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Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
Form 10-Q 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2019
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________

Commission File Number: 001-35630 
Hi-Crush Inc.
(Exact name of registrant as specified in its charter)
Delaware
90-0840530
(State or Other Jurisdiction of Incorporation or Organization)
(I.R.S. Employer Identification No.)
1330 Post Oak Blvd, Suite 600
Houston, Texas 77056
(Address of Principal Executive Offices and Zip Code)
(713980-6200 
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading symbol
Name of each exchange on which registered
Common stock, par value $0.01 per share
HCR
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.      Yes      No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).      Yes      No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
Accelerated filer
Non-accelerated filer  
 
Smaller reporting company
 
 
 
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).      Yes      No
As of August 2, 2019, there were 100,695,482 shares of common stock, par value $0.01 per share, of the registrant outstanding.


Table of Contents

HI-CRUSH INC.
INDEX TO FORM 10-Q
 
Page
 
 
Condensed Consolidated Statements of Comprehensive Income
Condensed Consolidated Statements of Changes in Equity
 
EXHIBIT INDEX

2

Table of Contents

PART I
ITEM 1. FINANCIAL STATEMENTS.
HI-CRUSH INC.
Condensed Consolidated Balance Sheets
(In thousands, except share amounts)
(Unaudited)
 
June 30, 2019
 
December 31, 2018
Assets
 
 
 
Current assets:
 
 
 
Cash
$
52,853

 
$
114,256

Accounts receivable, net (Note 2)
119,426

 
101,029

Inventories (Note 4)
47,240

 
57,089

Prepaid expenses and other current assets
11,026

 
13,239

Total current assets
230,545

 
285,613

Property, plant and equipment, net (Note 5)
1,044,724

 
1,031,188

Operating lease right-of-use assets (Note 6)
128,211

 

Goodwill and intangible assets, net (Note 7)
89,084

 
71,575

Equity method investments (Note 8)
33,560

 
37,354

Other assets
1,854

 
8,108

Total assets
$
1,527,978

 
$
1,433,838

Liabilities and Stockholders' Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
51,902

 
$
71,039

Accrued and other current liabilities
54,988

 
61,337

Current portion of deferred revenues (Note 14)
31,661

 
19,940

Current portion of long-term debt (Note 9)
1,604

 
2,194

Current portion of operating lease liabilities (Note 6)
38,565

 

Total current liabilities
178,720

 
154,510

Deferred revenues (Note 14)
246

 
9,845

Long-term debt (Note 9)
441,637

 
443,283

Operating lease liabilities (Note 6)
82,667

 

Asset retirement obligations
10,936

 
10,677

Deferred tax liabilities (Note 2)
117,207

 

Other liabilities (Note 10)
7,580

 
8,276

Total liabilities
838,993

 
626,591

Commitments and contingencies (Note 10)

 

Stockholders' equity
 
 
 
Limited partners interest, 100,874,988 units issued and outstanding at December 31, 2018

 
811,477

Preferred stock, $0.01 par value, 100,000,000 shares authorized; zero issued and outstanding at June 30, 2019

 

Common stock, $0.01 par value, 500,000,000 shares authorized; 100,633,257 issued and outstanding at June 30, 2019
1,006

 

Additional paid-in capital
803,371

 

Retained deficit
(113,533
)
 

Accumulated other comprehensive loss
(1,859
)
 
(4,230
)
Total stockholders' equity
688,985

 
807,247

Total liabilities and stockholders' equity
$
1,527,978

 
$
1,433,838


See Notes to Unaudited Condensed Consolidated Financial Statements.

3

Table of Contents

HI-CRUSH INC.
Condensed Consolidated Statements of Operations
(In thousands, except shares and per share amounts)
(Unaudited)
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2019
 
2018 (a)
 
2019
 
2018 (a)
Revenues (Note 14)
$
178,001

 
$
248,520

 
$
337,911

 
$
466,633

Cost of goods sold (excluding depreciation, depletion and amortization)
141,272

 
154,531

 
271,794

 
296,514

Depreciation, depletion and amortization
14,062

 
10,482

 
25,334

 
18,281

Gross profit
22,667

 
83,507

 
40,783

 
151,838

Operating costs and expenses:
 
 
 
 
 
 
 
General and administrative expenses
15,210

 
12,943

 
27,823

 
23,886

Depreciation and amortization
1,697

 
536

 
3,373

 
1,061

Accretion of asset retirement obligations
130

 
123

 
259

 
249

Change in estimated fair value of contingent consideration
(672
)
 

 
(672
)
 

Other operating expenses, net
469

 
371

 
900

 
1,370

Income from operations
5,833

 
69,534

 
9,100

 
125,272

Other income (expense):
 
 
 
 
 
 
 
Earnings from equity method investments (Note 8)
1,284

 
1,144

 
2,400

 
2,310

Gain on remeasurement of equity method investment
3,612

 

 
3,612

 

Interest expense
(11,806
)
 
(3,722
)
 
(22,396
)
 
(7,195
)
Income (loss) before income tax
(1,077
)
 
66,956

 
(7,284
)
 
120,387

Income tax expense (benefit):
 
 
 
 
 
 
 
Current tax
259

 

 
259

 

Deferred tax
660

 

 
660

 

Deferred tax resulting from conversion to a corporation
115,488

 

 
115,488

 

Income tax expense
116,407

 

 
116,407

 

Net income (loss)
$
(117,484
)
 
$
66,956

 
$
(123,691
)
 
$
120,387

Earnings (loss) per common share:
 
 
 
 
 
 
 
Basic
$
(1.16
)
 
$
0.68

 
$
(1.22
)
 
$
1.32

Diluted
$
(1.16
)
 
$
0.67

 
$
(1.22
)
 
$
1.30

Weighted average common stock outstanding:
 
 
 
 
 
 
 
Basic
101,312,754

 
88,392,179

 
101,165,914

 
88,629,958

Diluted
101,312,754

 
89,729,428

 
101,165,914

 
89,967,207



(a)
Financial information has been recast to include the results attributable to the sponsor and general partner. See Note 3.
See Notes to Unaudited Condensed Consolidated Financial Statements.


4

Table of Contents

HI-CRUSH INC.
Condensed Consolidated Statements of Comprehensive Income
(In thousands)
(Unaudited)

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2019
 
2018 (a)
 
2019
 
2018 (a)
Net income (loss)
$
(117,484
)
 
$
66,956

 
$
(123,691
)
 
$
120,387

Foreign currency translation adjustment, net of tax
647

 

 
2,371

 

Comprehensive income (loss)
$
(116,837
)
 
$
66,956

 
$
(121,320
)
 
$
120,387


(a)
Financial information has been recast to include the results attributable to the sponsor and general partner. See Note 3.

See Notes to Unaudited Condensed Consolidated Financial Statements.

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Table of Contents

HI-CRUSH INC.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
 
Six Months Ended
 
June 30,
 
2019
 
2018 (a)
Operating activities:
 
 
 
Net income (loss)
$
(123,691
)
 
$
120,387

Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Depreciation and depletion
25,737

 
18,501

Amortization of intangible assets
2,970

 
841

Deferred income taxes
116,148

 

Stock-based compensation to directors and employees
3,482

 
3,611

Amortization of loan origination costs into interest expense
816

 
437

Accretion of asset retirement obligations
259

 
249

(Gain) loss on disposal of property, plant and equipment
(111
)
 
163

Amortization of right of use assets
5,221

 

Change in estimated fair value of contingent consideration
(672
)
 

Earnings from equity method investments
(2,400
)
 
(2,310
)
Gain on remeasurement of equity method investment
(3,612
)
 

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(11,751
)
 
(6,169
)
Inventories
9,601

 
(1,098
)
Prepaid expenses and other current assets
1,175

 
(971
)
Other assets
51

 
(1,971
)
Accounts payable
(4,125
)
 
9,221

Accrued and other current liabilities
(8,517
)
 
1,207

Deferred revenues
2,133

 
(1,219
)
Operating lease liabilities
(3,739
)
 
(156
)
Net cash provided by operating activities
8,975

 
140,723

Investing activities:
 
 
 
Capital expenditures for property, plant and equipment
(57,935
)
 
(37,980
)
Proceeds from sale of property, plant and equipment
1,620

 
2,884

Business acquisitions, net of cash acquired
(4,229
)
 

Equity method investments
(495
)
 
(8,095
)
Net cash used in investing activities
(61,039
)
 
(43,191
)
Financing activities:
 
 
 
Repayment of long-term debt
(1,385
)
 
(2,925
)
Repayment of acquired credit facility
(3,237
)
 

Repayment of premium financing notes
(1,469
)
 
(1,183
)
Refund (payment) of loan origination costs
146

 
(115
)
Contributions from unit purchase program participants

 
212

Repurchase of common stock
(3,151
)
 
(9,426
)
Payment of accrued distribution equivalent rights
(254
)
 
(132
)
Distributions paid to members of Hi-Crush Proppants LLC

 
(25,500
)
Distributions paid to limited partner unitholders

 
(37,697
)
Net cash used in financing activities
(9,350
)
 
(76,766
)
Effects of exchange rate on cash
11

 

Net increase (decrease) in cash
(61,403
)
 
20,766

Cash at beginning of period
114,256

 
7,724

Cash at end of period
$
52,853

 
$
28,490





6

Table of Contents

HI-CRUSH INC.
Condensed Consolidated Statements of Cash Flows (continued)
(In thousands)
(Unaudited)
 
Six Months Ended
 
June 30,
 
2019
 
2018 (a)
Non-cash investing and financing activities:
 
 
 
Increase (decrease) in accounts payable and accrued liabilities for additions to property, plant and equipment
$
(22,714
)
 
$
8,558

Change in original fair value of contingent consideration
$
276

 
$

Issuance of common units for acquisitions
$
2,504

 
$

Increase (decrease) in accrued distribution equivalent rights
$
(100
)
 
$
561

Cash paid for interest, net of capitalized interest
$
21,926

 
$
6,757


(a)
Financial information has been recast to include the results attributable to the sponsor and general partner. See Note 3.

See Notes to Unaudited Condensed Consolidated Financial Statements.

7

Table of Contents

HI-CRUSH INC.
Condensed Consolidated Statements of Changes in Equity
(In thousands, except share amounts)
(Unaudited)
 
Three Months Ended June 30, 2019
 
Common Stock
 
Additional Paid-In Capital
 
Limited
Partner
Capital
 
Retained Deficit
 
Accumulated Other Comprehensive Income (Loss)
 
Total Equity
 
Shares
 
Par Value
 
 
 
 
 
Balance at March 31, 2019

 
$

 
$

 
$
807,148

 
$

 
$
(2,506
)
 
$
804,642

Issuance of common units for business acquisition

 

 

 
2,504

 

 

 
2,504

Repurchase of common stock
(1,177,731
)
 
(12
)
 
(3,139
)
 

 

 

 
(3,151
)
Stock-based compensation expense

 

 
618

 
1,225

 

 

 
1,843

Shares vested under stock-based compensation plan
9,616

 

 

 

 

 

 

Forfeiture of distribution equivalent rights

 

 
6

 
(22
)
 

 

 
(16
)
Reclassifications resulting from conversion to a corporation
101,801,372

 
1,018

 
805,886

 
(806,904
)
 

 

 

Other comprehensive income

 

 

 

 

 
647

 
647

Net loss

 

 

 
(3,951
)
 
(113,533
)
 

 
(117,484
)
Balance at June 30, 2019
100,633,257

 
$
1,006

 
$
803,371

 
$

 
$
(113,533
)
 
$
(1,859
)
 
$
688,985

 
Six Months Ended June 30, 2019
 
Common Stock
 
Additional Paid-In Capital
 
Limited
Partner
Capital
 
Retained Deficit
 
Accumulated Other Comprehensive Income (Loss)
 
Total Equity
 
Shares
 
Par Value
 
 
 
 
 
Balance at December 31, 2018

 
$

 
$

 
$
811,477

 
$

 
$
(4,230
)
 
$
807,247

Issuance of common units for business acquisition

 

 

 
2,504

 

 

 
2,504

Issuance of common units to directors

 

 

 
246

 

 

 
246

Repurchase of common stock
(1,177,731
)
 
(12
)
 
(3,139
)
 

 

 

 
(3,151
)
Stock-based compensation expense

 

 
618

 
2,741

 

 

 
3,359

Shares vested under stock-based compensation plan
9,616

 

 

 

 

 

 

Forfeiture of distribution equivalent rights

 

 
6

 
94

 

 

 
100

Reclassifications resulting from conversion to a corporation
101,801,372

 
1,018

 
805,886

 
(806,904
)
 

 

 

Other comprehensive income

 

 

 

 

 
2,371

 
2,371

Net loss

 

 

 
(10,158
)
 
(113,533
)
 

 
(123,691
)
Balance at June 30, 2019
100,633,257

 
$
1,006

 
$
803,371

 
$

 
$
(113,533
)
 
$
(1,859
)
 
$
688,985



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Table of Contents

HI-CRUSH INC.
Condensed Consolidated Statements of Changes in Equity (continued)
(In thousands, except share amounts)
(Unaudited)
 
Three Months Ended June 30, 2018
 
General
Partner
Capital
 
Limited
Partner
Capital
 
Non-Controlling
Interest
 
Total Equity and
Partners' Capital
Balance at March 31, 2018 (a)
$

 
$
1,267,364

 
$
(438,350
)
 
$
829,014

Unit-based compensation expense

 
1,692

 

 
1,692

Distributions to members of Hi-Crush Proppants LLC (a)

 

 
(662
)
 
(662
)
Distributions, including distribution equivalent rights ($0.225 per unit)

 
(20,179
)
 

 
(20,179
)
Net income (a)

 
66,956

 

 
66,956

Balance at June 30, 2018 (a)
$

 
$
1,315,833

 
$
(439,012
)
 
$
876,821


 
Six Months Ended June 30, 2018
 
General
Partner
Capital
 
Limited
Partner
Capital
 
Non-Controlling
Interest
 
Total Equity and
Partners' Capital
Balance at December 31, 2017 (a)
$

 
$
1,239,282

 
$
(413,512
)
 
$
825,770

Issuance of common units to directors and employees

 
474

 

 
474

Repurchase of common units

 
(9,426
)
 

 
(9,426
)
Unit-based compensation expense

 
3,374

 

 
3,374

Distributions to members of Hi-Crush Proppants LLC (a)

 

 
(25,500
)
 
(25,500
)
Distributions, including distribution equivalent rights ($0.425 per unit)

 
(38,258
)
 

 
(38,258
)
Net income (a)

 
120,387

 

 
120,387

Balance at June 30, 2018 (a)
$

 
$
1,315,833

 
$
(439,012
)
 
$
876,821


(a)
Financial information has been recast to include the results attributable to the sponsor and general partner. See Note 3.
See Notes to Unaudited Condensed Consolidated Financial Statements.

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Table of Contents
HI-CRUSH INC.
Notes to Unaudited Condensed Consolidated Financial Statements
(Dollars in thousands, except shares and per share amounts, or where otherwise noted)


1. Business and Organization
Description of Business and Organization
Hi-Crush Inc. (together with its subsidiaries, the "Company," "we," "us" or "our") is a fully-integrated, strategic provider of technology and logistics solutions to the North American petroleum industry. Our integrated suite of offerings, including software, range of equipment solutions for wellsite storage and delivery of proppant, owned and operated terminals, and frac sand mining facilities, as well as third party sourcing for proppant, provides mine-to-wellsite logistics solutions in all major oil and gas basins in the United States. The Company and the chief operating decision maker view the Company’s operations and manage its business as one operating segment. This reporting segment of the Company is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. 
On May 31, 2019, the Company completed its conversion (the "Conversion") from a Delaware limited partnership named Hi-Crush Partners LP to a Delaware corporation named Hi-Crush Inc. As a result of and at the effective date of the Conversion, each common unit representing limited partnership interests in Hi-Crush Partners LP ("common units") issued and outstanding immediately prior to the Conversion was automatically converted into one share of common stock, par value $0.01 per share, of Hi-Crush Inc. ("common stock").
Because the conversion became effective on May 31, 2019, the prior-period amounts in the accompanying Condensed Consolidated Financial Statements as of December 31, 2018 and for the three and six months ended June 30, 2018, reflect Hi-Crush as a limited partnership, not a corporation through May 31, 2019. In this report, references to "Hi-Crush," the "Company," "we," "us" or "our" refer to (i) Hi-Crush Inc. and its subsidiaries for periods following the Conversion and (ii) Hi-Crush Partners LP and its subsidiaries for periods prior to the Conversion, in each case, except where the context otherwise requires. References to common units for periods prior to the Conversion, and references to common units for periods following the Conversion means shares of common stock. As a result of the Conversion, the financial impact to the Condensed Consolidated Financial Statements contained herein consisted of (i) reclassification of partnership equity accounts to equity accounts reflective of a corporation and (ii) income tax effects. Refer to Note 2 - Significant Accounting Policies for the income tax effects of the Conversion and refer to Note 11 - Equity for the impact of the Conversion on Hi-Crush's equity.
On May 7, 2019, the Company completed the acquisition of Proppant Logistics LLC ("Proppant Logistics"), which owns Pronghorn Logistics, LLC ("Pronghorn"), a leading provider of end-to-end proppant logistics services.
On January 18, 2019, the Company completed the acquisition of BulkTracer Holdings LLC ("BulkTracer"), the owner of a logistics software system, PropDispatch.
On October 21, 2018, the Company acquired all of the then outstanding membership interests in our former sponsor, Hi-Crush Proppants LLC (the "sponsor") and the non-economic general partner interest to Hi-Crush GP LLC (the "general partner") in the Company (the "Sponsor Contribution"). In connection with the acquisition, all of the outstanding incentive distribution rights representing limited partnership interests in the Company were canceled and extinguished and the sponsor waived any and all rights to receive contingent consideration payments from the Company or our subsidiaries pursuant to certain previously entered into contribution agreements to which it was a party.
On August 1, 2018, the Company completed the acquisition of FB Industries Inc. ("FB Industries"), a company engaged in the engineering, design and marketing of silo-based frac sand management systems.
Refer to Note 3 - Acquisitions for additional disclosure regarding recent acquisitions.
Basis of Presentation
The accompanying unaudited interim Condensed Consolidated Financial Statements ("interim financial statements") of the Company have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X issued by the U.S. Securities and Exchange Commission ("SEC"). Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all normal and recurring adjustments and disclosures necessary for a fair statement are reflected in the interim periods presented. The results reported in these interim financial statements are not necessarily indicative of the results that may be reported for the entire year. These interim financial statements should be read in conjunction with the Company’s Consolidated Financial Statements for the year ended December 31, 2018, which are included in the Company’s Annual Report on Form 10-K filed with the SEC on February 20, 2019. The year-end balance sheet data was derived from the audited financial statements.

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Table of Contents
HI-CRUSH INC.
Notes to Unaudited Condensed Consolidated Financial Statements
(Dollars in thousands, except shares and per share amounts, or where otherwise noted)

Certain amounts in the prior period financial statements have been reclassified to conform to the presentation of the current period financial statements as it relates to the reclassification of depreciation and amortization separately from general and administrative expenses on the Condensed Consolidated Statements of Operations. These reclassifications had no effect on the previously reported results of operations.
The Sponsor Contribution was accounted for as a transaction between entities under common control whereby the net assets of the sponsor and general partner were recorded at their historical cost. Therefore, the Company's historical financial information has been recast to combine the sponsor and general partner with the Company as if the combination had been in effect since inception of the common control.
These financial statements have been prepared assuming the Company will continue to operate as a going concern. On a quarterly basis, the Company assesses whether conditions have emerged which may cast substantial doubt about the Company's ability to continue as a going concern for the next twelve months following the issuance of the interim financial statements.

2. Significant Accounting Policies
In addition to the significant accounting policies listed below, a comprehensive discussion of our critical accounting policies and estimates is included in our Annual Report on Form 10-K filed with the SEC on February 20, 2019.
Use of Estimates
The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Accounts Receivable
Trade receivables relate to sales of frac sand, related services and the sale of logistics equipment for which credit is extended based on the customer’s credit history and are recorded at the invoiced amount and do not bear interest. The Company regularly reviews the collectability of accounts receivable. When it is probable that all or part of an outstanding balance will not be collected, the Company establishes or adjusts an allowance as necessary, generally using the specific identification method. Account balances are charged against the allowance after all means of collection have been exhausted and potential recovery is considered remote. As of each of June 30, 2019 and December 31, 2018, the Company maintained an allowance for doubtful accounts of $1,060.
Impairment of Long-lived Assets
Recoverability of investments in property, plant and equipment, and other long-lived assets is evaluated annually, or more often if events or circumstances indicate the impairment of an asset may exist, based on reporting units, which management has defined as the mine and terminal operations and the logistics and wellsite operations. Estimated future undiscounted net cash flows are calculated using estimates, including but not limited to estimates of proven and probable sand reserves, estimated future sales prices (considering historical and current prices, price trends and related factors), operating costs and anticipated capital expenditures. Reductions in the carrying value of our investment are only recorded if the undiscounted cash flows are less than our book basis in the applicable assets.
Impairment losses are recognized based on the extent that the remaining investment exceeds the fair value, which is determined based upon the estimated future discounted net cash flows to be generated by the property, plant and equipment and other long-lived assets.
Management’s estimates of future sales prices, recoverable proven and probable reserves and operating and capital costs, among other estimates, are subject to certain risks and uncertainties which may affect the recoverability of our investments in property, plant and equipment and other long-lived assets. Although management has made its best estimate of these factors based on current conditions, it is reasonably possible that changes could occur in the near term, which could adversely affect management’s estimate of the net cash flows expected to be generated from its operating assets.

11

Table of Contents
HI-CRUSH INC.
Notes to Unaudited Condensed Consolidated Financial Statements
(Dollars in thousands, except shares and per share amounts, or where otherwise noted)

During the second quarter of 2019, we saw a significant decrease in the price of our common stock, which resulted in an overall reduction in our market capitalization, and our recorded net book value exceeded our market capitalization as of June 30, 2019.  We therefore updated our internal business outlook for the Company to consider the current economic environment that affects our operations. We allocated the enterprise fair value to the reporting units and determined that the fair value of our net assets in the logistics and wellsite operations reporting unit exceeded its carrying value and therefore there was no impairment of long-lived assets in the logistics and wellsite operations reporting unit as of June 30, 2019. Utilizing the allocation of the enterprise fair value to the mine and terminal operations reporting unit, we assessed qualitative factors and determined that we could not conclude that it was more likely than not that the fair value of our net assets exceeded its carrying value. In turn, we prepared a quantitative analysis of the fair value of the mine and terminal operations assets as of June 30, 2019, and determined there is sufficient undiscounted cash flows to recover the value of the long-lived assets although the cushion is not significant. Upon completion of the valuation exercise, it was determined that there was no impairment of long-lived assets as of June 30, 2019. We will reevaluate our long-lived assets in the third quarter of 2019.
Leases
On January 1, 2019, we adopted Accounting Standards Update ("ASU") 2016-02, Leases (Topic 842) using the modified retrospective transition method, utilizing the simplified transition option available, which allows entities to continue to apply the legacy guidance in ASC 840, Leases, including its disclosure requirements, in the comparative periods presented in the year of adoption. We have elected to apply certain practical expedients, whereby we will not reassess (i) whether any expired or existing contracts are or contain leases, (ii) the lease classification for any expired or existing leases and (iii) initial direct costs for any existing leases. Upon adoption of the new leasing standard on January 1, 2019, we recognized $135,480 of operating lease right-of-use assets, including any lease prepayments made, initial direct costs incurred and excludes lease incentives received, and $127,018 of related operating lease liabilities on the Consolidated Balance Sheet. The impact of adoption of the new leasing standard had no impact to the opening balance of retained earnings on the Consolidated Balance Sheet or to the Consolidated Statements of Operations. Refer to Note 6 - Leases for additional disclosure regarding leases.
At inception of a contract, the Company determines if it includes a lease. When a lease is identified, a right-of-use asset and the corresponding lease liability are recorded on the Condensed Consolidated Balance Sheet. Right-of-use assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease right-of-use assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The operating lease right-of-use assets also includes any lease prepayments made, initial direct costs incurred and excludes lease incentives received. The operating lease liabilities also includes any deferred rent accrued. We generally do not include renewal or termination options in our assessment of the leases unless extension or termination for certain assets is deemed to be reasonably certain. For all leases with a term of 12 months or less, we elected the practical expedient to not recognize lease assets and liabilities. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
Fair Value Measurements
The amounts reported in the balance sheet as current assets or liabilities, including cash, accounts receivable, accounts payable, accrued and other current liabilities approximate fair value due to the short-term maturities of these instruments. The Company's financial assets and liabilities are measured using inputs from the three levels of the fair value hierarchy, which are as follows:
Level 1 - observable inputs such as quoted prices in active markets;
Level 2 - inputs other than quoted prices in active markets that we can directly or indirectly observe to the extent that the markets are liquid for the relevant settlement periods; and
Level 3 - unobservable inputs in which little or no market data exists, therefore inputs reflect the Company's assumptions.
The fair value of the 9.50% senior unsecured notes due 2026 (the "Senior Notes") approximated $315,000 as of June 30, 2019, based on the market price quoted from external sources, compared with a carrying value of $450,000. If the Senior Notes were measured at fair value in the financial statements, it would be classified as Level 2 in the fair value hierarchy.
We measure the contingent consideration liability recognized in connection with the acquisition of FB Industries at fair value on a recurring basis using unobservable inputs and it would be classified as Level 3 in the fair value hierarchy. Refer to Note 10 - Commitments and Contingencies for additional disclosure regarding contingent consideration.

12

Table of Contents
HI-CRUSH INC.
Notes to Unaudited Condensed Consolidated Financial Statements
(Dollars in thousands, except shares and per share amounts, or where otherwise noted)

Income Taxes
As a result of the Conversion completed on May 31, 2019, the Company converted from an entity treated as a partnership for U.S. federal income tax purposes to an entity treated as a corporation for U.S. federal income tax purposes and is therefore subject to U.S. federal, state and local corporate income tax. The Conversion resulted in the Company obtaining a partial step-down in the tax basis of certain assets. On the date of the Conversion, we recorded an estimated net tax expense and estimated net deferred tax liability of $115,488 relating to the Conversion as well as this partial step-down in tax basis. Our overall tax provision is based on, among other things, an estimate of the amount of such partial step-down in tax basis that is derived from an analysis of the basis of our unitholders in their ownership of Hi-Crush common units at December 31, 2018 and estimated asset values at the time of the Conversion. While this information does not completely reflect the actual basis of our unitholders at May 31, 2019, our estimate is based on our best estimate of the individual asset valuations and the most recent unitholder basis information available to us. The amount of partial step-down in tax basis cannot be finally determined until complete trading information with respect to common units of the Company for the five months ended May 31, 2019 becomes available. The Company does not currently expect such information to become available until the first quarter of 2020 and the timing and the availability of this information is not within the Company’s control. Since the unitholder basis information currently available to us does not completely reflect the actual basis of our unitholders at May 31, 2019, the amount of partial step-down in tax basis as finally determined is expected to differ, possibly materially, from the current estimate, which in turn is expected to cause the Company’s income tax provision and effective tax rate under GAAP to differ, possibly to a material extent, from the current estimate described herein. If the amount of the partial step-down in tax basis as finally determined is lower than the current estimate, the Company would record a lower net tax expense and an incrementally lower deferred tax liability, which would have the effect of decreasing the amount of taxes payable by the Company in the future. If the amount of partial step-down in tax basis as finally determined is higher than the current estimate, the Company would record a higher net tax expense and an incrementally higher deferred tax liability, which would have the effect of increasing the amount of taxes payable by the Company in the future.
Excluding day one deferred taxes related to the Conversion and the Company's pre-tax loss for the five months ended May 31, 2019 prior to the Conversion, the consolidated income for the month of June 2019 and the Canadian operations income for the five months ended May 31, 2019 were subject to corporate tax at an estimated effective tax rate of approximately 20%. As such, the effective tax rate differs from the statutory rate primarily due to the following: (i) the tax expense recognized as a result of the partial step-down in tax basis of certain assets as a result of the Conversion as described above, (ii) the tax expense recognized that relates to the post-conversion book income, (iii) state income taxes, (iv) the impact of current year acquisitions, (v) certain compensation charges attributable to the Company that are not deductible for tax purposes, and (vi) certain book expenses that are not deductible for tax purposes.
Prior to the Conversion, the Company was a pass-through entity and was not considered a taxable entity for federal tax purposes. Therefore, there is not a provision for income taxes for U.S. federal or certain other state jurisdictions in the accompanying Condensed Consolidated Financial Statements prior to May 31, 2019.
Deferred Income Taxes
Income taxes are accounted for using the asset and liability method of accounting. Under this method, deferred tax assets and liabilities are recognized for the expected future tax consequences of differences between the carrying amounts of assets and liabilities and their respective tax basis, using tax rates in effect for the year in which the differences are expected to reverse. The effect on deferred assets and liabilities of a change in tax rates is recognized in the Condensed Consolidated Statements of Operations in the period when the change is enacted.
Deferred tax assets are reduced by a valuation allowance when, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. When evaluating the realizability of the deferred tax assets, all evidence, both positive and negative, is considered. Items considered when evaluating the need for a valuation allowance include the ability to carry back losses, future reversals of existing temporary differences, tax planning strategies, and expectations of future earnings.
For a particular tax‑paying component of an entity and within a particular tax jurisdiction, deferred tax assets and liabilities are offset and presented as a single amount, as applicable, in the accompanying statements of financial condition.

13

Table of Contents
HI-CRUSH INC.
Notes to Unaudited Condensed Consolidated Financial Statements
(Dollars in thousands, except shares and per share amounts, or where otherwise noted)

Foreign Currency Translation
The Company records foreign currency translation adjustments from the process of translating the functional currency of the financial statements of its foreign subsidiary into the U.S. dollar reporting currency. The Canadian dollar is the functional currency of the Company's foreign subsidiary as it is the primary currency within the economic environment in which the subsidiary operates. Assets and liabilities of the subsidiary's operations are translated into U.S. dollars at the rate of exchange in effect on the balance sheet date and income and expenses are translated at the average exchange rate in effect during the reporting period. Adjustments resulting from the translation of the subsidiary's financial statements are reported in other comprehensive income.

3. Acquisitions
Acquisition of Proppant Logistics LLC
On May 7, 2019, the Company acquired the remaining 34% ownership interest in Proppant Logistics, which owns Pronghorn, a leading provider of end-to-end proppant logistics services, for $2,951 in cash and 695,606 newly issued common units. The Company previously held a 66% ownership interest in Proppant Logistics, which was accounted for using the equity method. We remeasured our previously held equity interest in Proppant Logistics at fair value as of the date we obtained control in accordance with the accounting guidance for acquisitions achieved in stages in ASC 805, Business Combinations. As a result, we recognized a gain of $3,612 on the remeasurement of our equity method investment during the second quarter of 2019.
The preliminary purchase price of $16,045 was allocated to the net assets acquired as follows:
Net assets of Proppant Logistics as of May 7, 2019:
 
Cash
$
1,841

Accounts receivable
7,951

Prepaid expenses and other current assets
782

Property, plant and equipment
205

Other assets
247

Goodwill and intangible assets
15,662

Accounts payable
(7,047
)
Accrued and other current liabilities
(359
)
Credit facility
(3,237
)
Fair value of net assets acquired
$
16,045


The excess of the purchase consideration over the fair value of net assets acquired was recorded as goodwill. The recognition of goodwill is attributable to strategic benefits and expected synergies of our combined operations. Through the completion of acquiring 100% of the ownership interests in Proppant Logistics, the Company began to consolidate the operations of Proppant Logistics prospectively from May 7, 2019. In connection with this acquisition, the Company incurred $266 of acquisition related costs during the six months ended June 30, 2019, included in general and administrative expenses. Pro forma results of operations for Proppant Logistics have not been presented because the acquisition was not material to the consolidated results of operations.
Acquisition of BulkTracer Holdings LLC
On January 18, 2019, the Company completed the acquisition of BulkTracer, the owner of a logistics software system, PropDispatch, for $3,134 in cash. The acquisition was accounted for under the acquisition method of accounting whereby management assessed the net assets acquired and recognized amounts for the identified assets acquired and liabilities assumed.

14

Table of Contents
HI-CRUSH INC.
Notes to Unaudited Condensed Consolidated Financial Statements
(Dollars in thousands, except shares and per share amounts, or where otherwise noted)

The preliminary purchase price of $3,134 was allocated to the net assets acquired as follows:
Net assets of BulkTracer as of January 18, 2019:
 
Cash
$
15

Accounts receivable
152

Property, plant and equipment
3,030

Equity method investment in Proppant Express Investments, LLC
289

Accounts payable
(86
)
Accrued and other current liabilities
(166
)
Deferred revenues
(100
)
Fair value of net assets acquired
$
3,134


The operations of BulkTracer have been included in the statements prospectively from January 18, 2019. In connection with this acquisition, the Company incurred $100 of acquisition related costs during the six months ended June 30, 2019, included in general and administrative expenses. Pro forma results of operations for BulkTracer have not been presented because the acquisition was not material to the consolidated results of operations.
Acquisition of Hi-Crush Proppants LLC and Hi-Crush GP LLC
On October 21, 2018, the Company entered into a contribution agreement with the sponsor pursuant to which the Company acquired all of the then outstanding membership interests in the sponsor and the non-economic general partner interest in the Company, in exchange for 11,000,000 newly issued common units. In connection with the acquisition, all of the outstanding incentive distribution rights representing limited partnership interests in the Company were canceled and extinguished and the sponsor waived any and all rights to receive contingent consideration payments from the Company or our subsidiaries pursuant to certain previously entered into contribution agreements to which it was a party.
In connection with this acquisition, the Company incurred $3,810 of acquisition related costs during the year ended December 31, 2018, included in general and administrative expenses.
As a result of this transaction, the Company's historical financial information has been recast to combine the Consolidated Statements of Operations and the Consolidated Balance Sheets of the Company with those of our sponsor and general partner as if the combination had been in effect since inception of common control on October 28, 2010. All transactions between the Company, the sponsor and general partner have been eliminated. Except for the combination of the Consolidated Statements of Operations and the respective allocation of recast net income (loss), distributions paid by the sponsor to its members prior to October 21, 2018 have not been allocated on a recast basis to the Company’s unitholders. Such transactions were presented within the non-controlling interest column in the Consolidated Statement of Partners' Capital as the Company and its unitholders would not have participated in these transactions.

15

Table of Contents
HI-CRUSH INC.
Notes to Unaudited Condensed Consolidated Financial Statements
(Dollars in thousands, except shares and per share amounts, or where otherwise noted)

The following table summarizes the carrying value of the sponsor's and general partner's net assets as of October 21, 2018, and the allocation of the purchase price:
Net assets of the sponsor and general partner as of October 21, 2018:
 
Cash
$
1,314

Accounts receivable
29

Due from Hi-Crush Partners LP
1,446

Prepaid expenses and other current assets
3,132

Property, plant and equipment
2,087

Accounts payable
(2,236
)
Accrued and other current liabilities
(2,562
)
Current portion of long-term debt
(2,259
)
Other liabilities
(86
)
Total carrying value of sponsor and general partner net assets
$
865

 
 
Allocation of purchase price
 
Carrying value of sponsor's non-controlling interest prior to Sponsor Contribution
$
(453,028
)
Excess purchase price over the acquired interest
453,028

Common control cost of sponsor and general partner acquisition
$


The following tables present, on a supplemental basis, our recast revenues, net income, net income attributable to Hi-Crush and net income per limited partner unit giving effect to the Sponsor Contribution, as reconciled to the revenues, net income, net income attributable to Hi-Crush and net income per limited partner unit of the Company.
 
 
Three Months Ended June 30, 2018
 
 
Company Historical
 
Sponsor and General Partner
 
Eliminations
 
Company Recast (Supplemental)
Revenues
 
$
248,520

 
$

 
$

 
$
248,520

Net income (loss)
 
$
68,008

 
$
(1,052
)
 
$

 
$
66,956

Net income (loss) attributable to Hi-Crush
 
$
68,008

 
$
(1,052
)
 
$

 
$
66,956

Net income per limited partner unit - basic
 
$
0.68

 
 
 
 
 
$
0.67

 
 
Six Months Ended June 30, 2018
 
 
Company Historical
 
Sponsor and General Partner
 
Eliminations
 
Company Recast (Supplemental)
Revenues
 
$
466,633

 
$

 
$

 
$
466,633

Net income (loss)
 
$
121,957

 
$
(1,570
)
 
$

 
$
120,387

Net income (loss) attributable to Hi-Crush
 
$
121,957

 
$
(1,570
)
 
$

 
$
120,387

Net income per limited partner unit - basic
 
$
1.32

 
 
 
 
 
$
1.31


Acquisition of FB Industries Inc.
On August 1, 2018, the Company acquired FB Industries, a company engaged in the engineering, design and marketing of silo-based frac sand management systems for $45,000 in cash and 1,279,328 of newly issued common units valued at $19,190. The purchase price as of June 30, 2019 is $74,292 and is comprised of cash consideration of $55,102, which includes valuation of cash acquired, a preliminary working capital adjustment of $10,102 and the value of common units issued. The working capital adjustment is subject to agreement and settlement by the sellers. The terms also include the potential for additional future consideration payments based on the achievement of established performance benchmarks through 2021. The acquisition was accounted for under the acquisition method of accounting whereby management assessed the net assets acquired and recognized amounts for the identified assets acquired and liabilities assumed. Refer to Note 10 - Commitments and Contingencies for additional disclosure regarding contingent consideration.

16

Table of Contents
HI-CRUSH INC.
Notes to Unaudited Condensed Consolidated Financial Statements
(Dollars in thousands, except shares and per share amounts, or where otherwise noted)

The preliminary purchase price of $74,292 was allocated to the net assets acquired as follows:
Net assets of FB Industries as of August 1, 2018:
 
Cash
$
20,015

Accounts receivable
2,540

Inventories
13,416

Goodwill and intangible assets
71,723

Prepaid expenses and other current assets
2,202

Property, plant and equipment
1,868

Accounts payable
(1,628
)
Deferred revenues
(13,004
)
Accrued and other current liabilities
(13,988
)
Deferred tax liabilities
(429
)
Contingent consideration
(8,423
)
Fair value of net assets acquired
$
74,292


The excess of the purchase consideration over the fair value of net assets acquired was recorded as goodwill. The recognition of goodwill is attributable to the future growth opportunities and synergies of our combined operations. The operations of FB Industries have been included in the statements prospectively from August 1, 2018. In connection with this acquisition, the Company incurred $639 of acquisition related costs during the year ended December 31, 2018, included in general and administrative expenses. Pro forma results of operations for FB Industries have not been presented because the acquisition was not material to the consolidated results of operations.

4. Inventories
Inventories consisted of the following:
 
June 30, 2019
 
December 31, 2018
Raw material
$
859

 
$
512

Work-in-process
23,928

 
29,180

Finished goods
19,611

 
24,872

Spare parts
2,842

 
2,525

Inventories
$
47,240

 
$
57,089




17

Table of Contents
HI-CRUSH INC.
Notes to Unaudited Condensed Consolidated Financial Statements
(Dollars in thousands, except shares and per share amounts, or where otherwise noted)

5. Property, Plant and Equipment
Property, plant and equipment consisted of the following:
 
June 30, 2019
 
December 31, 2018
Buildings
$
36,220

 
$
32,751

Mining property and mine development
391,269

 
390,296

Plant and equipment
497,170

 
472,892

Rail and rail equipment
56,915

 
55,913

Transload facilities and equipment
119,427

 
118,982

Last mile equipment
77,450

 
66,083

Construction-in-progress
18,625

 
21,796

Property, plant and equipment
1,197,076

 
1,158,713

Less: Accumulated depreciation and depletion
(152,352
)
 
(127,525
)
Property, plant and equipment, net
$
1,044,724

 
$
1,031,188


Depreciation and depletion expense was $14,237 and $10,598 during the three months ended June 30, 2019 and 2018, respectively, and $25,737 and $18,501 during the six months ended June 30, 2019 and 2018, respectively.
The Company recognized a gain of $234 and $111 on the disposal of fixed assets during the three and six months ended June 30, 2019, respectively, and a loss of $187 and $163 on the disposal of fixed assets during the three and six months ended June 30, 2018, respectively, which is included in other operating expenses, net on our Condensed Consolidated Statements of Operations.

6. Leases
As described in Note 2, on January 1, 2019, we adopted ASU 2016-02, Leases (Topic 842). Prior periods presented have not been adjusted and continue to be reported in accordance with the legacy guidance in Topic 840.
Lessee
The Company has long-term operating leases, comprised primarily of railcars and container lease arrangements, equipment, office space and terminals. Our operating leases have remaining lease terms of 1.1 years to 9.1 years, some of which include automatic renewal options, options to extend the leases and options to terminate the leases.
As of June 30, 2019, the balance sheet information related to leases are as follows:
Operating lease right-of-use assets
$
128,211

 
 
Current portion of operating lease liabilities
$
38,565

Operating lease liabilities
82,667

Total operating lease liabilities
$
121,232


Operating lease liabilities are based on the net present value of the remaining lease payments over the remaining lease term. In determining the lease liability and the present value of lease payments, we used our incremental borrowing rate based on the information available at the lease commencement date. The weighted average remaining lease term and discount rate as of June 30, 2019 related to operating leases are as follows:
Weighted average remaining lease term
4.9 years

Weighted average discount rate
9.50
%


18

Table of Contents
HI-CRUSH INC.
Notes to Unaudited Condensed Consolidated Financial Statements
(Dollars in thousands, except shares and per share amounts, or where otherwise noted)

The components of operating lease expenses on our Condensed Consolidated Statement of Operations for the three and six months ended June 30, 2019 is as follows:
 
Three Months Ended
 
Six Months Ended
 
June 30, 2019
 
June 30, 2019
Cost of goods sold
 
 
 
Operating lease cost
$
10,189

 
$
20,126

Short-term lease cost
1,454

 
2,814

 
$
11,643

 
$
22,940

General and administrative expenses
 
 
 
Operating lease cost
$
65

 
$
129

Short-term lease cost
124

 
278

 
$
189

 
$
407

Total lease costs
$
11,832

 
$
23,347


Supplemental cash flow information related to our operating leases for the three and six months ended June 30, 2019 is as follows:
 
Three Months Ended
 
Six Months Ended
 
June 30, 2019
 
June 30, 2019
Cash paid for amounts included in the measurement of lease liabilities
$
12,992

 
$
25,575

Noncash information on lease liabilities arising from obtaining right-of-use assets
$
6,974

 
$
142,454


As of June 30, 2019, the maturities of operating lease liabilities are as follows:
Fiscal Year
 
2019 (remaining months)
$
20,379

2020
40,107

2021
31,931

2022
21,918

2023
10,826

Thereafter
25,996

Total lease payments
151,157

Less: present value adjustment
(29,925
)
Total operating lease liabilities
$
121,232


As of December 31, 2018, future minimum operating lease payments are as follows:
Fiscal Year
 
2019
$
36,019

2020
36,282

2021
29,272

2022
20,890

2023
10,280

Thereafter
31,066

 
$
163,809



19

Table of Contents
HI-CRUSH INC.
Notes to Unaudited Condensed Consolidated Financial Statements
(Dollars in thousands, except shares and per share amounts, or where otherwise noted)

Lessor
The Company has operating lease arrangements as the lessor associated for the use of logistics and wellsite operations equipment. These leases are classified as operating leases and result in the recognition of lease income on a straight-line basis, while the underlying leased asset remains on our balance sheet and continues to depreciate. Lease income associated with these leases is not material.

7. Goodwill and Intangible Assets
Changes in goodwill and intangible assets consisted of the following:
 
Goodwill
 
Intangible Assets
Balance at December 31, 2018
$
21,881

 
$
49,694

FB Industries acquisition measurement period adjustment
2,080

 

Proppant Logistics acquisition additions
10,701

 
4,961

Impact of foreign currency translation
951

 
1,786

Amortization expense

 
(2,970
)
Balance at June 30, 2019
$
35,613

 
$
53,471


As of June 30, 2019, the Company had goodwill of $35,613. Goodwill represents the excess purchase over the fair value of net assets acquired in the acquisitions of FB Industries and Proppant Logistics and is allocated to the logistics and wellsite operations reporting unit. We perform our annual assessment of the recoverability of goodwill during the third quarter of each fiscal year, or more often if events or circumstances indicate the impairment of an asset may exist.
During the second quarter of 2019, we saw a significant decrease in the price of our common stock, which resulted in an overall reduction in our market capitalization, and our market capitalization exceeded our recorded net book value as of June 30, 2019.  We therefore updated our internal business outlook for the Company, including the logistics and wellsite operations reporting unit, to consider the current economic environment that affects our operations. As a result, we assessed quantitative factors and determined that the fair value of goodwill exceeded its carrying value and therefore there was no impairment of goodwill as of June 30, 2019.

8. Equity Method Investments
The following table provides our net investments and the proportionate share of our equity method investments operating results:
 
Investment
 
Earnings from Equity Method Investments
 
 
 
Three Months Ended
 
Six Months Ended
 
June 30, 2019
 
December 31, 2018
 
June 30,
 
June 30,
 
 
 
2019
 
2018
 
2019
 
2018
Proppant Express Investments, LLC
$
33,560

 
$
30,870

 
$
1,329

 
$
1,144

 
$
2,401

 
$
2,310

Proppant Logistics LLC (through May 6, 2019)

 
6,484

 
(45
)
 

 
(1
)
 

Total
$
33,560

 
$
37,354

 
$
1,284

 
$
1,144

 
$
2,400