementsThe Company’s financialCompany has categorized its assets and liabilities that are to be measured using inputs from the three levels of theat fair value on a recurring and non-recurring basis into a three-level fair value hierarchy, of which the first two are considered observable and the last unobservable, which are as follows:Contingent Consideration Stock-Based CompensationThe Company’s contingent consideration is measured at fair value on a recurring basis and is comprised of payments for production of silos and related equipment during the three-year period after the Quickthree acquisition (Note 3). Contingent liabilities are valued using significant inputs that are not observable in the market, which are defined as Level 3 inputs according to fair value measurement accounting. The Company accounts for stock-based compensationused a probability-weighted average between 11 and 20 manufactured fleets over the remaining earnout period as the basis of its fair value determination. The actual contingent consideration could vary from the determined amount based on the actual number of silos and related equipment produced and the timing thereof.The fair value of the Company’s financial instruments carried at fair value were as follows:December 31, 2019 Level 1 Level 2 Level 3 Contingent consideration $ 1,900 $ — $ — $ 1,900 Total liabilities $ 1,900 $ — $ — $ 1,900 The following table provides a summary of changes in accordance with the provisions of Accounting Standards Codification (“ASC”) - 718, Compensation—Stock Compensation (“ASC 718”), which requires the recognition of expense related to the fair value of stock-based compensation awardsthe Company’s Level 3 financial instruments for the year ended December 31, 2019:Balance as of December 31, 2018 $ 7,167 Payment of contingent consideration (1,995) Fair value adjustment (3,272) Balance as of December 31, 2019 $ 1,900 Asset Retirement ObligationThe Company estimates the future cost of dismantling, restoring and reclaiming operating excavation sites and related facilities in accordance with federal, state and local regulatory requirements and recognizes reclamation obligations when disturbance occurs and records them as liabilities at estimated fair value. In addition, a corresponding increase in the Statementscarrying amount of Operations.Forthe related asset is recorded and depreciated over such asset’s useful life or the estimated number of years of extraction. The reclamation liability is accreted to expense over the estimated productive life of the related asset and is subject to adjustments to reflect changes in value resulting from the passage of time and revisions to the estimates of either the timing76SMART SAND, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(IN THOUSANDS, EXCEPT PER SHARE DATA)or amount of the reclamation costs. Changes in estimates at inactive mines or mining areas are reflected in earnings in the period an estimate is revised. If the asset retirement obligation is settled for more or less than the carrying amount of the liability, a loss or gain will be recognized, respectively.At December 31, 2019, the Company updated its reclamation plan for certain of the Company’s asset retirement obligations which resulted in a reduction to the asset retirement obligation by $9,828. There was no effect on the income statement in the current period for this change in estimate but there will be a reduction to the amount of depreciation and accretion expense recorded in future periods as a result of this change in estimate.Stock-Based CompensationThe Company issues restricted stock issued to certain employees and members of the board of directors of the Company (the “Board”) for their services on the Board, theBoard. The Company estimates the grant date fair value of each share of restricted stock at issuance. For awards subject to service-based vesting conditions, the Company recognizes, in the consolidated income statements, stock-based compensation expense net of estimated forfeitures, equal to the grant date fair value of stock optionsthe award on a straight-line basis over the requisite service period, which is generally the vesting term. For awards subject to both performance and service-based vesting conditions, the Company recognizes stock-based compensation expense using theon a straight-line recognition methodbasis when it is probable that the performance condition will be achieved. Forfeitures are required to be estimated ataccounted for when they occur. The Company uses the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.Share-based payments issued to non-employees are recorded at their fair values, and are periodically revalued as the equity instruments vest and are recognized as expense over the related service period in accordance with the provisions of ASC 718 and ASC Topic 505, Equity. Prior to the Company’s initial public offering, the grant date fair value was calculated based on a weighted analysis of (i) publicly-traded companies in similar line of business to the Company (market comparable method)—Level 2 inputs, and (ii) discounted cash flows of the Company—Level 3 inputs. Once the Company’s shares became publicly traded on November 4, 2016, the Company began to use the actual market price of its shares as the grant date fair value for restricted stock awards.74SMART SAND, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(IN THOUSANDS, EXCEPT PER SHARE DATA)Income TaxesOn December 22, 2017, the U.S. Tax Cuts and Jobs Act (the “Tax Reform Act”) was signed into law. The SEC subsequently issued Staff Accounting Bulletin 118, which allows issuers a one year measurement period to record adjustments related to the Tax Reform Act. As a result of the Tax Reform Act, the Company recorded a tax benefit of approximately $8,500 due to a re-measurement of deferred tax assets and liabilities in the fourth quarter of 2017. The Company has finalized the accounting for income taxes for the Tax Reform Act with no material adjustments to the provisional amounts recorded.The Company applies the provisions of ASC Topic 740, Income Taxes“Income Taxes” (“ASC 740”), which principally utilizes a balance sheet approach to provide for income taxes. Under this method, deferred tax assets and liabilities are recognized for the expected future tax consequences of net operating loss carryforwards and temporary differences between the carrying amounts and the tax bases of assets and liabilities.ASC 740 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. The impact of an uncertain income tax position on the income tax returns must be recognized at the largest amount that is more-likely-than-not to be required to be recognized upon audit by the relevant taxing authority. This standard also provides guidance on de-recognition, measurement, classification, interest and penalties, accounting for interim periods, disclosure and transition issues with respect to tax positions. The Company includes interest and penalties as a component of income tax expense in the consolidated statement of operations.income statements. For the periods presented, no0 interest and penalties were recorded.Environmental MattersThe Company is subject to various federal, state and local laws and regulations relating to the protection of the environment. Management has established procedures for the ongoing evaluation of the Company’s operations, to identify potential environmental exposures and to comply with regulatory policies and procedures. Environmental expenditures that relate to current operations are expensed or capitalized as appropriate. Expenditures that relate to an existing condition caused by past operations and do not contribute to current or future revenue generation are expensed as incurred. Liabilities are recorded when environmental costs are probable, and the costs can be reasonably estimated. The Company maintains insurance which may cover, in whole or in part, certain environmental expenditures. As of December 31, 20162019 and 2015,2018, there were no0 material probable environmental matters.Comprehensive IncomeComprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. Comprehensive income was equal to net income for all periods presented.Segment InformationOperatingReportable operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluationand utilized by the chief operating decision maker, or decision-making group, in making decisions on how to allocate resources and assess performance. The Company’s chief operating decision maker is the chief executive officer.Chief Executive Officer. The Company and the chief executive officerChief Executive Officer view the Company’s operations and manage its business as one1 reportable operating segment. All long-lived assets of the Company reside in the United States.77SMART SAND, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(IN THOUSANDS, EXCEPT PER SHARE DATA)Basic and Diluted Net Income Per Share of Common StockBasic net income per share of common stock is computed by dividing net income attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the period, excluding the dilutive effects of Series A Preferred Stock, warrants to purchase common stock and restricted stock. Diluted net income per share of common stock is computed by dividing the net income attributable to common stockholders by the sum of the weighted-average number of shares of common stock outstanding during the period plus the potential dilutive effects of Series A Preferred Stock and warrants to purchase common stock, and restricted stock outstanding during the period calculated in accordance with the treasury stock method, although these shares and restricted stock and warrants are excluded if their effect is anti-dilutive. The number of shares underlying equity-based awards that were excluded from the calculation of diluted earnings per share for the years ended December 31, 2019, 2018, 2017 was 764, 854 and 251, respectively as their effect would be anti-dilutive. The following table reconciles the weighted-average common shares outstanding used in the calculation of basic net income per share to the weighted average common shares outstanding used in the calculation of diluted net income per share: Year Ended December 31, 2019 2018 2017 Weighted average common shares outstanding 40,135 40,427 40,208 Assumed conversion of restricted stock 202 22 96 Diluted weighted average common stock outstanding 40,337 40,449 40,304 75SMART SAND, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(IN THOUSANDS, EXCEPT PER SHARE DATA)ReclassificationCertain 2015 financial statement items have been reclassified to conform to the current financial statement presentation. These reclassifications have no effect on previouspreviously reported net income.Recent Accounting PronouncementsAdoptedIn August 2016,2018, the Financial Accounting Standards Board (“FASB”)FASB issued Accounting Standards Update (“ASU”) 2016-15, StatementASU 2018-13, Fair Value Measurement (Topic 820), which modifies disclosure requirements for fair value measurements by removing the disclosure of Cash Flows (Topic 230) Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”). ASU 2016-15 eliminates the diversity in practice related to the classification of certain cash receipts and paymentsvaluation process for debt prepayment or extinguishment costs, the maturing of a zero coupon bond, the settlement of contingent liabilities arising from a business combination, proceeds from insurance settlements, distributions from certain equity method investees and beneficial interests obtained in a financial asset securitization. ASU 2016-15 designates the appropriate cash flow classification, including requirements to allocate certain components of these cash receipts and paymentsLevel 3 fair value measurements, among operating, investing and financing activities.other disclosure modifications. The guidance is effective for the Companyfinancial statements periods beginning after December 15, 2017,2019, although early adoption is permitted. The Company is currently evaluating the effects ofearly adopted ASU 2016-152018-13 on its consolidatedDecember 31, 2019 and fair value disclosures in these financial statements.In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients (“ASU 2016-12”).statements have been updated accordingly. The amendmentschanges in ASU 2016-12 provide clarifying guidance in certain narrow areas and add some practical expedients. Specifically, the amendments in this update (1) clarify the objective of the collectability criterion in step 1, and provides additional clarification for when to recognize revenue for a contract that fails step 1, (2) permit an entity, as an accounting policy election, to exclude amounts collected from customers for all sales (and other similar) taxes from the transaction price (3) specify that the measurement date for noncash consideration is contract inception, and clarifies that the variable consideration guidance applies only to variability resulting from reasons other than the form of the consideration, (4) provide a practical expedient that permits an entity to reflect the aggregate effect of all modifications that occur before the beginning of the earliest period presented when identifying the satisfied and unsatisfied performance obligations, determining the transaction price, and allocating the transaction price to the satisfied and unsatisfied performance obligations, (5) clarifies that a completed contract for purposes of transition is a contract for which all (or substantially all) of the revenue was recognized under legacy GAAP before the date of initial application. Further, accounting for elements of a contract that do not affect revenue under legacy GAAPdisclosures are irrelevant to the assessment of whether a contract is complete. In addition, the amendments permit an entity to apply the modified retrospective transition method either to all contracts or only to contracts that are not completed contracts, and (6) clarifies that an entity that retrospectively applies the guidance in Topic 606 to each prior reporting period is not required to disclose the effect of the accounting change for the period of adoption. However, an entity is still required to disclose the effect of the changes on any prior periods retrospectively adjusted. The effective date and transition requirements for the amendments are the same as the effective date and transition requirements in Topic 606. The guidance is effective for the Company beginning January 1, 2018, although early adoption is permitted beginning January 1, 2017. Although the Company is still in the process of assessing the impact of the adoption of ASU 2014-09, it does not currently anticipate a material impact on its financial statements.In May 2016, the FASB issued ASU 2016-11, Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815): Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting. ASU 2016-11 rescinds several SEC Staff Announcements that are codified in Topic 605, including, among other items, guidance relating to accounting for shipping and handling fees and freight services. The effective date and transition requirements for the amendments are the same as the effective date and transition requirements in Topic 606. The guidance is effective for the Company beginning January 1, 2018, although early adoption is permitted beginning January 1, 2017. The Company is currently evaluating the effects of ASU 2016-11 on its consolidated financial statements.In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing (“ASU 2016-10”). The amendments in ASU 2016-10 clarify the following two aspects of Topic 606: (a) identifying performance obligations; and (b) the licensing implementation guidance. The amendments do not change the core principle of the guidance in Topic 606. The effective date and transition requirements for the amendments are the same as the effective date and transition requirements in Topic 606. The guidance is effective for the Company beginning January 1, 2018, although early adoption is permitted beginning January 1, 2017. The Company is currently evaluating the effects of ASU 2016-10 on its consolidated financial statements.76SMART SAND, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(IN THOUSANDS, EXCEPT PER SHARE DATA)In March 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2016-09, “Stock Compensation (ASC 718)—Improvements to Employee Share-Based Payment Accounting”, which is intended to simplify the tax accounting impacts of stock compensation. Additionally, the new standard provides accounting policy elections regarding vesting and forfeiture accounting. The new standard is effective for annual periods beginning after December 15, 2016 and interim periods within those annual periods. The Company has elected to early adopt this standard. It elected to account for forfeitures when they occur.In February 2016, the FASB issued ASU No. 2016-02, “Leases” (ASCLeases (Topic 842), and related amendments, which replacesreplaced the existing guidance in ASC 840, “Leases.” ASC 842Leases. ASU 2016-02 requires lessees to recognize most leases on their balance sheets as lease liabilities with corresponding right-of-use assets. The new lease standard does not substantially change lessor accounting. The new standard is effective for interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted.2018. The Company is currently inadopted ASU 2016-02 and its related updates on January 1, 2019 using the processoptional transition practical expedients, which allow the Company to use the existing lease population, classification and determination of evaluatinginitial direct costs when calculating the impactlease liability and right-of-use asset balances. The Company also used the optional transition method, which allows the Company to initially apply the new standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings. There was no adjustment made to the adoptionopening balance of retained earnings. The Company has implemented new accounting policies and software to facilitate the recording and reporting of lease transactions and balances. The Company recorded initial operating right-of-use assets of $35,939 and related lease liabilities of $36,484 on its consolidated balance sheet on January 1, 2019. New disclosures are included in Note 9 to these financial statements.Not yet adoptedIn November 2015,June 2016, the FASB issued ASU No. 2015-17, “Income Taxes—Balance Sheet Classification of Deferred Taxes”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 presentationloss has been incurred. ASU 2016-13 requires companies to use a methodology that reflects current expected credit losses (“CECL”) and requires consideration of deferred tax liabilitiesa broad range of reasonable and assetssupportable information to record and report credit loss estimates, even when the CECL is remote. Companies will be classified as non-currentrequired 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 balance sheets.the income statement, similar to bad debt expense under78SMART SAND, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(IN THOUSANDS, EXCEPT PER SHARE DATA)existing GAAP. There is much latitude given to entities in determining the methodology for calculating the CECL. The amendments in this ASU areguidance is effective for the Company for financial statements issued for annualstatement periods beginning after December 15, 2016, and interim periods within those annual periods. Early2020, although early adoption is permitted for all entities as of the beginning of an interim or annual reporting period. We have elected to early adopt this guidance prospectively as of December 31, 2015. The adoption only impacted deferred tax presentation on the consolidated balance sheet and related disclosure. No prior periods were retrospectively adjusted.In July 2015, the FASB issued ASU No. 2015-11, “Simplifying the Measurement of Inventory”, which requires an entity to measure most inventory at the lower of cost and net realizable value, thereby simplifying the current guidance under which an entity must measure inventory at the lower of cost or market. The new standard is effective for public entities for financial statements issued for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The Company has elected to prospectively early adopt the standard effective December 31, 2016 and has measured its inventory at the lower of cost or net realizable value. The impacts on the early adoption of ASU 2015-11 are not significant.In April 2015, the FASB issued ASU No. 2015-15, “Interest-Imputation of Interest”, which simplifies presentation of debt issuance costs. The new standard requires that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of the debt liability, consistent with debt discounts or premiums. The new standard is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within fiscal years beginning after December 15, 2016. Since there is no outstanding balance under the revolving credit facility as of December 31, 2016, the Company has classified such debt issuance costs as non-current assets. The Company has presented such debt issuance costs as a reduction from its revolving credit facility as of December 31, 2015.In August 2014, the FASB issued ASU No. 2014-15, “Going Concern”, which provides guidance on determining when and how to disclose going-concern uncertainties in the financial statements. The new standard requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued. An entity must provide certain disclosures if “conditions or events raise substantial doubt about the entity’s ability to continue as a going concern.” The ASU applies to all entities and is effective for annual periods ending after December 15, 2016, and interim periods thereafter, with early adoption permitted. Accordingly, the Company incorporated this guidance into its internal control over financial reporting beginning with this Annual Report on Form 10-K for the year ended December 31, 2016.In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers”. The objective of ASU 2014-19 is to establish a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and will supersede most of the existing revenue recognition guidance, including industry-specific guidance. The core principle of ASU 2014-09 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In applying the new guidance, an entity will (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the contract’s performance obligations; and (5) recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 applies to all contracts with customers except those that are within the scope of other topics in the FASB Accounting Standards Codification. The new guidance is effective for annual reporting periods (including interim periods within those periods) beginning after December 15, 2017 for public companies. Early adoption is only permitted as of annual reporting periods beginning after December 15, 2016. Entities have the option of using either a full retrospective or modified approach to adopt ASU 2014-09. The Company is currently evaluating the new guidance and has not determined the impact this standard may have on its consolidated financial statements nor decided upon the method of adoption. AlthoughWhile the Company is still in the process of assessingevaluating the impact of the adoptioneffects of ASU 2014-09,2016-13 and its related updates on its consolidated financial statements, it does not currently anticipate a materialbelieves the primary effect will be an allowance recorded against its accounts and unbilled receivables on its balance sheet and related expense on its income statement upon adoption. The Company cannot determine the financial impact on its consolidated financial statements.77NOTE 3 — AcquisitionsAsset Acquisition - Van Hook Crude Terminal, LLCThe acquisition of the assets of Van Hook Crude Terminal, LLC occurred on March 15, 2018. The Company acquired all of the rights, title, and interest in certain properties and assigned contracts (collectively, the “Assets”) for a total consideration of $15,549 in cash.The acquisition cost has been allocated over the assets as set forth below.Machinery, equipment and tooling $ 1,478 Plant and building 1,407 Railroad and sidings 9,926 Land improvements 2,738 Total assets acquired $ 15,549 Business Combination - Quickthree Solutions Inc.On June 1, 2018, the Company acquired substantially all of the assets of Quickthree Solutions, Inc., a manufacturer of portable vertical frac sand storage solution systems.The aggregate purchase price consisted of approximately $30,000 cash paid at closing, subject to adjustment based upon Quickthree’s closing date working capital, and up to $12,750 in potential earn-out payments over a three-year period after closing. Payment of the earn-out is based upon the production of silos and related equipment during the earn-out period. The closing portion of the purchase price was paid using cash on hand and advances under the Company’s Credit Facility. The Company expects the earn-out portion of the purchase price to be paid using cash on hand, equipment financing options available to the Company and advances under the Company’s Credit Facility. Goodwill in this transaction is attributable to planned expansion into the wellsite storage solutions market, and is fully deductible for tax purposes.The table below presents the calculation of the total purchase consideration:Base price - cash $ 30,000 Contingent consideration – earnout 9,200 Working capital adjustment (122) Total purchase consideration $ 39,078 79SMART SAND, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSThe Company’s allocation of the purchase price in connection with the acquisition was calculated as follows.Fair Value Useful Life Assets Acquired Accounts receivable $ 112 Inventory 1,700 Prepaid expenses and other current assets 126 Total current assets acquired $ 1,938 Property, plant and equipment 740 Customer relationships 270 1 year Developed technology 18,800 13 years Trade name 900 Indefinite Goodwill 16,935 Other assets 225 Total non-current assets acquired 37,870 Total assets acquired $ 39,808 Liabilities Assumed Accounts payable $ 331 Accrued and other expenses 399 Total liabilities assumed 730 Estimated fair value of net assets acquired $ 39,078 The purchase price allocation was considered complete as of December 31, 2018. Total acquisition costs for the Quickthree acquisition incurred during the years ended December 31, 2019 and Restricted CashCashCash is maintained at financial institutions2018 were $0 and at times, balances may exceed federally insured limits$1,159, respectively, which are included in selling, general and administrative expense on the Company’s consolidated income statements. The goodwill and trade name were fully impaired as of $250 thousand at each financial institution. December 31, 2018 and $8,500 of gross intangible assets related to developed technology were impaired in the year ended December 31, 2019. See Note 6 — Intangible Assets, net for additional information.The Company has not experienced any losses relateddetermined the fair value of the contingent consideration to these balances. Cashbe $9,200 at December 31, 2016the June 1, 2018 acquisition date and 2015, was $46,563recorded it as a liability in the Company’s consolidated balance sheets. Each reporting period, the Company reassesses its inputs including market comparable information and $3,896, respectively.Restricted CashRestricted cashmanagement assessments regarding potential future scenarios, then discounts the liabilities to present value and records adjustments to the fair value of the contingent consideration. The Company will continue to reassess earn-out calculations related to the Company represents cash held as collateral relating to an outstanding short-term bond assuring performance under a fuel agreement with a pipeline common carrier. As of December 31, 2016 and 2015, we had $971 and $0 respectively, of restricted cash.5.contingent consideration through June 30, 2021.NOTE 4 — InventoriesInventories consisted of the following:December 31, 2019 2018 Raw material $ 527 $ 1,201 Work in progress 14,173 10,070 Finished goods 4,097 4,648 Spare parts 2,618 1,356 Total sand inventory Total sand inventory $ 21,415 $ 17,275 6. Prepaid Expenses and Other Current AssetsPrepaid expenses and other current assets comprised of the following:8078SmartSystems inventory represents work in progress inventory related to existing arrangements at the time the Company acquired Quickthree and consisted of the following:December 31, 2019 2018 Work in progress $ — $ 1,300 Total SmartSystems inventory $ — $ 1,300 Total inventory $ 21,415 $ 18,575 NOTE 5 — Property, Plant and Equipment, netNet property, plant and equipment consists of: December 31, 2019 2018 Machinery, equipment and tooling $ 19,683 $ 14,858 SmartSystems SmartSystems 15,811 5,286 Vehicles 2,419 1,955 Furniture and fixtures 1,228 1,140 Plant and building 170,283 158,882 Real estate properties 4,946 4,601 Railroad and sidings 27,701 27,347 Land and land improvements Land and land improvements 21,320 27,167 Asset retirement obligation 11,480 16,469 Mineral properties 7,442 10,075 Deferred mining costs 2,004 1,806 Construction in progress 9,208 21,619 293,525 291,205 Less: accumulated depreciation and depletion 63,064 42,809 Total property, plant and equipment, net $ 230,461 $ 248,396 Depreciation expense was $6,441, $5,276$25,689, $17,117 and $3,611$7,267 for the years ended December 31, 2016, 20152019, 2018 and 2014,2017, respectively. Depletion expense was $3, $13$49, $47 and $14$33 for the years ended December 31, 2016, 20152019, 2018 and 2014,2017, respectively.The Company capitalized $132, $1,808 and $453 of0 interest expense associated with the construction of new property, plant and equipment for the years ended December 31, 2016, 20152019, 2018 and 2014, respectively.8. Accrued and Other ExpensesAccrued and other expenses were comprised2017.NOTE 6 — Intangible Assets, netThe following table reflects the changes in the net carrying amounts of the following:From time to time,Company’s intangible assets for the Company enters into fixed-price purchase obligations to purchase propane or natural gas (which are used in its production operations). The contracts specify the quantity of propane or natural gas to be delivered over a specified period of time and at a specified fixed price. The Company has historically concluded that these obligations are precluded from recognition in its consolidated financial statements in accordance with the normal sales and normal purchases exclusion as provided in ASC 815 “Derivatives and Hedging”. However, as the Company did not take physical delivery under a fixed-price propane agreement entered into during 2015, the Company accounted for this agreement under derivative accounting. As ofyear ended December 31, 2015 the liability for this agreement was marked to market and was settled in February 2016 for $460. The settlement is presented as part of the change in accrued and other expenses in operating activities on the consolidated statement of cash flows.79Balance at
December 31, 2018Assets Acquired Pursuant to Business Combination Impairment Charges Amortization Expense Balance at
December 31, 2019Developed technology $ 17,956 $ — $ 8,500 $ 410 $ 9,046 Customer relationships 112 — — 112 — $ 18,068 $ — $ 8,500 $ 522 $ 9,046 81The following table reflects the changes in the net carrying amounts of the Company’s finite-lived intangible assets for the year ended December 31, 2018.Balance at
December 31, 2017Assets Acquired Pursuant to Business Combination Impairment Charges Amortization Expense Balance at
December 31, 2018Developed technology $ — $ 18,800 $ — $ 844 $ 17,956 Customer relationships — 270 — 158 112 Trade name — 900 900 — — $ — $ 19,970 $ 900 $ 1,002 $ 18,068 The following table reflects the carrying amounts of the Company's finite-lived intangible assets at December 31, 2019 and 2018.December 31, 2019 December 31, 2018 Gross Carrying Amount Accumulated Amortization Gross Carrying Amount Accumulated Amortization Developed technology $ 10,300 $ (1,254) $ 18,800 $ (844) Customer relationships 270 (270) 270 (158) $ 10,570 $ (1,524) $ 19,070 $ (1,002) The Company uses the straight-line method to determine the amortization expense for its definite-lived intangible assets. The weighted-average remaining useful life for the intangible assets is 11.4 years. Amortization expense related to the purchased intangible assets was $1,398 and $1,002 for the year ended December 31, 2019 and 2018, respectively. There were no intangible assets or related amortization expense as of or for the year ended December 31, 2017. The Company recorded an impairment charge of $7,628 related to specific developed technology allocated to the Quickload during the third quarter of 2019. Amortizable intangible assets are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable through the estimated undiscounted future cash flows derived from such assets. The Company is developing and testing a new transload technology and no longer plans to actively market the Quickload and as such, all developed technology intangible assets related to the Quickload has been impaired.The table below reflects the future estimated amortization expense for amortizable intangible assets as of December 31, 2019.Year ending December 31, 2020 $ 792 2021 792 2022 792 2023 792 2024 792 Thereafter 5,086 Total $ 9,046 The Company conducted a review of its indefinite-lived intangible assets as of December 31, 2018 and determined the carrying value exceeded its fair value, which resulted in a full impairment of indefinite-lived intangible assets in 2018.82SMART SAND, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(IN THOUSANDS, EXCEPT PER SHARE DATA)NOTE 7 — Accrued and Other ExpenseAccrued and other expense consists of the following: December 31, 2019 2018 Employee related expenses $ 2,233 $ 1,894 Accrued construction related expenses 188 948 Accrued equipment 429 — Accrued professional fees 750 465 Accrued royalties 2,419 1,780 Accrued freight and delivery charges 882 2,556 Accrued real estate tax 806 — Accrued utilities 10 327 Sales tax liability 424 65 Deferred rent — 712 Other accrued liabilities 437 (355) Total accrued liabilities $ 8,578 $ 8,392 NOTE 8 — DebtLong-term debt, net, current consists of the following: December 31, 2019 2018 Oakdale Equipment Financing $ 3,431 $ — Finance leases 116 90 Notes payable 2,628 739 Long-term debt, net, current $ 6,175 $ 829 Long-term debt, net consists of the following: December 31, 2019 2018 ABL Credit Facility $ 2,500 $ — Oakdale Equipment Financing, net 18,074 — Former Credit Facility, net — 44,255 Finance leases 474 547 Notes payable 7,192 3,091 Long-term debt, net $ 28,240 $ 47,893 83SMART SAND, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(IN THOUSANDS, EXCEPT PER SHARE DATA)ABL Credit FacilitiesOn March 28, 2014,December 13, 2019, the Company entered into a $72,500 revolving credit and security agreement (“the Credit Agreement”) with PNC Bank National Association as administrative agent and collateral agent. The Credit Agreement provided for a $72,500 variable rate$20,000 five-year senior secured revolvingasset-based credit facility (“former revolving credit facility”) whichwith Jefferies Finance LLC. The available borrowing amount under the ABL Credit Facility as of December 31, 2019 was available$17,500 and is based on the Company's eligible accounts receivable and inventory, as described in the ABL Credit Agreement. Borrowings under the ABL Credit Facility bear interest at a rate per annum equal to repayan applicable margin, plus, at our option, either a $40,000 portion of the outstanding Series A Preferred Stock (Note 13)LIBOR rate or an alternate base rate (“ABR”). The applicable margin is 2.00% for LIBOR loans and the outstanding balance of a previous line of credit. In addition, the former revolving credit facility was available to fund fees and expenses totaling $1,675 incurred in connection with the Credit Agreement, and1.00% for general business purposes, including working capital requirements, capital expenditures, and permitted acquisitions. The Credit Agreement included a sublimit of up to $5,000 for the issuance of letters of credit.ABR loans. Substantially all of the assets of the Company were pledged as collateral under the Credit Agreement. The former revolving credit facility had a maturity date of March 28, 2019.The Company also incurred certain commitment fees on committed amounts that were neither used for borrowings nor under letters of credit.On December 18, 2015, the Company entered into the fourth amendment to the Credit Agreement (“Fourth Amendment”). Under the Fourth Amendment, an event of default related to the September 30, 2015 leverage ratio was waived, the total commitment was adjusted to $75,000, required quarterly paydowns were implemented and certain covenants were amended.The Company incurred a $250 commitment fee for this amendment, recorded as debt discount related to the former revolving credit facility. On November 9, 2016, the former revolving credit facility under the Credit Agreement was paid in full and terminated using a portion of the proceeds from our IPO.On December 8, 2016, the Company entered into a $45 million three-year senior secured Revolving Credit Facility (the “Facility”) with Jefferies Finance LLC as administrative and collateral agent. Substantially all of theU.S. assets of the Company are pledged as collateral under the ABL Credit Facility. The Facility expires on December 8, 2019 and has the following terms and conditions (the “NewABL Credit Agreement”):Letters of Credit: A portion of the Facility, not in excess of $10 million, is available for the issuance of letters of credit to be issued by the administrative agent or any other lender approved by the administrative agent and the Company that is willing to become a letter of credit issuer. A per annum fee equal to the interest rate margin for LIBOR loans under the Facility will be payable to the lenders (other than a defaulting lender (as defined in the New Credit Agreement) which has not provided cash collateral for its pro rata share of any letter of credit exposure) and accrue on the aggregate undrawn face amount of outstanding letters of credit under the facility, payable in arrears at the end of each quarter and on the date the commitments under the Facility are terminated, calculated based upon the actual number of days elapsed over a 360-day year. Additionally a fronting fee equal to 0.25% per annum will be payable to the applicable letter of credit issuer payable on the aggregate undrawn face amount of outstanding letters of credit issued by such issuer under the facility, payable in arrears at the end of each quarter and on the date the commitments under the Facility are terminated, calculated based upon the actual numbers of days elapsed over a 360-day year.Commitment Fees: The Company will pay each lender under the Facility (other than a defaulting lender (as defined in the New Credit Agreement)) a commitment fee of 0.375% per annum on the average daily unused portion of the Facility, payable in arrears at the end of each quarter and on the date the commitments under the Facility are terminated, calculated based upon the actual number of days elapsed over a 360-day year.Interest Rates: The interest rates under the Facility will be based on the leverage ratio (as defined in the New Credit Agreement) for the most recently ended fiscal quarter. Interest will be payable in arrears (a) for loans accruing interest at a rate based on LIBOR (plus an applicable margin ranging from 3.00% - 4.00%, depending on the leverage ratio), at the end of each interest period and, for interest periods of greater than three months, every three months, and on the maturity date of the Facility and (b) for loans accruing interest based on the ABR (plus an applicable margin ranging from 2.00% - 3.00%, depending on the leverage ratio), quarterly in arrears and on the maturity date of the Facility.Default Rate: Upon the occurrence and during the continuance of any payment event of default, with respect to overdue principal and interest, the applicable interest rate plus 2.00% per annum, and with respect to overdue fees, the interest rate applicable to ABR loans plus 2.00% per annum and in each case will be payable on demand.80SMART SAND, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(IN THOUSANDS, EXCEPT PER SHARE DATA)The Facility contains various reporting requirements, negative covenants and restrictive provisions and requires maintenance of financial covenants, under certain conditions, including a fixed charge coverage ratio, and a leverage ratio (each as defined in the NewABL Credit Agreement).Agreement. As of December 31, 2016, no amounts were outstanding under the Facility and2019, the Company was in compliance with all covenants.10. As of December 31, 2019, the weighted average interest rate on the borrowings outstanding was 5.75%.Oakdale Equipment Lease ObligationsOn December 13, 2019, the Company received net proceeds of $23,000 in an equipment financing arrangement with Nexseer. The Oakdale Equipment Financing is legally comprised of an MLA and five lease schedules. The Oakdale Equipment Financing is considered a lease under article 2A of the Uniform Commercial Code but is considered a financing arrangement for accounting or financial reporting purposes and not a lease. 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%. The Company used the net proceeds to repay in full and terminate the Former Credit Facility, pay transaction costs, and the remainder was used for working capital purposes. The Oakdale Equipment Financing matures on December 13, 2024. The Company has the right to prepay the financing and reacquire the underlying equipment on a lease schedule-by-lease schedule basis during the period commencing on the seventh month of the term and continuing until the 54th month of the term at a percentage of the purchase price of the relevant equipment, and at the end of the term at the fair market value of the equipment. The Oakdale Equipment Financing contains affirmative and restrictive covenants customary for transactions of this type. As of December 31, 2019, the Company was in compliance with all covenants.Former Credit FacilityOn December 8, 2016, the Company entered into a $45,000 three-year senior secured revolving credit facility under a revolving credit agreement with Jefferies Finance LLC as administrative and collateral agent. On April 8, 2018, the Credit Facility was amended to increase the Company’s total borrowing capacity under the Credit Facility to $60,000. On July 13, 2018, the Credit Facility was amended to, among other things, (i) increase the limit on the Company’s ability to sell, transfer or dispose of assets, subject to certain considerations, from an aggregate amount of $25,000 to $55,000, (ii) increase the limit on the Company’s ability to incur capital lease obligations from an aggregate principal amount of $15,000 to $30,000 and (iii) exclude certain current and future earn-out obligations from the definition of indebtedness in the Credit Agreement. On February 22, 2019, we entered into an agreement with the existing lenders on the Credit Facility to, among other things, (i) extend the maturity date of the Credit Facility to June 30, 2020 and (ii) reduce the total capacity to $50,000 by December 31, 2019. The Former Credit Facility was paid in full and terminated with proceeds from the Oakdale Equipment Financing.Notes PayableThe Company entered into various financing arrangements to finance its manufactured wellsite proppant storage solutions equipment. Accordingly,Upon completion of the equipment withmanufacturing, the Company signs a note payable and title to the equipment passes to the financial institutions as collateral. The notes bear interest at rates between 6.48% and 7.49%.Finance LeasesSee Note 9 - Leases for additional information about the Company's finance leases.84SMART SAND, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(IN THOUSANDS, EXCEPT PER SHARE DATA)Future minimum payments as of December 31, 2019 are as follows:Year Ended December 31, ABL Credit Facility Oakdale Equipment Financing Notes Payable Finance Leases Total 2020 $ — $ 4,638 $ 3,170 $ 151 $ 7,959 2021 — 4,639 3,155 151 7,945 2022 — 4,638 2,917 136 7,691 2023 — 4,639 1,649 245 6,533 2024 2,500 7,701 88 — 10,289 Total minimum payments 2,500 26,255 10,979 683 40,417 Amount representing interest — (3,851) (1,159) (93) (5,103) Amount representing unamortized lender fees — (899) — — (899) Present value of payments 590 Less: current portion — (3,431) (2,628) (116) (6,175) Total long-term debt, net $ 2,500 $ 18,074 $ 7,192 $ 474 $ 28,240 NOTE 9 — LeasesDisclosures subsequent to the adoption of ASC 842LesseeAt December 31, 2019, the operating and financing components of the Company’s right-of-use assets and lease liabilities on the consolidated balance sheet are as follows:Balance Sheet Location December 31, 2019 Right-of-use assets Operating Operating right-of-use assets $ 28,178 Financing Property, plant and equipment, net 505 Total right-of use assets $ 28,683 Lease liabilities Operating Operating lease liabilities, current and long-term portions $ 28,577 Financing Long-term debt, current and long-term portions 590 Total lease liabilities $ 29,167 85SMART SAND, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(IN THOUSANDS, EXCEPT PER SHARE DATA)Operating lease costs are recorded in 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 year ended December 31, 2019 is as follows:December 31, 2019 Finance lease cost Amortization of right-of-use assets $ 134 Interest on lease liabilities 43 Operating lease cost 16,640 Short-term lease cost 470 Total lease cost $ 17,287 Other information related to the Company’s leasing activity for year ended December 31, 2019 is as follows:Cash paid for amounts included in the measurement of lease liabilities Operating cash flows used for finance leases $ 43 Operating cash flows used for operating leases $ 16,714 Financing cash flows used for finance leases $ 104 Right-of-use assets obtained in exchange for new finance lease liabilities $ 55 Right of use assets upon adoption $ 35,939 Right-of-use assets obtained in exchange for new operating lease liabilities $ 7,251 Weighted average remaining lease term - finance leases 3.6 years Weighted average discount rate - finance leases 6.55 % Weighted average remaining lease term - operating leases 2.6 years Weighted average discount rate - operating leases 5.50 % Maturities of the Company’s lease liabilities as of December 31, 2019 are as follows:Year Operating Leases Finance Leases Total 2020 $ 14,292 $ 151 $ 14,443 2021 10,005 151 10,156 2022 4,034 136 4,170 2023 1,394 245 1,639 2024 888 — 888 Total cash lease payments 30,613 683 31,296 Less: amounts representing interest (2,036) (93) (2,129) Total lease liabilities $ 28,577 $ 590 $ 29,167 86SMART SAND, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(IN THOUSANDS, EXCEPT PER SHARE DATA)Disclosures prior to the adoption of ASC 842Capital LeasesThe Company entered into various lease arrangements to lease equipment. Equipment cost of $2,853 has been$657 was capitalized and included in the Company’s property, plant and equipment.equipment as of December 31, 2018. Depreciation expense forunder leased assets under equipment leases was $293, $293 and $245 for the years ended December 31, 2016, 20152018 and 2014,2017 was $155 and $255, respectively. Accumulated depreciationOperating LeasesExpense related to operating leases and rental agreements for assets under equipment leases was $757 and $464 as ofthe years ended December 31, 20162018 and 2015,2017 was $10,239 and $7,065, respectively.Future minimum lease payments for equipment lease obligations as Lease expense related to railcars is included in cost of December 31, 2016 are as follows:11. Notes PayableThe Company financed certain equipment and automobile purchases by entering into various debt agreements. Interest rates on these notes ranged from 0% to 4.75%. Aggregate maturitiesgoods sold in the consolidated statements of notes payable are as follows:12.NOTE 10 — Asset Retirement ObligationThe Company had recorded a post-closure reclamation and site restoration obligation of $1,384 at$6,142 as of December 31, 2016.2019. The following is a reconciliation of the total reclamation liability for asset retirement obligations.Balance at December 31, 2017 $ 8,982 Additions and revisions of prior estimates 7,546 Accretion expenses (26) Settlement of liability (3,180) Balance at December 31, 2018 $ 13,322 Additions and revisions of prior estimates (5,114) Accretion expenses 687 Settlement of liability (2,753) Balance at December 31, 2019 $ 6,142 81NOTE 11 — RevenueDisaggregation of RevenueThe following table presents the Company’s revenues disaggregated by type and percentage of total revenues for the periods indicated.Year Ended December 31, 2019 2018 2017 Revenue Percentage of Total Revenue Revenue Percentage of Total Revenue Revenue Percentage of Total Revenue Sand sales revenue $ 109,621 47 % $ 143,533 67 % $ 80,200 59 % Shortfall revenue 49,259 21 % 6,032 3 % 1,244 1 % Logistics revenue 74,193 32 % 62,905 30 % 55,768 40 % Total revenues $ 233,073 100 % $ 212,470 100 % $ 137,212 100 % Total current and long-term deferred revenue balances at December 31, 2019 and 2018 were $9,324 and $4,095, respectively. The Company expects to recognize the current portion of deferred revenue in 2020 and expects to recognize the long-term portion through 2023. In 2019, the Company recognized $1,017 of the 2018 deferred revenue balance, recharacterized $2,500 due to an amended contract and $578 remains in the current portion of deferred revenue at December 31, 2019.87SMART SAND, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(IN THOUSANDS, EXCEPT PER SHARE DATA)13. Mandatorily Redeemable Series A Preferred StockOn September 13, 2011, the Company entered into a financing agreement with an investor (the “Series A Investor”). The agreement provided for the sale of Series A Preferred Stock (“Series A Preferred Stock”) to the Series A Investor in multiple tranches. As part of this agreement, the Series A Investor received 22,000 shares of Series A Preferred Stock with an issuance price of $1,000 per share as well as 14,300,000 shares of common stock in exchange for gross proceeds of $22,000 in September 2011. The second tranche of 26,000 shares of Series A Preferred Stock was issued in January 2012, in exchange for gross proceeds of $26,000.The Company originally authorized 200,000 shares of Series A Preferred Stock. Effective July 1, 2013, the Company reduced the number of shares of authorized Series A Preferred Stock to 100,000. The holders of the shares of Series A Preferred Stock were not entitled to vote, but were entitled to elect four of the seven directors to the Board. In the event of liquidation, after provision for payment of all debts and liabilities of the Company, the holders of the Series A Preferred Stock, before any payment to the holders of common stock, would have been entitled to receive the original issuance price per share, for all outstanding Series A Preferred Stock plus any unpaid accrued dividends. If upon any such liquidation event the assets of the Company available for distribution to its stockholders were insufficient to pay the holders of shares of Series A Preferred Stock the full amount to which they were entitled, the holders of Series A Preferred Stock would share ratably in any distribution of the assets available for distribution in proportion to the respective amounts to which they were respectively entitled. Dividends accrued and accumulated on the Series A Preferred Stock, whether or not earned or declared, at the rate of 15% per annum and compound quarterly on April 1, July 1, October 1 and January 1. Dividends were paid in-kind with additional Series A Preferred Stock; fractional share portions of calculated dividends were paid in cash. In-kind dividends are accounted for as interest expense and were accrued as part of the long-term liability in the consolidated balance sheets. The Company issued 4,776, 4,865 and 4,218 Series A Preferred Stock for dividends in December 31, 2016, 2015 and 2014, respectively. The Company incurred $5,624, $5,652 and $5,965 of interest expense related to the Series A Preferred Stock for the years ending December 31, 2016, 2015 and 2014, respectively. Of this expense $59, $574 and $364 was capitalized into property, plant and equipment in the consolidated balance sheet at December 31, 2016, 2015 and 2014, respectively.The Series A Preferred Stock were mandatorily redeemable on September 13, 2016 only if certain defined pro forma covenants of the Credit Agreement (Note 9) were met. The shares of Series A Preferred Stock were not convertible into common stock or any other security issued by the Company. As a result of the Series A Preferred Stock’s mandatory redemption feature, the Company classified these securities as current liabilities in the accompanying consolidated balance sheets as of December 31, 2015.The Company incurred $1,698 of transaction costs in connection with the issuance of the first tranche of the Preferred Shares. The transaction costs and the allocation of value to the common shares (see Note 14) have been recorded as a reduction of the carrying amount of the Preferred Shares liability. The Company incurred $1,639 of transaction costs in connection with the issuance of the second tranche of the Preferred Shares. The Preferred Shares liability will be accreted to the face value with a corresponding charge to interest expense over the remaining term of the Preferred Shares to present the face value of the Preferred Shares mandatory redemption date value on September 13, 2016.At December 31, 2016 and 2015, the Series A Redeemable Preferred Stock consisted of:On November 9, 2016, the Series A Preferred Stock was fully redeemed at a total redemption value of $40,329 using a portion of the proceeds from the IPO.82SMART SAND, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(IN THOUSANDS, EXCEPT PER SHARE DATA)The holder of the Series A Preferred Stock was issued 14,300,000 shares of common stock for no cash consideration in 2011. As a result and in order to recognize the value of the common stock issued, $1,179 was bifurcated from the proceeds of the Series A Preferred Stock and allocated to the 14,300,000 shares of common stock received by the Series A Investor. The Company used a current value method to determine the fair value of the shares at the issuance date since the company was at such an early stage of development that no material progress had been made to the Company’s business plan. As discussed in Note 13, the amount allocated to the Series A Investor’s common shares was accreted to the face value of the Series A Preferred Stock with a corresponding charge to interest expense over the 5-year term of the Series A Preferred Stock.Certain management stockholders pledged 5,896,000 shares of common stock as a guarantee of performance on the Series A Preferred Stock (Note 13). Upon full redemption of the Series A Preferred Stock on November 9, 2016, this pledge was released.As disclosed in Note 2 – Basis of Presentation, on November 9, 2016, the Second Amended and Restated Certificate of Incorporation of the Company became effective and, among other things:provided for a 2,200 for 1 stock split;increased the authorized number of shares of common stock to 350,000,000 shares;authorized 10,000,000 shares of undesignated preferred stock that may be used from time to time by the Company’s board of directors in one or more series.15. WarrantsContemporaneous with the financing transaction in 2011 described in Note 13, the Company issued certain management stockholders warrants to purchase 3,999,998 shares of common stock for a purchase price of $0.0045 per share. The warrants were scheduled to expire 8 years after issuance. The warrants were exercisable upon the achievement of certain triggering events, as defined in the warrant agreements. During the year ended December 31, 2016, management determined that certain performance criteria for the warrants were more likely than not to be met and therefore $348 of total expense was recognized during the year, inclusive of any accelerated expense. This amount has been reflected as an additional component of stock-based compensation expense for the year ended December 31, 2016. No expense was recorded for the years ended December 31, 2015 and 2014. On December 2, 2016, a triggering event, as defined in the warrant agreement had been achieved. The Company had been recognizing expense on these warrants over the expected timeframe until a triggering event, but has accelerated recognition of the remaining $255 of warrant expense through the trigger date. 16.NOTE 12 — Stock-Based CompensationEquity Incentive PlanIn May 2012, the Board approved the 2012 Equity Incentive Plan (“2012 Plan”), which provides for the issuance of Awards (as defined in the 2012 Plan) of up to a maximum of 440,000440 shares of the Company’s common stock to employees, non-employee members of the Board, and consultants of the Company. During 2014, the 2012 Plan was amended to provide for the issuance of Awards up to 880,000880 shares of the Company’s common stock. The awards could be issued in the form of incentive stock options, non-qualified stock options or restricted stock, and have expiration dates of 5 or 10 years after issuance, depending on whether the recipient already holdsheld above 10% of the voting power of all classes of the Company’s shares.shares as of the grant date. The exercise price was based on the fair market value of the share on the date of issuance; vesting periods were determined by the boardBoard upon issuance of the Award.83SMART SAND, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(IN THOUSANDS, EXCEPT PER SHARE DATA)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 Board and consultants of the Company. The awards can be issued in the form of incentive stock options, non-qualified stock options or restricted stock. Together, the 2012 Plan and the 2016 Plan are referenced to collectively as the “Plans”.During 2016, 20152019, 2018 and 2014, 160,600, 44,0002017, 1,884, 746 and 338,800352 shares of restricted stock were issued under the 2012 Plan,Plans, respectively. The grant date fair value of all the restricted stock per share was $1.89—$8.06.$2.44 - $19.00. The shares vest over twoone to five years from their respective grant dates. For Awards issued under the 2016 Plan, the grant date fair value was the 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 significant assumptions used in the Monte Carlo simulation are presented in the following table.Years ended December 31, 2019 2018 Expected volatility 71.05 % 67.13 % Expected life (years) 2.0 2.7 Risk-free interest rate 1.63 % 2.55 % The total number of shares and their respective fair values that vested during the years ended December 31, 2019, 2018 and 2017 were 261 at $844, 177 at $1,047 and 90 at $731, respectively. For awards issued under the 2012 Plan, the grant date fair value was calculated based on a weighted analysis of (i) publicly-traded companies in a similar line of business to the Company (market comparable method)— - Level 2 inputs, and (ii) discounted cash flows of the Company—Company - Level 3 inputs.The Company recognized $1,072, $793$2,909, $2,938 and $419$1,973 of compensation expense for the restricted stock during 2016, 20152019, 2018 and 2014,2017, respectively, in cost of goods sold and operating expenses on the consolidated income statements. There is no impact to the cash flows of the Company related to stock-based compensation expense. At December 31, 20162019, the Company had unrecognized compensation expense of $1,347.$7,598 related to granted but unvested stock awards. That expense is expected to be recognized as follows:Year Ended December 31, 2020 $ 3,849 2021 2,349 2022 885 2023 515 $ 7,598 88SMART SAND, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(IN THOUSANDS, EXCEPT PER SHARE DATA)The following table summarizes restricted stock activity under the PlanPlans from January 1, 20152018 through December 31, 2016:2019: Number ofSharesWeightedAverageUnvested, January 1, 2018 Unvested, January 1, 2018 534 $ 11.27 Granted 746 $ 6.61 Vested (177) $ 12.15 Forfeiture (76) $ 11.56 Unvested, December 31, 2018 Unvested, December 31, 2018 1,027 $ 9.83 Granted 1,884 $ 2.58 Vested (261) $ 8.76 Forfeiture (32) $ 5.85 Unvested December 31, 2019 Unvested December 31, 2019 2,618 $ 6.91 In December 2016, 77,000 shares of performance-based restricted stock vested. The Company had been recognizing compensation expense on these performance-based restricted stock over the expected timeframe until a performance condition was satisfied, but has accelerated recognitionEmployee Stock Purchase PlanShares of the remaining $242 compensation expense through the date such a condition was satisfied.In connection withCompany’s common stock may be purchased by eligible employees under the Company’s initial public2016 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 the Company adopted a 2016 Omnibus Incentive Plan. The Company hasperiod. Employee purchases may not made any grants under the 2016 Omnibus Incentive Plan.17.exceed 20% of their gross compensation during an offering period.NOTE 13 — Income TaxesThe provision for income taxes consists of the following: Year Ended December 31, 2019 2018 2017 Current Federal $ 913 $ 230 $ (965) State and local 550 161 (39) Foreign Foreign 223 72 — Total current expense (benefit) Total current expense (benefit) 1,686 463 (1,004) Deferred Federal 5,746 4,611 (2,221) State and local 377 48 416 Foreign Foreign — — — Total deferred income tax expense (benefit) Total deferred income tax expense (benefit) 6,123 4,659 (1,805) Total income tax expense (benefit) Total income tax expense (benefit) $ 7,809 $ 5,122 $ (2,809) 8489Income tax expense related to operations differs from the amounts computed by applying the statutory income tax rate of 35%rates to pretax income. The statutory income tax rates were 21% for the years ended December 31, 2019 and 2018 and 35.0% for the year ended December 31, 2017. The reconciliations from the applicable statutory income tax rates to income tax (benefit) expense are as follows: Year Ended December 31, 2019 2018 2017 At statutory rate $ 8,281 $ 5,000 $ 6,551 Non-deductible interest expense — — — State taxes, net of U.S. federal benefit State taxes, net of U.S. federal benefit 926 209 377 Foreign taxes Foreign taxes 223 72 — Federal tax deductions (1,248) 238 (73) Change in applicable tax rate — 144 (8,468) Provision to return permanent difference 7 (129) (767) Refund claims Refund claims (29) (120) (201) Fuel tax credit Fuel tax credit (176) (243) (166) Foreign tax credit Foreign tax credit (175) (49) — Other — — (62) Total income tax expense (benefit) Total income tax expense (benefit) $ 7,809 $ 5,122 $ (2,809) Deferred income taxes reflect the net tax effects of loss and credit carry-forwards and temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.Significant components of the Company’s deferred tax assets for federal and state income taxes are as follows: Year Ended December 31, 2019 2018 Deferred tax assets: Reserves and accruals $ 463 $ 918 Prepaid expenses and other Prepaid expenses and other 958 1,086 Federal net operating losses Federal net operating losses — 7,391 State net operating losses State net operating losses — 106 Operating lease liabilities Operating lease liabilities 6,385 — Total deferred tax assets Total deferred tax assets 7,806 9,501 Deferred tax liabilities: Depreciation and amortization (25,531) (27,399) Operating lease right-of-use assets Operating lease right-of-use assets (6,296) — Total deferred tax liabilities Total deferred tax liabilities (31,827) (27,399) Deferred tax liabilities, long-term, net Deferred tax liabilities, long-term, net $ (24,021) $ (17,898) In assessing the realizability of deferred tax assets, the Company considered whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the period in which those temporary differences become deductible. At December 31, 20162019 and 2015,2018, based on the Company’s future income projections and reversal of taxable temporary differences, management determined it was more likely than not that the Company will be able to realize the benefits of the deductible temporary differences. As of December 31, 20162019 and 2015,2018, the Company determined no0 valuation allowance was necessary.The Company has no state net operating losses as of December 31, 2016, 2015 and 2014, respectively.The Company has evaluated its tax positions taken as of December 31, 20162019 and 20152018 and believes all positions taken would be upheld under examination from income taxing authorities. Therefore, no0 liability for the effects of uncertain tax positions has been recorded in the accompanying consolidated balance sheets as of December 31, 20162019 or 2015.2018. The Company is open to examination by taxing authorities since incorporation.18. 401(k)beginning with the 2014 tax year.90SMART SAND, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(IN THOUSANDS, EXCEPT PER SHARE DATA)NOTE 14 — Retirement BenefitsU.S. Defined Contribution PlanThe Company hasis the sponsor of a defined contribution plan, that covers all employees over the age of 21 who have been employed for at least 90 days. The plan is subject to the provisions of the Employee Retirement Income Security Act of 1974.1974, that covers substantially all U.S. employees over the age of 21 that have been employed for at least 90 days. The plan allows participants to make pre-tax and Roth after-tax contributions and the Company provides 100% matching contributions on the first 3% of employee contributions and 50% matching contributions on the next 2% of employee contributions. Employees are immediately vested in both their contributions and the Company’s matching contributions. In accordance with the provisions of the plan, the Company may make additional discretionary contributioncontributions to the accountaccounts of each participant.its participants. There were no additional discretionary contributions during the years ended December 31, 2019, 2018 and 2017. During the years ended December 31, 2016, 20152019, 2018 and 2014,2017, the Company made matching contributions of $248, $181$488, $425 and $121, respectively.85SMART SAND, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(IN THOUSANDS, EXCEPT PER SHARE DATA)19.$336, respectively to its U.S. Defined Contribution Plan.Canada Group Savings Plan and Deferred Profit Sharing PlanThe Company is the sponsor of a defined contribution plan that covers substantially all Canada employees that have been employed for at least 90 days. The plan allows participants to make contributions to the Group Savings Plan and after six months of employment the Company provides 100% matching contributions on between 3% - 5% of the employee’s salary, depending on their length of service to the Deferred Profit Sharing Plan. Employees are immediately vested in their contributions to the Group Savings Plan and vest in the Company’s contributions to the Deferred Profit Sharing Plan after two years of service. All accounts opened prior to May 31, 2018 are fully vested. During the year ended December 31, 2019 and subsequent to the acquisition of Quickthree in 2018, the Company made matching contributions of $59 and $25, respectively, to its Deferred Profit Sharing Plan.NOTE 15 — ConcentrationsAs of December 31, 2016 and 2015, three2019, two customers accounted for 92% and three customers accounted for 96%81% of the Company’s total accounts receivable, respectively.During the years ended December 31, 2016, 20152019, 2018 and 2014, 96%2017, 73%, 94%66% and 79%72% of our revenues were earned from four customers, four customers and three customers, respectively.As of December 31, 2016 and 2015,2019, one vendor accounted for 35% and three vendors accounted for 71%26% of the Company’s accounts payable, respectively.Forpayable. As of December 31, 2018, one vendor accounted for 16% of the Company’s accounts payable.During the years ended December 31, 2016, 20152019, 2018 and 2014,2017, two suppliers, four suppliers and three suppliers accounted for 32%44%, 33%40% and 45%59% of the Company’s cost of goods sold, respectively.The Company’s sand inventory and mining operations are located in Wisconsin. There is a risk of loss if there are significant environmental, legal or economic changes to this geographic area.The Company currently primarily utilizes one third-party rail company to ship its products to customers from its plant. There is a risk of business loss if there are significant impacts to this third party’s operations.20. Related Party TransactionsIn January 2016,NOTE 16 — Common StockOn February 1, 2017, the Company providedcompleted the public offering and sale of 1,500 shares of common stock at a one-year, 0% loanprice of $17.50 per share, generating net proceeds to its Chief Executive Officer in the amount of $61. This loan was fully forgiven and included as compensation in September 2016.During 2016, 2015 and 2014, the Company reimbursedof approximately $24,200 after underwriting discounts and expenses. The Company used the Series A Investor $42, $27proceeds from this offering for capital projects and $130, respectively, for certain out-of-pocket and other expenses in connection with certain management and administrative support services provided. During 2016, 2015 and 2014, the Company expensed $0, $0 and $104, respectively, for services under consulting agreements from relatives of certain Company stockholders. During 2014, the Company purchased vehicles from certain Company stockholders and upper management for $45.21.general corporate services. The offering closed on February 7, 2017.91SMART SAND, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(IN THOUSANDS, EXCEPT PER SHARE DATA)NOTE 17 — Commitments and ContingenciesLeasesFuture Minimum CommitmentsThe Company is obligated under certain operatingcontracts for minimum payments for the right to use land for extractive activities, which is not within the scope of leases and rental agreements for railroad cars, office space, and other equipment.under ASC 842. Future minimum annual commitments under such operating leasescontracts at December 31, 20162019 are as follows:2020 $ 2,275 2021 2,275 2022 2,275 2023 2,275 2024 2,275 Thereafter 29,575 Total future minimum annual commitments under operating lease obligations $ 40,950 Expense relatedLitigationIn addition to operating leasesthe matters described below, we may be subject to various legal proceedings, claims and rental agreements was $7,065, $4,098 and $2,530 for the years ended December 31, 2016, 2015 and 2014, respectively. Lease expense related to rail cars are included in costgovernmental inspections, audits or investigations arising out of goods soldour operations in the consolidated statementnormal course of operations. LitigationThe Company is periodically involvedbusiness, which cover matters such as general commercial, governmental and trade regulations, product liability, environmental, intellectual property, employment and other actions. Although the outcomes of these routine claims cannot be predicted with certainty, in litigation and claims incidental to its operation. Other than the below,opinion of management, believes that any pending litigationthe ultimate resolution of these matters will not have a material impactadverse effect on our financial statements.U.S. Well Services, LLCOn January 14, 2019, Smart Sand, Inc. (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]). In the suit, plaintiff alleges that defendant is 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 and is seeking unspecified monetary damages and other appropriate relief. Plaintiff is also seeking a declaratory judgment that the relevant agreements are continuing in full force and effect despite defendant’s purported notice of termination to the contrary. Defendant has filed an Answer, Affirmative Defenses and Amended Counterclaim seeking unspecified monetary damages and declaratory relief. The case is currently in the discovery phase. The Company intends to continue to both vigorously prosecute its claims and defend against U.S. Well’s counterclaims. At this time, the Company is unable to express an opinion as to the likely outcome of the matter.The Company recorded revenue of $34,271 for the year ended December 31, 2019, related to U.S. Well. As of December 31, 2019 and 2018, $37,422 and $3,237 of accounts and unbilled receivables is attributable to U.S. Well. Amounts recorded as accounts and unbilled receivables in the financial statements do not represent the full amounts sought in this lawsuit.Schlumberger Technology CorporationOn January 3, 2019, Smart Sand, Inc. (plaintiff) filed suit against Schlumberger Technology Corporation (defendant) (“STC”) in the District Court of Harris County, Texas (Case No. 2019-00557). In the suit, plaintiff 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 was seeking unspecified monetary damages and other appropriate relief. Defendant filed an Answer, Affirmative Defenses and Counterclaim seeking unspecified monetary damages and declaratory relief. On September 10, 2019, the Company and defendant entered into an agreement to settle such lawsuit and the case has been dismissed with prejudice. The settlement included an upfront cash payment, a new take-or-pay contract for up to four years, and existing amounts recorded as accounts and unbilled receivables and deferred revenue were removed from the Company’s financial position.In August 2016, an affiliate of one of the Company’s customers, in conjunction with bankruptcy proceedings, demanded a refund of the remainingconsolidated balance of prepayments it claimed to have made pursuant to the agreement with the Company’s customer. In November 2016, this was settled favorably for the Company; accordingly, the full amount of the prepayment was recognized as8692SMART SAND, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(IN THOUSANDS, EXCEPT PER SHARE DATA)revenue. As part of this settlement, the Company was granted an unsecured bankruptcy claim of approximately $12 million; in December 2016, a third party purchased the Company’s unsecured claim for approximately $6.6 million which was recognized in other income in the fourth quarter.Employment AgreementsCertain of the Company’s executives are employed under employment agreements, the terms of which provide for, among other things, a base salary plus additional compensation including an annual bonus based on the percentage as defined and agreed upon by the Board based on service and/or performance in a given calendar year. The agreements, which contain one-year automatic renewals, provide for benefits that are customary for senior-level employees. The Company is required to pay severance under these agreements under certain conditions, as defined, in the event employment of these key executives is terminated. The Company’s commitment under these agreements is $1,175 as of December 31, 2016. The agreements are scheduled to expire through May 2017.Consulting AgreementsOn August 1, 2010, the Company entered into a consulting agreement related to the purchase of land with a third party. The third party acted as an agent for the Company to obtain options to purchase certain identified real property in Wisconsin, as well as obtain permits and approvals necessary to open, construct and operate a sand mining and processing facility on such real property. The agreement continues for two years after the closing of one or more of the identified real properties. The third party’s compensation consists of $10 per month through the end of the agreement, reimbursement of expenses, and $1 per each acre purchased as a closing fee. In 2016, 2015 and 2014, the Company paid the third party $0, $841 and $206, respectively, in consulting fees, expense reimbursements and closing costs.These costs have been capitalized in property and equipment in the accompanying consolidated balance sheets as they relate to the acquisition of land.In addition to the aforementioned fees, the consulting agreement provides for tonnage fees based upon mining operations. The payment of $0.50 per sold ton of certain grades of sand that were mined and sold from the properties acquired under the consulting agreement begins with the second year of operations of the plant and continues indefinitely. The minimum annual tonnage fee is $200 per contract year, which runs from August 1 to July 31. During the years ended December 31, 2016, 2015 and 2014, the Company incurred $258, $252 and $332, respectively, related to tonnage fees.BondsThe Company entered into performance bonds with Jackson County, Wisconsin and Monroe County, Wisconsin for $4,400 and $900, respectively. The Company provided these performance bonds to assure performance under the reclamation plan filed with each respective county. The Company entered into a $1,000 permit bondbonds amounting to $1,350 with the Town of Curran, Wisconsincertain towns and counties in which it operates to use certaindesignated town and county roadways. The Company provided thisthese permit bondbonds to assure maintenance and restoration of the roadway.roadways. The Company has an outstanding $1,9431230 bond to assure performance under its fuel agreement with a pipeline common carrier. AsNOTE 18 — Supplemental Disclosures of December 31, 2016, $971 ofCash Flow informationSupplemental disclosures regarding cash is being heldflow information and non-cash investing and financing activities are as collateral related to the bond and is presented as restricted cash on the balance sheet.87SMART SAND, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(IN THOUSANDS, EXCEPT PER SHARE DATA)Year Ended December 31, 2019 2018 2017 Cash paid for interest $ 2,833 $ 1,660 $ 251 Cash paid for taxes $ 207 $ 666 $ 7,664 Non-cash investing activities: Contingent consideration $ — $ 9,200 $ — Asset retirement obligation $ (5,114) $ 7,546 $ 7,084 Non-cash financing activities: Equipment purchased with debt $ — $ 4,733 $ — Leasehold improvements funded by landlord $ — $ — $ 787 Write-off of remaining balance of returned equipment under capital lease $ — $ 398 $ — Capitalized expenditures in accounts payable and accrued expenses $ 899 $ 3,014 $ 17,477 NOTE 19 — Quarterly Financial Data (Unaudited)The following table sets forth our unaudited quarterly consolidated statements of operations for each of the last four quarters for the periods ended December 31, 20162019 and 2015.2018. This unaudited quarterly information has been prepared on the same basis as our annual audited financial statements and includes all adjustments, consisting only of normal recurring adjustments that are necessary to present fairly the financial information for the fiscal quarters presented.2019: 2019: First Quarter Second Quarter Third Quarter Fourth Quarter Revenue $ 51,775 $ 67,941 $ 65,690 $ 47,667 Cost of goods sold 40,605 43,068 38,555 29,793 Operating expenses 5,219 5,668 12,687 13,995 Net income Net income 4,033 14,276 10,926 2,388 Earnings per share, basic 0.10 0.36 0.27 0.06 Earnings per share, diluted 0.10 0.36 0.27 0.05 During2018: First Quarter Second Quarter Third Quarter Fourth Quarter Revenue $ 42,628 $ 54,448 $ 63,146 $ 52,248 Cost of goods sold 35,413 34,678 40,595 34,217 Operating expenses 5,862 6,861 5,145 23,820 Net income 975 10,021 12,125 (4,433) Earnings per share, basic 0.02 0.25 0.30 (0.11) Earnings per share, diluted 0.02 0.25 0.30 (0.11) 93ITEM 9. — CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL DISCLOSURENone.ITEM 9A. — CONTROLS AND PROCEDURESEvaluation of Disclosure Controls and ProceduresOur management, with the fourth quarter 2016, the Company recognized approximately $1,908participation of year-end performance-based bonus expense included in cost of goods soldour Chief Executive Officer and operating expenses in the consolidated statement of operations. Such bonus expenses were recognized only in the fourth quarter rather than ratably over each quarter in 2016 as the Company’s board of directors did not approve a bonus plan until the fourth quarter.23. Subsequent EventsThe CompanyChief Financial Officer, has evaluated eventsthe effectiveness of our disclosure controls and transactions subsequent toprocedures (as defined in Rules 13a-15(e) and 15d-15(e) under the consolidated balance sheet date and through March 16, 2017,Exchange Act) as of the dateend of the consolidated financial statements were available to be issued.period covered by this Annual Report on Form 10-K. Based on thissuch evaluation, the Company is not awareour Chief Executive Officer and Chief Financial Officer have concluded that as of any events or transactions that occurred subsequent to December 31, 2016 through March 16, 2017 that would require recognition orsuch date, our disclosure in the consolidated financial statements.On January 30, 2017, the Company announced its decision, based on its assessment of increased demand for its products, particularly fine mesh sand, to increase the wetcontrols and dry plant processing capacity at its Oakdale facility in order to produce up to approximately 4.4 million tons of raw frac sand per year. The Company also decided to expand rail and logistics infrastructure in Wisconsin to support this potential increase in customer demand.On February 1, 2017, the Company entered into an Underwriting Agreement by and among the Company, the Selling Shareholders named therein and Credit Suisse Securities LLC and Goldman, Sachs & Co., as representatives of the several underwriters (the “Underwriters”), providing for the offer and sale and the purchase by the Underwriters, of 5,950,000 shares of the Company’s common stock, $0.001 par value at a price to the public of $17.50 per share ($16.58125 per share, net of the underwriting discount), of which 1,500,000 shares are to be sold by the Company and 4,450,000 shares are to be sold by Selling Shareholders.88SMART SAND, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(IN THOUSANDS, EXCEPT PER SHARE DATA)On February 10, 2017, the underwriters exercised in full their option to purchase additional shares of common stock from the Selling Shareholders. On February 15, 2017, the Selling Shareholders consummated the sale of 892,500 shares of common stock to the underwriters pursuant to the underwriters’ exercise of their over-allotment option at a price of $17.50 per share. We received no proceeds from the sale of common stock to the underwriters by the Selling Shareholders.On March 8, 2017, the Company entered into a multi-year Master Product Purchase Agreement (the “PPA”) with Liberty Oilfield Services, LLC (the “Buyer”). We expect that the Buyer will begin purchasing frac sand under the PPA in May 2017. The PPA is structured as a take-or-pay agreement.Item 9. – Changes in and Disagreements with Accountants on Accounting and Financial DisclosureNone.Item 9A. – Controls and ProceduresoverOver Financial ReportingWeOur management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. Our internal control over financial reporting is a process designed under the supervision of our Chief Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.Because of its inherent limitations, internal control over financial reporting may not detect or prevent misstatements. Also, projections of any evaluation of the effectiveness to future periods are not currently requiredsubject to complyrisk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the SEC’s rules implementing Section 404policies or procedures may deteriorate.As of the Sarbanes Oxley Act of 2002, and are therefore not required to make a formal assessment ofDecember 31, 2019, our management assessed the effectiveness of our internal control over financial reporting for that purpose. Since becoming a public company in November 2016, we are required to comply with the SEC’s rules implementing Section 302 of the Sarbanes-Oxley Act of 2002, which requires our management to certify financial and other information in our quarterly and annual reports and provide an annual management reportbased on the effectiveness of our internal control over financial reporting. We are not required to make our first assessment of ourcriteria for effective internal control over financial reporting untilestablished in Internal Control - Integrated Framework, issued by the yearCommittee of our second annual report required to be filed withSponsoring Organizations of the SEC.Further, ourTreadway Commission in 2013. Based on its assessment, management determined that we maintained effective internal control over financial reporting as of December 31, 2019.Our independent registered public accounting firm is not yet required to formally attest to the effectiveness of our internal controls over financial reporting, and will not be required to do so for as long as we are an “emerging growth company” pursuant to the provisions of the JOBS Act.Evaluation of Disclosure Controls and ProceduresOur 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 ControlControls Over Financial ReportingThere have been no changes in our internal control over financial reporting for the yearthree months ended December 31, 20162019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.ITEM 9B. – Other InformationNone
None.94ITEM 10. –— DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCEThe information required by this item with respect to directors and corporate governance will be set forth under “Proposal No. 1: Election of Directors” in the 20172020 Proxy Statement and is incorporated herein by reference.The information required by this item with respect to executive officers of Smart Sand, Inc., pursuant to instruction 3 of paragraph (b) of Item 401 of Regulation S-K, is set forth following Part I, Item 1 of this Annual Report on Form 10-K under “Executive Officers of the Registrant”.The information required by this item regarding Section 16(a) beneficial ownership reporting compliance will be set forth under “Section 16(a) Beneficial Ownership Reporting Compliance” in the 2020 Proxy Statement and is incorporated herein by reference.ITEM 11. –— EXECUTIVE COMPENSATIONThe information required by this item will be set forth under “Executive and Director Compensation” and “Report of Compensation Committee” in the 20172020 Proxy Statement and is incorporated herein by reference.ITEM 12. — SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERSThe Equity Compensation Plan Information table required pursuant to Item 201(d) of Regulation S-K will be set forth in the 20172020 Proxy Statement and is incorporated herein by reference.ITEM 12. – SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERSThe information required by Item 403 of Regulation S-K regarding security ownership of certain beneficial owners and management will be set forth under “Stock Ownership”“Principal Stockholders” in the 20172020 Proxy Statement and is incorporated herein by reference.ITEM 13. –— CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCEThe information required by this item will be set forth under “Transactions“Certain Relationships and Transactions with Related Persons” and “Determination of Independence”“Corporate Governance” in the 20172020 Proxy Statement and is incorporated herein by reference.ITEM 14. –— PRINCIPAL ACCOUNTING FEES AND SERVICESThe information required by this item will be set forth under “Ratification of the Selection of Grant Thornton LLP as the Company’s Independent Registered Public Accounting Firm for 2017”the Year Ending December 31, 2020” in the 20172020 Proxy Statement and is incorporated herein by reference.95ITEM 15. – Exhibits— EXHIBITS3.13.1 3.2 3.24.1 21.1*4.3* 10.1† 10.2† 10.3† 10.4† 10.5† 10.6† 10.7† 10.8 10.9 10.10* 10.11* 10.12* 10.13‡ 10.14‡ 10.15‡ 9610.16‡ 10.17‡ 10.18‡ 10.19† 10.20‡ 10.21‡ 10.22‡ 10.23‡ 10.24‡ 10.25‡ 10.26*‡ 10.27‡ 10.28‡ 10.29‡ 10.30‡ 21.1* 23.1* 23.1*31.1* 31.1*31.2* 31.2*32.1*t32.1+32.2*t32.2+95.1* 95.1*101.INS* 101.INS*101.SCH* 101.SCH*101.CAL* 101.CAL*97101.DEF* 101.DEF*101.LAB* 101.LAB*101.PRE* 101.PRE**Filed Herewith+* Filed herewith †Compensatory plan, contract or arrangement. ‡ Certain portions have been omitted pursuant to a confidential treatment request. Omitted information has been separately filed with the Securities and Exchange Commission. t This certification is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended (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. ITEM 16. — FORM 10-K SUMMARYNone.98SignaturesDate: February 26, 2020Pursuant 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.March 16, 2017By: Charles E. Young, Chief Executive Officer(Principal Executive Officer)Smart Sand Inc.March 16, 2017By: Charles E. Young, Director and Chief Executive Officer Chief Financial Officer (Principal Executive Officer) Smart Sand Inc.March 16, 2017By: /s/ Susan Neumann Controller and Vice President of Accounting Smart Sand Inc.March 16, 2017By: /s/ José E. Feliciano /s/ Andrew Speaker DirectorAndrew Speaker Director (Co-Chairman of the Board) Smart Sand Inc.(Co-Chairman of the Board) March 16, 2017By: /s/ Colin Leonard Colin Leonard, DirectorSmart Sand Inc.March 16, 2017By: Colin Leonard DirectorSmart Sand Inc.Director Director March 16, 2017By: /s/ Tracy RobinsonTracy Robinson, DirectorSmart Sand Inc.March 16, 2017By: DirectorSmart Sand Inc.Director March 16, 2017By: /s/ Andrew SpeakerAndrew Speaker, Director(Co-Chairman of the Board)3.1Second 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)3.2Second 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)21.1*List of subsidiaries of Smart Sand, Inc.23.1*Consent of Independent Registered Public Accounting Firm31.1*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 200231.2*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 200232.1+Certification Pursuant to 18 U.S.C. adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2+Certification Pursuant to 18 U.S.C. adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 200295.1*Mine Safety Disclosure Exhibit101.INS*XBRL Instance Document101.SCH*XBRL Taxonomy Extension Schema Document101.CAL*XBRL Taxonomy Extension Calculation Linkbase Document101.DEF*XBRL Taxonomy Extension Definition Linkbase Document101.LAB*XBRL Taxonomy Extension Label Linkbase Document101.PRE*XBRL Taxonomy Extension Presentation Linkbase Document*Filed Herewith+This certification is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended (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.9499