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Solaris Oilfield Infrastructure, Inc. – ‘10-Q’ for 9/30/19

On:  Wednesday, 10/30/19, at 5:23pm ET   ·   For:  9/30/19   ·   Accession #:  1697500-19-57   ·   File #:  1-38090

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Quarterly Report   —   Form 10-Q   —   Sect. 13 / 15(d) – SEA’34
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

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 2: EX-31.1     Certification -- §302 - SOA'02                      HTML     26K 
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                (Parenthetical)                                                  
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                (Parenthetical)                                                  
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                Stockholders' Equity                                             
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                Stockholders' Equity (Parenthetical)                             
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                (Policies)                                                       
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‘10-Q’   —   Quarterly Report
Document Table of Contents

Page (sequential)   (alphabetic) Top
 
11st Page  –  Filing Submission
"Table of Contents
"Cautionary Statement Regarding Forward-Looking Statements
"Part 1 : Financial Information
"Item 1
"Financial Statements
"Item 2
"Management's Discussion and Analysis of Financial Condition and Results of Operations
"Item 3
"Quantitative and Qualitative Disclosures about Market Risk
"Item 4
"Controls and Procedures
"Part Ii. Other Information
"Legal Proceedings
"Item 1A
"Risk Factors
"Unregistered Sales of Equity Securities and Use of Proceeds
"Defaults upon Senior Securities
"Mine Safety Disclosures
"Item 5
"Other Information
"Item 6
"Exhibits
"Signatures

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  soi_CurrentFolio_10Q  

Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q


(Mark One)

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

For the quarterly period ended September  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: 001-38090

 

SOLARIS OILFIELD INFRASTRUCTURE, INC.

(Exact name of registrant as specified in its charter)


 

 

 

Delaware

81-5223109

(State or other jurisdiction
of incorporation or organization)

(I.R.S. Employer
Identification No.)

 

 

9811 Katy Freeway, Suite 700

Houston, Texas

77024

(Address of principal executive offices)

(Zip code)

 

 

(281) 501-3070

(Registrant’s telephone number, including area code)

 

 

(Former name, former address and former fiscal year, if changed since last report)

 

 

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Class A Common Stock, $0.01 par value

“SOI”

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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b‑2 of the Exchange Act.

 

 

 

 

Large accelerated filer

Accelerated filer

 

Non-accelerated filer

Smaller reporting company

 

 

 

Emerging growth company

 

 

If an emerging growth company indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑2 of the Exchange Act). Yes No 

As of October 25, 2019, the registrant had 31,648,317  shares of Class A common stock, $0.01 par value per share, and 15,939,169 shares of Class B common stock, $0.00 par value per share, outstanding.

 

 

Table of Contents

SOLARIS OILFIELD INFRASTRUCTURE, INC.

TABLE OF CONTENTS

 

 

 

 

 

Page

Cautionary Statement Regarding Forward-Looking Statements 

1

PART 1: FINANCIAL INFORMATION 

3

Item 1. 

Financial Statements

3

Item 2. 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

25

Item 3. 

Quantitative and Qualitative Disclosures about Market Risk

45

Item 4. 

Controls and Procedures

45

PART II. OTHER INFORMATION 

47

Item 1. 

Legal Proceedings

47

Item 1A. 

Risk Factors

47

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

47

Item 3. 

Defaults upon Senior Securities

47

Item 4. 

Mine Safety Disclosures

47

Item 5. 

Other Information

47

Item 6. 

Exhibits

48

SIGNATURES 

49

 

 

 

i

Table of Contents

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10‑Q (the “Quarterly Report”) includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Statements that are predictive in nature, that depend upon or refer to future events or conditions or that include the words “believe,” “expect,” “anticipate,” “intend,” “estimate” and other expressions that are predictions of or indicate future events and trends and that do not relate to historical matters identify forward-looking statements. Our forward-looking statements include statements about our business strategy, our industry, our future profitability, our expected capital expenditures and the impact of such expenditures on our performance, the costs of being a publicly traded corporation and our capital programs.

A forward-looking statement may include a statement of the assumptions or bases underlying the forward-looking statement. We believe that we have chosen these assumptions or bases in good faith and that they are reasonable. You are cautioned not to place undue reliance on any forward-looking statements. You should also understand that it is not possible to predict or identify all such factors and should not consider the following list to be a complete statement of all potential risks and uncertainties. Factors that could cause our actual results to differ materially from the results contemplated by such forward-looking statements include:

·

the level of domestic capital spending by the oil and natural gas industry;

·

natural or man-made disasters and other external events that may disrupt our manufacturing operations;

·

volatility of oil and natural gas prices;

·

changes in general economic and geopolitical conditions;

·

large or multiple customer defaults, including defaults resulting from actual or potential insolvencies;

·

technological advancements in well completion technologies;

·

competitive conditions in our industry;

·

inability to fully protect our intellectual property rights;

·

changes in the long-term supply of and demand for oil and natural gas;

·

actions taken by our customers, competitors and third-party operators;

·

fluctuations in transportation costs or the availability or reliability of transportation to supply our systems and transloading services;

·

changes in the availability and cost of capital;

·

our ability to successfully implement our business plan;

·

our ability to complete growth projects on time and on budget;

·

the price and availability of debt and equity financing (including changes in interest rates);

·

changes in our tax status;

·

our ability to successfully develop our research and technology capabilities and implement technological developments and enhancements and expand our product and service offerings;

·

changes in market price and availability of materials;

1

Table of Contents

·

the effects of existing and future laws and governmental regulations (or the interpretation thereof);

·

cyber-attacks targeting systems and infrastructure used by the oil and natural gas industry;

·

failure to secure or maintain contracts with our largest customers;

·

the effects of future litigation;

·

credit markets;

·

leasehold or business acquisitions;

·

uncertainty regarding our future operating results;

·

significant changes in the transportation industries that service our business, such as increased regulation and embargoes; and

·

plans, objectives, expectations and intentions contained in this Quarterly Report that are not historical.

All forward-looking statements speak only as of the date of this Quarterly Report. You should not place undue reliance on our forward-looking statements. Although forward-looking statements reflect our good faith beliefs at the time they are made, forward-looking statements involve known and unknown risks, uncertainties and other factors, including the factors described under Item 1A, “Risk Factors” in our Annual Report on Form 10-K/A for the year ended December 31, 2018, this Quarterly Report and in our other filings with the Securities and Exchange Commission (the “SEC”), which may cause our actual results, performance or achievements to differ materially from anticipated future results, performance or achievements expressed or implied by such forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events, changed circumstances or otherwise, unless required by law.

 

 

 

2

Table of Contents

PART 1: FINANCIAL INFORMATION

Item 1:     Financial Statements

SOLARIS OILFIELD INFRASTRUCTURE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts)

(Unaudited)

 

 

 

 

 

 

 

 

    

September 30,

 

December 31,

 

 

2019

 

2018

Assets

 

 

  

 

 

  

Current assets:

 

 

  

 

 

  

Cash

 

$

51,686

 

$

25,057

Accounts receivable, net

 

 

44,115

 

 

39,746

Prepaid expenses and other current assets

 

 

5,246

 

 

5,492

Inventories

 

 

7,481

 

 

10,470

Total current assets

 

 

108,528

 

 

80,765

Property, plant and equipment, net

 

 

311,253

 

 

296,538

Operating lease right-of-use assets

 

 

8,032

 

 

 —

Goodwill

 

 

17,236

 

 

17,236

Intangible assets, net

 

 

3,956

 

 

4,540

Deferred tax assets

 

 

56,475

 

 

58,074

Other assets

 

 

660

 

 

1,454

Total assets

 

$

506,140

 

$

458,607

Liabilities and Stockholders' Equity

 

 

  

 

 

  

Current liabilities:

 

 

  

 

 

  

Accounts payable

 

$

3,502

 

$

9,127

Accrued liabilities

 

 

16,834

 

 

12,658

Current portion of deferred revenue

 

 

12,990

 

 

12,990

Current portion of operating lease liabilities

 

 

598

 

 

 —

Current portion of finance lease liabilities

 

 

30

 

 

35

Other current liabilities

 

 

1,115

 

 

515

Total current liabilities

 

 

35,069

 

 

35,325

Senior secured credit facility

 

 

 —

 

 

13,000

Deferred revenue, net of current

 

 

2,960

 

 

12,468

Operating lease liabilities, net of current

 

 

7,961

 

 

 —

Finance lease liabilities, net of current

 

 

137

 

 

154

Payables related to Tax Receivable Agreement

 

 

67,987

 

 

56,149

Other long-term liabilities

 

 

494

 

 

633

Total liabilities

 

 

114,608

 

 

117,729

Commitments and contingencies (Note 11)

 

 

  

 

 

  

Stockholders' equity:

 

 

  

 

 

  

Preferred stock, $0.01 par value, 50,000 shares authorized, none issued and outstanding

 

 

 —

 

 

 —

Class A common stock, $0.01 par value, 600,000 shares authorized, 31,179 issued and 31,016 outstanding as of September 30, 2019 and 27,182 issued and 27,091 outstanding as of December 31, 2018

 

 

310

 

 

271

Class B common stock, $0.00 par value, 180,000 shares authorized, 15,940 shares issued and outstanding as of September 30, 2019 and 19,627 issued and outstanding as of December 31, 2018

 

 

 —

 

 

 —

Additional paid-in capital

 

 

194,153

 

 

164,086

Retained earnings

 

 

62,517

 

 

35,507

Treasury stock (at cost), 163 shares and 91 shares as of September 30, 2019 and December 31, 2018, respectively

 

 

(2,522)

 

 

(1,414)

Total stockholders' equity attributable to Solaris

 

 

254,458

 

 

198,450

Non-controlling interest

 

 

137,074

 

 

142,428

Total stockholders' equity

 

 

391,532

 

 

340,878

Total liabilities and stockholders' equity

 

$

506,140

 

$

458,607

 

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

3

Table of Contents

SOLARIS OILFIELD INFRASTRUCTURE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

September 30,

 

    

2019

    

2018

    

2019

    

2018

Revenue:

 

 

  

 

 

  

 

 

  

 

 

  

System rental

 

$

36,638

 

$

42,031

 

$

113,726

 

$

104,563

System services

 

 

18,153

 

 

12,053

 

 

48,621

 

 

29,499

Transloading services

 

 

4,417

 

 

2,000

 

 

15,131

 

 

3,847

Inventory software services

 

 

396

 

 

602

 

 

1,351

 

 

1,950

Total revenue

 

 

59,604

 

 

56,686

 

 

178,829

 

 

139,859

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating costs and expenses:

 

 

  

 

 

  

 

 

  

 

 

  

Cost of system rental (excluding $5,773 and $4,133 and $16,481 and $10,128 of depreciation and amortization for the three and nine months ended September 30, 2019 and 2018, respectively, shown separately) (1)

 

 

2,838

 

 

1,949

 

 

7,737

 

 

5,050

Cost of system services (excluding $384 and $347 and $1,173 and $889 of depreciation and amortization for the three and nine months ended September 30, 2019 and 2018, respectively, shown separately) (1)

 

 

21,072

 

 

13,906

 

 

56,366

 

 

34,691

Cost of transloading services (excluding $411 and $529 and $1,231 and $544 of depreciation and amortization for the three and nine months ended September 30, 2019 and 2018, respectively, shown separately) (1)

 

 

652

 

 

597

 

 

2,051

 

 

1,464

Cost of inventory software services (excluding $193 and $193 and $579 and $598 of depreciation and amortization for the three and nine months ended September 30, 2019 and 2018, respectively, shown separately)

 

 

160

 

 

191

 

 

460

 

 

614

Depreciation and amortization

 

 

6,908

 

 

5,328

 

 

19,875

 

 

12,514

Selling, general and administrative (excluding $147 and $126 and $411 and $355 of depreciation and amortization for the three and nine months ended September 30, 2019 and 2018, respectively, shown separately) (1)

 

 

4,933

 

 

3,869

 

 

13,967

 

 

12,662

Other operating expenses

 

 

248

 

 

56

 

 

529

 

 

1,752

Total operating costs and expenses

 

 

36,811

 

 

25,896

 

 

100,985

 

 

68,747

Operating income

 

 

22,793

 

 

30,790

 

 

77,844

 

 

71,112

Interest expense, net (2)

 

 

(8)

 

 

(116)

 

 

(775)

 

 

(271)

Total other expense

 

 

(8)

 

 

(116)

 

 

(775)

 

 

(271)

Income before income tax expense

 

 

22,785

 

 

30,674

 

 

77,069

 

 

70,841

Provision for income taxes

 

 

(3,703)

 

 

(4,237)

 

 

(12,042)

 

 

(9,541)

Net income

 

 

19,082

 

 

26,437

 

 

65,027

 

 

61,300

Less: net income related to non-controlling interests

 

 

(7,684)

 

 

(13,418)

 

 

(28,036)

 

 

(31,754)

Net income attributable to Solaris

 

$

11,398

 

$

13,019

 

$

36,991

 

$

29,546

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share of Class A common stock – basic

 

$

0.36

 

$

0.49

 

$

1.33

 

$

1.13

Earnings per share of Class A common stock – diluted

 

$

0.36

 

$

0.49

 

$

1.33

 

$

1.12

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic weighted-average shares of Class A common stock outstanding

 

 

30,951

 

 

26,197

 

 

27,270

 

 

25,216

Diluted weighted-average shares of Class A common stock outstanding

 

 

30,980

 

 

26,329

 

 

27,317

 

 

25,380

 

(1)

The condensed consolidated statements of operations include stock-based compensation expense as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of system rental

 

$

10

 

$

 —

 

$

24

 

$

 5

Cost of system services

 

 

71

 

 

51

 

 

187

 

 

132

Cost of transloading services

 

 

 5

 

 

 1

 

 

12

 

 

 1

Selling, general and administrative

 

 

1,139

 

 

286

 

 

3,042

 

 

3,002

Stock-based compensation expense

 

$

1,225

 

$

338

 

$

3,265

 

$

3,140

 

(2)Interest expense includes $528 of unamortized debt issuance costs written-off in the nine months ended September 30, 2019 in connection with the amended and restated 2019 Credit Agreement.

 

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

 

4

Table of Contents

SOLARIS OILFIELD INFRASTRUCTURE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2019

 

 

Class A

 

Class B

 

Additional

 

 

 

 

 

Non-

 

Total

 

 

Common Stock

 

Common Stock

 

Paid-in

 

Retained

 

Treasury Stock

 

controlling

 

Stockholders'

 

  

Shares

  

Amount

  

Shares

  

Amount

  

Capital

  

Earnings

  

Shares

  

Amount

  

Interest

  

Equity

Balance at January 1, 2019

 

27,091

 

$

271

 

19,627

 

$

 —

 

$

164,086

 

$

35,507

 

91

 

$

(1,414)

 

$

142,428

 

$

340,878

Effect of ASU No. 2016-02 implementation (Refer to Note 2)

 

 —

 

 

 —

 

 —

 

 

 —

 

 

186

 

 

(532)

 

 —

 

 

 —

 

 

(186)

 

 

(532)

Exchange of Solaris LLC Units and shares of Class B common stock for shares of Class A common stock

 

3,245

 

 

32

 

(3,245)

 

 

 —

 

 

24,925

 

 

 —

 

 —

 

 

 —

 

 

(24,957)

 

 

 —

Net effect of deferred tax asset and payables related to Tax Receivable Agreement from the exchange of Solaris LLC Units and shares of Class B common stock for shares of Class A common stock

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(1,895)

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(1,895)

Stock option exercises

 

65

 

 

 1

 

 —

 

 

 —

 

 

601

 

 

 —

 

28

 

 

(427)

 

 

(336)

 

 

(161)

Stock-based compensation

 

 —

 

 

 —

 

 —

 

 

 —

 

 

553

 

 

 —

 

 —

 

 

 —

 

 

346

 

 

899

Vesting of restricted stock

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 2

 

 

 —

 

 —

 

 

(4)

 

 

(2)

 

 

(4)

Solaris LLC distribution paid to Solaris LLC unitholders at $0.10 per Solaris LLC Unit

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(1,638)

 

 

(1,638)

Dividends paid ($0.10 per share of Class A common stock)

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(3,119)

 

 —

 

 

 —

 

 

 —

 

 

(3,119)

Net income

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

12,317

 

 —

 

 

 —

 

 

11,118

 

 

23,435

Balance at March 31, 2019

 

30,401

 

 

304

 

16,382

 

 

 —

 

 

188,458

 

 

44,173

 

119

 

 

(1,845)

 

 

126,773

 

 

357,863

Exchange of Solaris LLC Units and shares of Class B common stock for shares of Class A common stock

 

442

 

 

 4

 

(442)

 

 

 —

 

 

3,571

 

 

 —

 

 —

 

 

 —

 

 

(3,575)

 

 

 —

Net effect of deferred tax asset and payables related to Tax Receivable Agreement from the exchange of Solaris LLC Units and shares of Class B common stock for shares of Class A common stock

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(397)

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(397)

Stock option exercises

 

11

 

 

 —

 

 —

 

 

 —

 

 

48

 

 

 —

 

 —

 

 

 —

 

 

(20)

 

 

28

Stock-based compensation

 

 —

 

 

 —

 

 —

 

 

 —

 

 

809

 

 

 —

 

 —

 

 

 —

 

 

428

 

 

1,237

Vesting of restricted stock

 

51

 

 

 1

 

 —

 

 

 —

 

 

245

 

 

 —

 

16

 

 

(299)

 

 

(246)

 

 

(299)

Solaris LLC distribution paid to Solaris LLC unitholders at $0.10 per Solaris LLC Unit

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(1,594)

 

 

(1,594)

Dividends paid ($0.10 per share of Class A common stock)

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(3,164)

 

 —

 

 

 —

 

 

 —

 

 

(3,164)

Net income

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

13,275

 

 —

 

 

 —

 

 

9,234

 

 

22,509

Balance at June 30, 2019

 

30,905

 

$

309

 

15,940

 

$

 —

 

$

192,734

 

$

54,284

 

135

 

$

(2,144)

 

$

131,000

 

$

376,183

Net effect of deferred tax asset and payables related to Tax Receivable Agreement from the exchange of Solaris LLC Units and shares of Class B common stock for shares of Class A common stock

 

 —

 

 

 —

 

 —

 

 

 —

 

 

143

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

143

Stock-based compensation

 

 —

 

 

 —

 

 —

 

 

 —

 

 

833

 

 

 —

 

 —

 

 

 —

 

 

429

 

 

1,262

Vesting of restricted stock

 

111

 

 

 1

 

 —

 

 

 —

 

 

443

 

 

 —

 

28

 

 

(378)

 

 

(445)

 

 

(379)

Solaris LLC distribution paid to Solaris LLC unitholders at $0.10 per Solaris LLC Unit

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(1,594)

 

 

(1,594)

Dividends paid ($0.10 per share of Class A common stock)

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(3,165)

 

 —

 

 

 —

 

 

 —

 

 

(3,165)

Net income

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

11,398

 

 —

 

 

 —

 

 

7,684

 

 

19,082

Balance at September 30, 2019

 

31,016

 

$

310

 

15,940

 

$

 —

 

$

194,153

 

$

62,517

 

163

 

$

(2,522)

 

$

137,074

 

$

391,532

 

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

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SOLARIS OILFIELD INFRASTRUCTURE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2018

 

 

Class A

 

Class B

 

Additional

 

 

 

 

 

Non-

 

Total

 

 

Common Stock

 

Common Stock

 

Paid-in

 

Retained

 

Treasury Stock

 

controlling

 

Stockholders'

 

  

Shares

  

Amount

  

Shares

  

Amount

  

Capital

  

Earnings

  

Shares

  

Amount

  

Interest

  

Equity

Balance at January 1, 2018

 

19,010

 

$

190

 

26,811

 

$

 —

 

$

117,638

 

$

(4,174)

 

16

 

$

(261)

 

$

140,850

 

$

254,243

Exchange of Solaris LLC Units and shares of Class B common stock for shares of Class A common stock

 

5,904

 

 

59

 

(5,904)

 

 

 —

 

 

31,317

 

 

 —

 

 —

 

 

 —

 

 

(31,376)

 

 

 —

Net effect of deferred tax asset and payables related to Tax Receivable Agreement from the exchange of Solaris LLC Units and shares of Class B common stock for shares of Class A common stock

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(171)

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(171)

Stock option exercises

 

235

 

 

 3

 

 —

 

 

 —

 

 

1,047

 

 

 —

 

 —

 

 

 —

 

 

(374)

 

 

676

Stock-based compensation

 

 —

 

 

 —

 

 —

 

 

 —

 

 

989

 

 

 —

 

 —

 

 

 —

 

 

885

 

 

1,874

Net income

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

5,930

 

 —

 

 

 —

 

 

7,485

 

 

13,415

Balance at March 31, 2018

 

25,149

 

 

252

 

20,907

 

 

 —

 

 

150,820

 

 

1,756

 

16

 

 

(261)

 

 

117,470

 

 

270,037

Exchange of Solaris LLC Units and shares of Class B common stock for shares of Class A common stock

 

269

 

 

 3

 

(269)

 

 

 —

 

 

1,549

 

 

 —

 

 —

 

 

 —

 

 

(1,552)

 

 

 —

Net effect of deferred tax asset and payables related to Tax Receivable Agreement from the exchange of Solaris LLC Units and shares of Class B common stock for shares of Class A common stock

 

 —

 

 

 —

 

 —

 

 

 —

 

 

753

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

753

Stock option exercises

 

56

 

 

 —

 

 —

 

 

 —

 

 

171

 

 

 —

 

 —

 

 

 —

 

 

(11)

 

 

160

Stock-based compensation

 

 —

 

 

 —

 

 —

 

 

 —

 

 

964

 

 

 —

 

 —

 

 

 —

 

 

781

 

 

1,745

Vesting of restricted stock

 

346

 

 

 3

 

 —

 

 

 —

 

 

895

 

 

 —

 

 —

 

 

 —

 

 

(898)

 

 

 —

Other

 

 —

 

 

 —

 

 —

 

 

 —

 

 

60

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

60

Net income

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

10,597

 

 —

 

 

 —

 

 

10,851

 

 

21,448

Balance at June 30, 2018

 

25,820

 

$

258

 

20,638

 

$

 —

 

$

155,212

 

$

12,353

 

16

 

$

(261)

 

$

126,641

 

$

294,203

Exchange of Solaris LLC Units and shares of Class B common stock for shares of Class A common stock

 

528

 

 

 5

 

(528)

 

 

 —

 

 

3,417

 

 

 —

 

 —

 

 

 —

 

 

(3,422)

 

 

 —

Net effect of deferred tax asset and payables related to Tax Receivable Agreement from the exchange of Solaris LLC Units and shares of Class B common stock for shares of Class A common stock

 

 —

 

 

 —

 

 —

 

 

 —

 

 

842

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

842

Stock option exercises

 

36

 

 

 —

 

 —

 

 

 —

 

 

312

 

 

 —

 

 1

 

 

(9)

 

 

(207)

 

 

96

Stock-based compensation

 

 —

 

 

 —

 

 —

 

 

 —

 

 

222

 

 

 —

 

 —

 

 

 —

 

 

310

 

 

532

Vesting of restricted stock

 

223

 

 

 3

 

 —

 

 

 —

 

 

1,111

 

 

 —

 

74

 

 

(1,140)

 

 

(1,114)

 

 

(1,140)

Net income

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

13,019

 

 —

 

 

 —

 

 

13,418

 

 

26,437

Balance at September 30, 2018

 

26,607

 

$

266

 

20,110

 

$

 —

 

$

161,116

 

$

25,372

 

91

 

$

(1,410)

 

$

135,626

 

$

320,970

 

 

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

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SOLARIS OILFIELD INFRASTRUCTURE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

For the Nine Months Ended

 

 

September 30, 

 

    

2019

    

2018

Cash flows from operating activities:

 

 

  

 

 

  

Net income

 

$

65,027

 

$

61,300

Adjustment to reconcile net income to net cash provided by operating activities:

 

 

  

 

 

  

Depreciation and amortization

 

 

19,875

 

 

12,514

Loss on disposal of asset

 

 

181

 

 

222

Stock-based compensation

 

 

3,265

 

 

3,140

Amortization of debt issuance costs

 

 

709

 

 

218

Write-off of deposit

 

 

202

 

 

 —

Deferred income tax expense

 

 

11,284

 

 

9,000

Other

 

 

(165)

 

 

651

Changes in operating assets and liabilities:

 

 

 

 

 

  

Accounts receivable

 

 

(4,369)

 

 

(21,599)

Prepaid expenses and other assets

 

 

2,088

 

 

(3,667)

Inventories

 

 

(2,555)

 

 

(8,575)

Accounts payable

 

 

(3,909)

 

 

441

Accrued liabilities

 

 

6,424

 

 

3,894

Deferred revenue

 

 

(9,508)

 

 

 —

Net cash provided by operating activities

 

 

88,549

 

 

57,539

Cash flows from investing activities:

 

 

  

 

 

  

Investment in property, plant and equipment

 

 

(32,914)

 

 

(125,013)

Proceeds from disposal of assets

 

 

130

 

 

 —

Investment in intangible assets

 

 

 —

 

 

(6)

Cash received from insurance proceeds

 

 

618

 

 

160

Net cash used in investing activities

 

 

(32,166)

 

 

(124,859)

Cash flows from financing activities:

 

 

  

 

 

  

Payments under finance leases

 

 

(26)

 

 

(21)

Payments under insurance premium financing

 

 

(1,443)

 

 

(841)

Proceeds from stock option exercises

 

 

294

 

 

932

Payments related to purchase of treasury stock

 

 

(1,108)

 

 

(1,140)

Repayment of senior secured credit facility

 

 

(13,000)

 

 

8,000

Payments related to debt issuance costs

 

 

(197)

 

 

(1,014)

Distribution and dividend paid to Solaris LLC unitholders and Class A common shareholders

 

 

(14,274)

 

 

 —

Other

 

 

 —

 

 

60

Net cash provided by (used in) financing activities

 

 

(29,754)

 

 

5,976

 

 

 

 

 

 

 

Net increase (decrease) in cash

 

 

26,629

 

 

(61,344)

Cash at beginning of period

 

 

25,057

 

 

63,421

Cash at end of period

 

$

51,686

 

$

2,077

 

 

 

 

 

 

 

Non-cash activities

 

 

  

 

 

  

Investing:

 

 

  

 

 

  

Capitalized depreciation in property, plant and equipment

 

$

559

 

$

501

Property and equipment additions incurred but not paid at period-end

 

 

235

 

 

6,309

Property, plant and equipment additions transferred from inventory

 

 

5,355

 

 

7,532

Financing:

 

 

 

 

 

 

Insurance premium financing

 

 

1,869

 

 

1,552

Cash paid for:

 

 

 

 

 

  

Interest

 

 

200

 

 

118

Income Taxes

 

 

663

 

 

314

 

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

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SOLARIS OILFIELD INFRASTRUCTURE, INC.

Notes to the Condensed Consolidated Financial Statements

(Dollars in thousands)

1.    Organization and Background of Business

Description of Business

We are an independent provider of supply chain management and logistics solutions designed to drive efficiencies and reduce costs for the oil and natural gas industry. We manufacture and provide patented mobile proppant and chemical management systems that unload, store and deliver proppant and chemicals used in hydraulic fracturing of oil and natural gas wells. The systems are designed to address the challenges associated with transferring large quantities of proppant and chemicals to the well site, including the cost and management of last mile logistics, which includes coordinating proppant delivery to systems. Our systems are deployed in most of the active oil and natural gas basins in the United States.

We operate an independent, unit-train capable, high speed transload facility in Oklahoma (the “Kingfisher Facility”) that provides rail-to-truck transloading and high-efficiency sand silo storage and transloading services.  Commercial operations at the Kingfisher Facility commenced in January 2018 and we completed construction at the end of July 2018.  

We also provide software solutions to remotely monitor proppant inventory from the source mine to well site through our Railtronix® and Solaris Lens™ inventory management systems. Our customers use data from our software solutions to manage distribution of proppant and chemicals throughout their supply chain.

2.    Summary of Significant Accounting Policies

Basis of Presentation and Consolidation

The accompanying interim unaudited condensed consolidated financial statements of Solaris Inc. have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). These financial statements reflect all normal recurring adjustments that are necessary for fair presentation. Operating results for the three and nine months ended September 30, 2019 and 2018 are not necessarily indicative of the results that may be expected for the full year or for any interim period.

The unaudited interim condensed consolidated financial statements should be read in conjunction with Solaris Inc.’s Annual Report on Form 10-K/A for the year ended December 31, 2018.    

Solaris Oilfield Infrastructure, Inc. (either individually or together with its subsidiaries, as the context requires, “Solaris Inc.” or the “Company”) is the managing member of Solaris Oilfield Infrastructure, LLC (“Solaris LLC”) and is responsible for all operational, management and administrative decisions relating to Solaris LLC's business. Solaris Inc. consolidates the financial results of Solaris LLC and its subsidiaries and reports non-controlling interest related to the portion of the units in Solaris LLC (the “Solaris LLC Units”) not owned by Solaris Inc., which will reduce net income attributable to the holders of Solaris Inc.’s Class A common stock

All material intercompany transactions and balances have been eliminated upon consolidation.

Use of Estimates

The preparation of condensed consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Significant estimates used in the preparation of these condensed consolidated financial statements include, but are not limited to, stock-based compensation, depreciation associated with property, plant and equipment and related impairment considerations of those assets, determination of fair value of intangible assets acquired in business combinations, determination of the present value of lease payments and right-of-use assets and certain other assets and

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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.

Cash

For the purposes of the statements of cash flows, the Company considers all short-term, highly liquid, investments with an original maturity of three months or less to be cash equivalents. Cash is deposited in demand accounts in federally insured domestic institutions to minimize risk. Accounts of each institution are insured by Federal Deposit Insurance Corporation. Cash balances at times may exceed federally-insured limits. We have not incurred losses related to these deposits.

Accounts Receivable

Accounts receivable consists of trade receivables recorded at the invoice amount, plus accrued revenue that is not yet billed, less an estimated allowance for doubtful accounts (if any). Accounts receivable are generally due within 60 days or less, or in accordance with terms agreed with customers. 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, the customer’s current ability to 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 the allowance for doubtful accounts. Allowance for doubtful accounts was zero as of September 30, 2019 and December 31, 2018.

Inventories

Inventories consist of materials used in the manufacturing of the Company’s systems, which include raw materials and purchased parts and is stated at the lower of cost or net realizable value. Net realizable value is determined, giving consideration to quality, excessive levels, obsolescence and other factors. Adjustments that reduce stated amounts will be recognized as impairments in the condensed consolidated statements of operations. There were no impairments recorded for the three and nine months ended September 30, 2019 and 2018.

Property, Plant and Equipment

Property, plant and equipment are stated at cost, or fair value for assets acquired in a business combination, less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful service lives of the assets as noted below:

 

 

 

 

    

Useful Life

Systems and related equipment

 

Up to 15 years

Machinery and equipment

 

3-10 years

Furniture and fixtures

 

5 years

Computer hardware and software

 

3-10 years

Vehicles

 

5 years

Transloading facility and equipment

 

15-30 years

Buildings and leasehold improvements

 

15 years

 

Systems that are in the process of being manufactured are considered property, plant and equipment. However, the systems do not depreciate until they are fully completed. Systems in process are a culmination of material, labor and overhead.

Expenditures 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 condensed consolidated financial statements and any resulting gain or loss is recognized in the condensed consolidated statements of operations.

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Table of Contents

Definite-lived Intangible Assets

Identified intangible assets with determinable lives consist primarily of customer relationships, a non-competition agreement and software acquired in the acquisition of Railtronix, LLC (“Railtronix”), as well as patents that were filed for our systems and other intellectual property. Amortization on these assets is calculated on the straight-line method over the estimated useful lives of the assets, which is five to fifteen years. The Company recorded amortization expense of $195 for each of the three months ended September 30, 2019 and 2018. The Company recorded amortization expense of $584 and $606 for the nine months ended September 30, 2019 and 2018, respectively.

Identified intangible assets by major classification consist of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

Net Book

 

 

Gross

 

Amortization

 

Value

As of September 30, 2019:

 

 

 

 

 

 

 

 

 

Customer relationships

 

$

4,703

 

$

(1,232)

 

$

3,471

Software acquired in the acquisition of Railtronix

 

 

346

 

 

(91)

 

 

255

Non-competition agreement

 

 

225

 

 

(82)

 

 

143

Patents and other

 

 

114

 

 

(27)

 

 

87

Total identifiable intangibles

 

$

5,388

 

$

(1,432)

 

$

3,956

 

 

 

 

 

 

 

 

 

 

As of December 31, 2018:

 

 

 

 

 

 

 

 

 

Customer relationships

 

$

4,703

 

$

(727)

 

$

3,976

Software acquired in the acquisition of Railtronix

 

 

346

 

 

(54)

 

 

292

Non-competition agreement

 

 

225

 

 

(49)

 

 

176

Patents and other

 

 

114

 

 

(18)

 

 

96

Total identifiable intangibles

 

$

5,388

 

$

(848)

 

$

4,540

 

Leases

The Company accounts for leases in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 842, Leases (“ASC Topic 842”), which the Company adopted under ASU No. 2016-02 “Leases (Topic 842)” effective January 1, 2019. The Company applied ASC Topic 842 to all leases existing at or commencing after January 1, 2019 and elected the package of transition practical expedients for expired or existing contracts, which does not require reassessment of: (1) whether any of our contracts are or contain leases, (2) lease classification and (3) initial direct costs. The Company also elected the practical expedient to adopt the new lease requirements through a cumulative effect adjustment in the period of adoption and did not adjust comparative periods. As a result of the adoption of ASC Topic 842 on January 1, 2019, the Company recorded operating right-of-use (“ROU”) assets of $8,503, operating lease liabilities of $9,016 and a cumulative effect adjustment to retained earnings for operating leases of $532.

We determine if an arrangement is a lease at inception. The Company made the election to not apply the recognition requirements in ASC Topic 842 to short-term leases (i.e., leases of twelve months or less). Instead, the Company recognizes the lease payments in profit or loss on a straight-line basis over the lease term. Operating leases are included in operating lease ROU assets, current portion of operating lease liabilities, and operating lease liabilities, net of current in the Company’s condensed consolidated balance sheets. Finance leases are included in property and equipment, current portion of finance lease liabilities, and finance lease liabilities, net of current in the Company’s condensed consolidated balance sheets. 

ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. As most of the Company’s leases do not provide an implicit rate, we use our incremental borrowing rate in determining the present value of lease payments based on the information available at the commencement date. Our incremental borrowing rate reflects the estimated rate of interest that we would pay to borrow on a collateralized basis over a similar term an amount equal to

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the lease payments in a similar economic environment. We use the implicit rate when readily determinable. The ROU asset also includes any lease payments made and excludes lease incentives received. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

Goodwill

Goodwill represents the excess of the purchase price of a business over the estimated fair value of the identifiable assets acquired and liabilities assumed. As of September 30, 2019 and December 31, 2018, the Company reported $17,236 of goodwill related to the 2014 purchase of the silo manufacturing business from Loadcraft Industries Ltd. and the 2017 purchase of the assets of Railtronix. The Company evaluates goodwill for impairment annually, as of October 31, or more often as facts and circumstances warrant. Factors such as unexpected adverse economic conditions, competition and market changes may require more frequent assessments. There was no impairment for the three and nine months ended September 30, 2019 and 2018.

Before employing detailed impairment testing methodologies, the Company may first evaluate the likelihood of impairment by considering qualitative factors relevant to the business, such as macroeconomic, industry, market or any other factors that have a significant bearing on fair value. If the Company first utilizes a qualitative approach and determines that it is more likely than not that goodwill is impaired, detailed testing methodologies are then applied. Otherwise, the Company concludes that no impairment has occurred. The Company may also choose to bypass a qualitative approach and opt instead to employ detailed testing methodologies, regardless of a possible more likely than not outcome. If the Company determines through the qualitative approach that detailed testing methodologies are required, or if the qualitative approach is bypassed, the Company compares the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.

Impairment of Long-Lived Assets and Definite-lived Intangible Assets

Long-lived assets, such as property, plant, equipment and definite-lived intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable, such as insufficient cash flows or plans to dispose of or sell long-lived assets before the end of their previously estimated useful lives. If the carrying amount is not recoverable, the Company recognizes an impairment loss equal to the amount by which the carrying amount exceeds fair value. The Company estimates fair value based on projected future discounted cash flows. Fair value calculations for long-lived assets and intangible assets contain uncertainties because it requires the Company to apply judgment and estimates concerning future cash flows, strategic plans, useful lives and market performance. The Company also applies judgment in the selection of a discount rate that reflects the risk inherent in the current business model. There was no impairment indicators for the three and nine months ended September 30, 2019 and 2018.

Revenue Recognition

In determining the appropriate amount of revenue to be recognized as we fulfill our obligations under the agreement, the following steps must be performed at contract inception: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations, including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) we satisfy each performance obligation.

Revenues from system rental consist primarily of fixed monthly fees charged to customers for the use of our patented mobile proppant management systems that unload, store and deliver proppant and chemicals at oil and natural gas well sites, which is considered to be our performance obligation. Contracts with customers are typically on thirty- to sixty-day payment terms. Revenues are recognized over time as the performance obligations are satisfied under the terms of the customer contract. We determined that the performance obligation is satisfied over time as the customer simultaneously receives and consumes the benefits provided by the entity’s performance of services, typically as our

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systems are used by the customer. We measure progress using an input method based on resources consumed or expended relative to the total resources expected to be consumed or expended. We typically charge our customers for the rental of our systems on a monthly basis under agreements requiring the rental of a minimum number of systems for a period of twelve months. The Company is typically entitled to short fall payments if such minimum contractual obligations are not maintained by our customers. Minimum contractual obligations have been maintained and thus the Company has not recognized revenues related to shortfalls on such take or pay contractual obligations to date.

Revenues from system services consist primarily of the fees charged to customers for services including mobilization and transportation of our systems, field supervision and support and services coordinating proppant delivery to systems, each of which are considered to be separate performance obligations. Contracts with customers are typically on thirty- to sixty-day payment terms. When the Company provides system services including field supervision and support, we determined that the performance obligation is satisfied over time as the customer simultaneously receives and consumes the benefits provided by the entity’s performance of the services, typically based on fixed weekly or monthly contractual rates for field supervision and support and when the Company provides services coordinating proppant delivery. We measure progress using an input method based on resources consumed or expended relative to the total resources expected to be consumed or expended. When the Company provides mobilization and transportation of our systems on behalf of our customers, we determined that the performance obligation is satisfied at a point in time when the system has reached its intended destination.

Revenues from transloading services consist primarily of the fees charged to customers for transloading proppant at our transloading facility, which is considered to be our performance obligation. Transloading services operations commenced in January 2018. We provide rail-to-truck transloading and high-efficiency sand silo storage and transloading services at the facility. Contracts with customers are typically on thirty- to sixty-day payment terms. Revenues are typically recognized over time as the customer simultaneously receives and consumes the benefits provided by the entity’s performance of the transloading service based on a throughput fee per ton rate for proppant delivered to and transloaded at the facility. We measure progress based on the proppant delivered and transloaded at the facility. Under our agreements at the facility, quarterly minimum throughput volumes are required and the Company is entitled to short fall payments if such minimum quarterly contractual obligations are not maintained. These shortfalls are based on fixed minimum volumes at a fixed rate and are recognized over time as throughput volumes transloaded are below minimum throughput volumes required. The Company recorded $221 and $522 of shortfall revenue during the three and nine months ended September 30, 2019, respectively.

Revenues from inventory software services consist primarily of the fees charged to customers for the use of our Railtronix inventory management software, which is considered to be our performance obligation. Revenues are recognized over time as the customer simultaneously receives and consumes the benefits provided by the entity’s performance based on a throughput fee to monitor proppant that is loaded into a railcar, stored at a transload facility or loaded into a truck.

Deferred Revenue

Deferred revenue consists of a $25,980 partial termination payment fee received in December 2018 in accordance with a contract modification which is accounted for prospectively. The partial termination payment fee represents the distinct unsatisfied portion of a contract to provide transloading services and are considered part of the transaction price and will be allocated to the remaining performance obligations under the contract. Deferred revenues in the condensed consolidated balance sheets were $15,950 and $25,458 as of September 30, 2019 and December 31, 2018, respectively, which will be recognized as revenue from transloading services. The Company recognized $3,203 and $9,508 of deferred revenue as revenue from transloading services in the condensed consolidated statements of operations for the three and nine months ended September 30, 2019, respectively.  Refer to Note 13. “Subsequent Events” for termination information on this agreement and recognition of the remaining deferred revenue. No deferred revenue was recorded or recognized as revenue during the three and nine months ended September 30, 2018.

Stock-based Compensation

The Company accounts for its stock-based compensation including grants of restricted stock and options in the condensed consolidated statements of operations based on their fair values on the date of grant. The Company

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recognizes expense on a straight-line basis over the awards’ vesting period, which is generally the requisite service period.

Research and Development

The Company expenses research and development costs as incurred, which is included in selling, general and administrative expenses in the condensed consolidated statements of operations. There were no research and development costs for the three and nine months ended September 30, 2019 and 2018.

Financial Instruments

The carrying value of the Company’s financial instruments, consisting of cash, accounts receivable, notes receivable, accounts payable and insurance premium financing, approximates their fair value due to the short maturity of such instruments. Financial instruments also consist of a revolving credit facility and term loans, for which fair value approximates carrying value as the debt bears interest at a variable rate which is reflective of current rates otherwise available to the Company. As of September 30, 2019, we had no borrowings under the 2019 Credit Agreement (as defined below) outstanding. 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.

Fair Value Measurements

The Company’s financial assets and liabilities are to be measured using inputs from the three levels of the fair value hierarchy, of which the first two are considered observable and the last unobservable, which are as follows:

·

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.

Income Taxes

Solaris Inc. is a corporation and, as a result, is subject to United States federal, state and local income taxes. For the three months ended September 30, 2019 and 2018, we recognized a combined United States federal and state provision for income taxes of $3,703 and $4,237, respectively. For the nine months ended September 30, 2019 and 2018, we recognized a combined United States federal and state provision for income taxes of $12,042 and $9,541, respectively.

Solaris LLC is treated as a partnership for United States federal income tax purposes and therefore does not pay United States federal income tax on its taxable income. Instead, the Solaris LLC members are liable for United States federal income tax on their respective shares of the Company’s taxable income reported on the members’ United States federal income tax returns.

Our revenues are derived through transactions in several states, which may be subject to state and local taxes. Accordingly, we have recorded a liability for state and local taxes that management believes is adequate for activities as of September 30, 2019 and December 31, 2018.

We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events included in the condensed consolidated financial statements. Under this method, we determine deferred tax assets and liabilities on the basis of the differences between the book value and tax bases of assets and liabilities by using enacted tax rates in effect for the year in which the

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differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period in which the enactment date occurs.

We recognize deferred tax assets to the extent we believe these assets are more-likely-than-not to be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent results of operations.

We record uncertain tax positions on the basis of a two-step process in which (1) we determine whether it is more-likely-than-not the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions meeting the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50% likely to be realized upon ultimate settlement with the related tax authority.

Interest and penalties related to income taxes are included in the benefit (provision) for income taxes in our condensed consolidated statement of operations. We have not incurred any significant interest or penalties related to income taxes in any of the periods presented.

See Note 9. “Income Taxes” for additional information regarding income taxes.

Payable Related to the Tax Receivable Agreement

In connection with the Solaris Inc.’s initial public offering (the “IPO” or the “Offering”), Solaris Inc. entered into a Tax Receivable Agreement (the “Tax Receivable Agreement”) with the members of Solaris LLC immediately prior to the IPO (each such person and any permitted transferee, a “TRA Holder,” and together, the “TRA Holders”) on May 17, 2017. This agreement generally provides for the payment by Solaris Inc. to each TRA Holder of 85% of the net cash savings, if any, in United States federal, state and local income tax and franchise tax that Solaris Inc. actually realizes (computed using simplifying assumptions to address the impact of state and local taxes) or is deemed to realize in certain circumstances in periods after the IPO as a result of (i) certain increases in tax basis that occur as a result of Solaris Inc.’s acquisition (or deemed acquisition for United States federal income tax purposes) of all or a portion of such TRA Holder’s Solaris LLC Units in connection with the IPO or pursuant to the exercise of the Redemption Right or the Call Right (each as defined in Solaris LLC’s Second Amended and Restated Limited Liability Company Agreement (the “Solaris LLC Agreement”)) and (ii) imputed interest deemed to be paid by Solaris Inc. as a result of, and additional tax basis arising from, any payments Solaris makes under the Tax Receivable Agreement. Solaris Inc. will retain the benefit of the remaining 15% of these cash savings. As of September 30, 2019 and December 31, 2018, Solaris Inc. recorded a payable related to the Tax Receivable Agreement of $67,987 and $56,149, respectively. The increase in payables related to the Tax Receivable Agreement is a result of Solaris Inc.’s acquisition (or deemed acquisition for United States federal income tax purposes) of Solaris LLC Units from TRA Holders during the nine months ended September 30, 2019.

 

Environmental Matters

The 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 September 30, 2019 and December 31, 2018, there were no environmental matters deemed probable.

Segment Information

Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation 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

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Chief Executive Officer. The Company and the Chief Executive Officer view the Company’s operations and manage its business as one operating segment. All long-lived assets of the Company reside in the United States. 

Accounting Standards Recently Issued But Not Yet Adopted

There are no accounting standards recently issued, but not yet adopted which are expected to impact our condensed consolidated financial statements. 

 

 

 

3.    Prepaid Expenses and Other Current Assets

Prepaid expenses and other currents assets were comprised of the following at September  30, 2019 and December 31, 2018:

 

 

 

 

 

 

 

 

    

September 30, 

    

December 31,

 

 

2019

 

2018

Prepaid purchase orders

 

$

1,106

 

$

2,802

Prepaid insurance

 

 

1,481

 

 

576

Deposits

 

 

901

 

 

882

Incentive receivables and other assets

 

 

1,758

 

 

1,232

Prepaid expenses and other current assets

 

$

5,246

 

$

5,492

 

 

 

4.    Property, Plant and Equipment

Property, plant and equipment was comprised of the following at September  30, 2019 and December 31, 2018:

 

 

 

 

 

 

 

 

    

September 30, 

    

December 31, 

 

    

2019

    

2018

Systems and related equipment

 

$

287,565

 

$

258,600

Systems in process

 

 

16,437

 

 

11,245

Transloading facility and equipment

 

 

40,254

 

 

40,218

Computer hardware and software

 

 

1,238

 

 

1,185

Machinery and equipment

 

 

5,216

 

 

5,126

Vehicles

 

 

8,044

 

 

8,334

Buildings

 

 

4,339

 

 

4,280

Land

 

 

612

 

 

612

Furniture and fixtures

 

 

284

 

 

282

Property, plant and equipment, gross

 

 

363,989

 

 

329,882

Less: accumulated depreciation

 

 

(52,736)

 

 

(33,344)

Property, plant and equipment, net

 

$

311,253

 

$

296,538

 

Depreciation expense for the three months ended September 30, 2019 and 2018 was $6,713  and $5,133, respectively, of which $5,773 and $4,133 is attributable to cost of system rental, $384 and $347 is attributable to cost of system services, $411 and $529 is attributable to cost of transloading services and $145 and $124 is attributable to selling, general and administrative expenses, respectively. Depreciation expense for the nine months ended September 30, 2019 and 2018 was $19,291 and $11,908, respectively, of which $16,481 and $10,128 is attributable to cost of system rental, $1,173 and $889 is attributable to cost of system services, $1,231 and $544 is attributable to cost of transloading services and $406 and $347 is attributable to selling, general and administrative expenses, respectively. The Company capitalized $187 and $182 of depreciation expense associated with machinery and equipment used in the manufacturing of its systems for the three months ended September  30, 2019 and 2018, respectively. The Company capitalized $559 and $501 of depreciation expense associated with machinery and equipment used in the manufacturing of its systems for the nine months ended September 30, 2019 and 2018, respectively.

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5.    Accrued Liabilities

Accrued liabilities were comprised of the following at September  30, 2019 and December 31, 2018:

 

 

 

 

 

 

 

 

    

September 30, 

    

December 31, 

 

    

2019

    

2018

Property, plant and equipment

 

$

194

 

$

2,153

Employee related expenses

 

 

3,996

 

 

4,500

Selling, general and administrative

 

 

1,491

 

 

944

Cost of revenue

 

 

5,700

 

 

2,702

Excise, franchise and sales taxes

 

 

4,045

 

 

1,461

Ad valorem taxes

 

 

1,306

 

 

774

Other

 

 

102

 

 

124

Accrued liabilities

 

$

16,834

 

$

12,658

 

 

6.    Leases

The Company leases land and equipment under operating leases which expire at various dates through February 2047. These land leases include commitments related to a 30-year land lease with the State of Oklahoma related to the Company’s Kingfisher Facility. Equipment leases include locomotives rented from third-parties in order to facilitate rail transloading activities at the Kingfisher Facility. Upon completion of the primary term, both parties have substantive rights to terminate the leases. As a result, enforceable rights and obligations do not exist under the rental agreements subsequent to the primary term.

Additionally, the Company leases office and storage from third parties for our corporate and field locations under operating leases, which include commitments related to a guarantee of lease agreement with Solaris Energy Management, LLC, a related party of the Company, related to the rental of office space for the Company's corporate headquarters. Refer to Note 12. “Related Party Transactions” for additional information regarding related party transactions recognized. Upon completion of the primary term, both parties have substantive rights to terminate the leases. As a result, enforceable rights and obligations do not exist under the rental agreements subsequent to the primary term.

Solaris LLC leases property from the City of Early, Texas under an agreement classified as a finance lease. The lease expires on February 25, 2025. The finance lease obligation is payable in monthly installments including imputed interest. The Company also leases certain office equipment with purchase options upon the end of lease terms which are accounted for as finance leases with various expiration dates. As of September  30, 2019 and December 31, 2018, the Company had property, plant and equipment under finance leases with a cost of $299 and accumulated depreciation of $101 and $85, respectively.

The Company’s lease agreements do not include both lease and non-lease components, extension options or residual value guarantees, and there are no leases that have yet to commence. Additionally, our lease agreements do not impose restrictions on our ability to pay dividends or incur financing obligations.

The components of lease expense were as follows:

 

 

 

 

 

 

 

 

    

Three Months Ended

    

Nine Months Ended

 

 

September 30, 2019

 

September 30, 2019

Operating lease cost (1) (2)

 

$

297

 

$

890

 

 

 

 

 

 

 

Finance lease cost

 

 

 

 

 

 

Amortization of ROU assets

 

 

 8

 

 

25

Interest on lease liabilities

 

 

 1

 

 

 1

Total finance lease cost

 

$

 9

 

$

26

 

(1)

Includes short term leases.

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(2)

Operating lease costs of $185,  $20 and $92 were reported in Selling, general and administrative, Cost of system services and Cost of transloading services for the three months ended September 30, 2019, respectively. Operating lease costs of $556,  $58 and $276 were reported in Selling, general and administrative, Cost of system services and Cost of transloading services for the nine months ended September 30, 2019, respectively. No variable lease costs were recognized during the three and nine months ended September 30, 2019.

 

Future minimum lease payments under non-cancellable operating leases as of December 31, 2018 were as follows:

 

 

 

 

Year Ending December 31, 

    

Amount

2019

 

$

1,432

2020

 

 

1,375

2021

 

 

1,299

2022

 

 

1,093

2023

 

 

1,092

Thereafter

 

 

9,725

Total minimum lease payments

 

$

16,016

 

Future minimum lease payments under non-cancellable leases as of September 30, 2019 were as follows:

 

 

 

 

 

 

 

Year Ending December 31,

    

Operating Leases

    

Finance Leases

2019 (remainder of)

 

$

243

 

 

14

2020

 

 

1,116

 

 

35

2021

 

 

1,060

 

 

33

2022

 

 

1,091

 

 

33

2023

 

 

1,100

 

 

33

Thereafter

 

 

9,463

 

 

36

Total future minimum lease payments

 

 

14,073

 

 

184

Less: effects of discounting

 

 

(5,514)

 

 

(17)

Total lease liabilities

 

$

8,559

 

$

167

 

Supplemental cash flow information related to leases was as follows:

 

 

 

 

 

 

 

 

    

Three Months Ended

    

Nine Months Ended

 

 

September 30, 2019

 

September 30, 2019

Supplemental Cash Flows Information

 

 

 

 

 

 

Cash paid for amounts included in the measurement of lease liabilities:

 

 

 

 

 

 

Operating cash flows from operating leases

 

$

243

 

$

877

Financing cash flows from finance leases

 

 

 9

 

 

26

 

Other information related to leases was as follows:

 

 

 

 

 

    

September 30,

 

 

2019

Weighted Average Remaining Lease Term

 

 

 

Operating leases

 

 

13.9 years

Finance leases

 

 

5.4 years

Weighted Average Discount Rate

 

 

 

Operating leases

 

 

6.3%

Finance leases

 

 

3.3%

 

 

 

7.    Senior Secured Credit Facility

On April 26, 2019, Solaris LLC entered into an Amended and Restated Credit Agreement (the “2019 Credit Agreement”) by and among Solaris LLC, as borrower, each of the lenders party thereto and Wells Fargo Bank, National

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Association, as administrative agent.  The 2019 Credit Agreement replaced, in its entirety, Solaris LLC’s 2018 Credit Agreement (as defined herein). The 2019 Credit Agreement consists of an initial $50,000 revolving loan commitment (the “Loan”) with a $25,000 uncommitted accordion option to increase the Loan availability to $75,000. The term of the 2019 Credit Agreement expires on April 26, 2022

Our obligations under the Loan are generally secured by a pledge of substantially all the assets of Solaris LLC and its subsidiaries, and such obligations are guaranteed by Solaris LLC’s domestic subsidiaries other than Immaterial Subsidiaries (as defined in the 2019 Credit Agreement). We have the option to prepay the loans at any time without penalty.

Borrowings under the 2019 Credit Agreement bear interest at either LIBOR or an alternate base rate plus an applicable margin, and interest is payable quarterly. The applicable margin ranges from 1.75% to 2.50% for Eurodollar loans and 0.75% to 1.50% for alternate base rate loans, in each case depending on our total leverage ratio. The 2019 Credit Agreement requires that we pay a quarterly commitment fee on undrawn amounts of the Loan, ranging from 0.25% to 0.375% depending upon the total leverage ratio.

The 2019 Credit Agreement requires that we maintain ratios of (a) consolidated EBITDA to interest expense of not less than 2.75 to 1.00, (b) senior indebtedness to consolidated EBITDA of not more than 2.50 to 1.00 and (c) the sum of 100% of eligible accounts, inventory and fixed assets to the total revolving exposure of not less than 1.00 to 1.00 when the total leverage ratio is greater than 2.00 to 1.00 and total revolving exposure under the Loan exceeds $3,000. For the purpose of these tests, certain items are subtracted from indebtedness and senior indebtedness. EBITDA, as defined in the 2019 Credit Agreement, excludes certain noncash items and any extraordinary, unusual or non-recurring gains, losses or expenses.

The 2019 Credit Agreement also requires that we prepay any outstanding borrowings under the Loan in the event our total leverage ratio is greater than 1.00 to 1.00 and our consolidated cash balance exceeds $20,000, taking into account certain adjustments. Capital expenditures are not restricted unless borrowings under the Loan exceed $5,000 for any 180 consecutive day period, in which case capital expenditures will be permitted up to $100,000 plus any unused availability for capital expenditures from the immediately preceding fiscal year.

As of September 30, 2019, we had no borrowings under the 2019 Credit Agreement outstanding and ability to draw $50,000.

As of September 30, 2019 we were in compliance will all covenants in accordance with the 2019 Credit Agreement.

On January 19, 2018, Solaris LLC entered into a credit agreement (the “2018 Credit Agreement”) which consisted of a $50,000 advancing term loan (the “Advance Loan”) and a $20,000 revolving loan, with a $10,000 uncommitted accordion option to increase the total revolving loans (the “Revolving Loan”, and together with the Advance Loan, the “Loans”). The 2019 Credit Agreement replaced, in its entirety, the 2018 Credit Agreement.

As of December 31, 2018 we had $13,000 of borrowings outstanding under the 2018 Credit Agreement. During the three and nine months ended September 30, 2019, all outstanding borrowings were repaid and as of September  30, 2019.

Borrowings under the 2018 Credit Agreement bore interest at one-month LIBOR plus an applicable margin and interest were payable monthly. The applicable margin ranged from 3.00% to 3.50% depending on our senior leverage ratio. Borrowings under the Revolving Loan had a weighted average interest rate of 5.49% for the nine months ended September 30, 2019. The 2018 Credit Agreement required that we pay a monthly commitment fee on undrawn amounts of the Revolving Loan, ranging from 0.25% to 0.50% depending upon the average outstanding balance of the obligations relative to the Revolving Loan commitments.

8.    Equity

On September 26, 2019, Solaris Inc. paid a quarterly cash dividend of $0.10 per share of Class A common stock. Solaris LLC paid a distribution of $4,759, or $0.10 per Solaris LLC Unit, to all Solaris LLC unitholders as of September 19, 2019, $3,165 of which was paid to Solaris Inc. Solaris Inc. used the proceeds from the distribution to pay the

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dividend to all holders of shares of Class A common stock as of September 19, 2019, which totaled $3,165, including $64 related to shares of restricted stock.

On June 26, 2019, Solaris Inc. paid a quarterly cash dividend of $0.10 per share of Class A common stock. Solaris LLC paid a distribution of $4,758, or $0.10 per Solaris LLC Unit, to all Solaris LLC unitholders as of June 14, 2019, $3,164 of which was paid to Solaris Inc. Solaris Inc. used the proceeds from the distribution to pay the dividend to all holders of shares of Class A common stock as of June 14, 2019, which totaled $3,164, including $74 related to shares of restricted stock.

On March 29, 2019, Solaris Inc. paid a quarterly cash dividend of $0.10 per share of Class A common stock. Solaris LLC paid a distribution of $4,757, or $0.10 per Solaris LLC Unit, to all Solaris LLC unitholders as of March 22, 2019, $3,119 of which was paid to Solaris Inc.  Solaris Inc. used the proceeds from the distribution to pay the dividend to all holders of shares of Class A common stock as of March 22, 2019, which totaled $3,119, including $79 related to shares of restricted stock.

Stock-based compensation

The Company’s long-term incentive plan for employees, directors and consultants of the Company and its affiliates (the “LTIP”) provides for the grant of all or any of the following types of equity-based awards: (1) incentive stock options qualified as such under United States federal income tax laws; (2) stock options that do not qualify as incentive stock options; (3) stock appreciation rights; (4) restricted stock awards; (5) restricted stock units; (6) bonus stock; (7) performance awards; (8) dividend equivalents; (9) other stock-based awards; (10) cash awards; and (11) substitute awards.

Subject to adjustment in accordance with the terms of the LTIP, 5,118,080 shares of Solaris Inc.’s Class A common stock have been reserved for issuance pursuant to awards under the LTIP. Class A common stock withheld to satisfy exercise prices or tax withholding obligations will be available for delivery pursuant to other awards. The LTIP will be administered by the Board, the Compensation Committee of the Board or an alternative committee appointed by the Board.

A total of 591,261 options to purchase Class A common stock of the Company have been issued to employees, directors and consultants under the LTIP at an exercise price of $2.87 per option and a weighted average grant date fair value of $12.04 per option. All options were vested by November 13, 2017. As of September  30,  2019, 522,285 options have been exercised, 33,348 forfeited and 35,628 remain outstanding.

The fair value of each option award is estimated on the date of grant using the Black-Scholes option-pricing model. Expected volatility is based on implied volatilities from historical trading of publicly traded companies which are in the same industry sector. The simplified method is used to derive an expected term. The expected term represents an estimate of the time options are expected to remain outstanding. The risk-free rate for periods within the contractual life of the option is based on the United States treasury yield curve in effect at the time of grant. Compensation cost, as measured at the grant date fair value of the award, is recognized as an expense over the employee’s requisite service period for service-based awards (generally the vesting period of the award of four years). For the three and nine months ended September  30, 2019 and 2018, the Company did not recognize stock-based compensation expense on options.

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The Company accounts for its stock-based compensation including grants of restricted stock in the condensed consolidated statements of operations based on their estimated fair values on the date of grant. The following table further summarizes activity related to restricted stock for the three and nine months ended September  30, 2019 and 2018:

 

 

 

 

 

 

 

Restricted Stock Awards

 

  

2019

  

2018

Unvested at January 1,

 

411,497

 

1,218,265

Awarded

 

375,068

 

2,120

Vested

 

(706)

 

 —

Forfeited

 

(405)

 

(848)

Unvested at March 31,

 

785,454

 

1,219,537

Awarded

 

29,847

 

 —

Vested

 

(67,674)

 

(345,520)

Forfeited

 

(7,896)

 

(21,495)

Unvested at June 30,

 

739,731

 

852,522

Awarded

 

43,830

 

86,544

Vested

 

(138,821)

 

(297,371)

Forfeited

 

(9,644)

 

(223,988)

Unvested at September 30,

 

635,096

 

417,707

 

For the three months ended September  30, 2019, the Company recognized $10,  $71, $5 and $1,139 of stock-based compensation expense on restricted stock in cost of system rental, cost of system services, cost of transloading services and selling, general and administrative, respectively, in the condensed consolidated statements of operations and $37 within property, plant and equipment, net in the condensed consolidated balance sheets. For the nine months ended September  30, 2019, the Company recognized $24,  $187,  $12 and $3,042 of stock-based compensation expense on restricted stock in cost of system rental, cost of system services, cost of transloading services and selling, general and administrative, respectively, in the condensed consolidated statements of operations and $133 within property, plant and equipment, net in the condensed consolidated balance sheets. Compensation expense includes adjustment for forfeitures as incurred. As of September  30,  2019,  635,096 shares of restricted stock are issued and are outstanding. 1,497 shares, 350,907 shares, 149,688 shares and 133,004 shares of restricted stock vest in 2019, 2020, 2021 and 2022, respectively.

Earnings Per Share

Basic earnings per share of Class A common stock is computed by dividing net income attributable to Solaris by the weighted-average number of shares of Class A common stock outstanding during the same period. Diluted earnings per share is computed giving effect to all potentially dilutive shares. 

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The following table sets forth the calculation of earnings per share, or EPS, for the three and nine months ended September  30, 2019 and 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

Basic net income per share:

 

2019

 

2018

 

2019

    

2018

Numerator

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to Solaris

 

$

11,398

 

$

13,019

 

$

36,991

 

$

29,546

Less income attributable to participating securities (1)

 

 

(245)

 

 

(251)

 

 

(817)

 

 

(1,042)

Net income attributable to common stockholders

 

$

11,153

 

$

12,768

 

$

36,174

 

$

28,504

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of unrestricted outstanding common shares used to calculate basic net income per share

 

 

30,951

 

 

26,197

 

 

27,270

 

 

25,216

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

Stock options

 

 

29

 

 

132

 

 

47

 

 

164

Diluted weighted-average shares of Class A common stock outstanding used to calculate diluted net income per share

 

 

30,980

 

 

26,329

 

 

27,317

 

 

25,380

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share of Class A common stock - basic

 

$

0.36

 

 

0.49

 

 

1.33

 

 

1.13

Earnings per share of Class A common stock - diluted

 

$

0.36

 

 

0.49

 

 

1.33

 

 

1.12

 

(1) The Company’s restricted shares of common stock are participating securities.

 

The following number of weighted-average potentially dilutive shares were excluded from the calculation of diluted earnings per share because the effect of including such potentially dilutive shares would have been antidilutive upon conversion:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

2019

 

2018

 

2019

    

2018

Class B common stock

 

 

15,939

 

 

20,398

 

 

15,598

 

 

21,085

Restricted stock awards

 

 

129

 

 

195

 

 

242

 

 

524

Total

 

 

16,068

 

 

20,593

 

 

15,840

 

 

21,609

 

 

9. Income Taxes

Income Taxes

Solaris Inc. is a corporation and, as a result is subject to United States federal, state and local income taxes. Solaris LLC is treated as a pass-through entity for United States federal tax purposes and in most state and local jurisdictions. As such, Solaris LLC’s members, including the Solaris Inc., are liable for federal and state income taxes on their respective shares of Solaris LLC’s taxable income. Solaris LLC is liable for income taxes in those states not recognizing its pass-through status.

The effective combined United States federal and state income tax rates were 14.80% and 13.98% for the three months ended September  30, 2019 and 2018, respectively. The effective combined United States federal and state income tax rates were 14.88% and 13.54% for the nine months ended September  30, 2019 and 2018, respectively. For the three and nine months ended September  30, 2019 and 2018, our effective tax rate differed from the statutory rate primarily due to Solaris LLC’s pass-through treatment for United States federal income tax purposes.

The Company’s deferred tax position reflects the net tax effects of the temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax reporting. The largest components of the Company’s deferred tax position relate to the Company’s investment in Solaris LLC and net

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operating loss carryovers. The Company recorded a deferred tax asset and additional paid-in capital for the difference between the book value and the tax basis of the Company’s investment in Solaris LLC. This difference originates from the equity offerings of Class A common stock, exchanges of membership interest in Solaris LLC (together with a corresponding number of shares of Class B common stock) for shares of Class A common stock, and a contribution of Class A common stock in connection with stock-based compensation.

Based on our cumulative earnings history and forecasted future sources of taxable income, we believe that we will be able to realize our deferred tax assets in the future. As the Company reassesses these assumptions in the future, changes in forecasted taxable income may alter this expectation and may result in an increase in to the valuation allowance and an increase in the effective tax rate.

 

The Company evaluates its tax positions and recognizes only tax benefits that, more likely than not, will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The tax position is measured at the largest amount of benefit that has a greater than 50.0% likelihood of being realized upon settlement. As of September  30, 2019 and December 31, 2018, the Company’s uncertain tax benefits totaling $816 are reported as a component of the net deferred tax asset in the condensed consolidated balance sheets. The full balance of unrecognized tax benefits as of September  30, 2019, if recognized, would affect the effective tax rate. However, we do not believe that any of the unrecognized tax benefits will be realized within the coming year. The Company has elected to recognize interest and penalties related to unrecognized tax benefits in income tax expense notwithstanding the fact that, as of September  30, 2019, the Company has not accrued any penalties or interest.

Payables Related to the Tax Receivable Agreement

As of September  30, 2019, our liability under the Tax Receivable Agreement was $67,987, representing 85% of the calculated net cash savings in United States federal, state and local income tax and franchise tax that Solaris Inc. anticipates realizing in future years from certain increases in tax basis and certain tax benefits attributable to imputed interest as a result of Solaris Inc.’s acquisition (or deemed acquisition for United States federal income tax purposes) of Solaris LLC Units in connection with the IPO or pursuant to an exercise of the Redemption Right or the Call Right (each as defined in the Solaris LLC Agreement).

The projection of future taxable income involves significant judgment. Actual taxable income may differ from our estimates, which could significantly impact our liability under the Tax Receivable Agreement. We have determined it is more-likely-than-not that we will be able to utilize all of our deferred tax assets subject to the Tax Receivable Agreement; therefore, we have recorded a liability under the Tax Receivable Agreement related to the tax savings we may realize from certain increases in tax basis and certain tax benefits attributable to imputed interest as a result of Solaris Inc.’s acquisition (or deemed acquisition for United States federal income tax purposes) of Solaris LLC Units in connection with the IPO or pursuant to an exercise of the Redemption Right or the Call Right (each as defined in the Solaris LLC Agreement). If we determine the utilization of these deferred tax assets is not more-likely-than-not in the future, our estimate of amounts to be paid under the Tax Receivable Agreement would be reduced. In this scenario, the reduction of the liability under the Tax Receivable Agreement would result in a benefit to our condensed consolidated statement of operations.

10.  Concentrations

For the three months ended September  30, 2019, two customers accounted for  14% and 12% of the Company’s revenue. For the three months ended September  30, 2018, two customers accounted for 13%, and 10% of the Company’s revenue. For the nine months ended September  30, 2019, four customers accounted for 14%,  11%,  11% and 10% of the Company’s revenue. For the nine months ended September 30, 2018, three customers accounted for 16%,  10% and 10% of the Company’s revenue. As of September  30, 2019, four customers accounted for 14%,  14%,  12% and 10% of the Company’s accounts receivable. As of December 31, 2018, three customers accounted for 20%,  10% and 10% of the Company’s accounts receivable.

For the three months ended September  30, 2019, one supplier accounted for 38% of the Company’s total purchases. For the three months ended September  30, 2018, two suppliers accounted for 17% and 12% of the Company’s total purchases. For the nine months ended September  30, 2019, one supplier accounted for 17% of the Company’s total

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purchases. For the nine months ended September  30, 2018, two suppliers accounted for 14% and 12% of the Company’s total purchases. As of September  30, 2019, one supplier accounted for 77% of the Company’s accounts payable. As of December 31, 2018, one supplier accounted for 13% of the Company’s accounts payable.

11.  Commitments and Contingencies

In the normal course of business, the Company is subjected to various claims, legal actions, contract negotiations and disputes. The Company provides for losses, if any, in the year in which they can be reasonably estimated. In management’s opinion, there are currently no such matters outstanding that would have a material effect on the accompanying condensed consolidated financial statements.

The table below provides estimates of the timing of future payments that we are contractually obligated to make based on agreements in place at September 30, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Year Ending December 31, 

 

    

2019

    

2020

    

2021

    

2022

    

2023

    

Thereafter

    

Total

 

 

(in thousands)

Operating lease obligations (1)

 

$

243

 

$

1,116

 

$

1,060

 

$

1,091

 

$

1,100

 

$

9,463

 

$

14,073

Finance lease obligations (2)

 

 

14

 

 

35

 

 

33

 

 

33

 

 

33

 

 

36

 

 

184

Commitment fees on Revolving Loan (3)

 

 

32

 

 

125

 

 

125

 

 

40

 

 

 —

 

 

 —

 

 

322

Purchase commitments (4)

 

 

 —

 

 

2,588

 

 

2,217

 

 

 —

 

 

 —

 

 

 —

 

 

4,805

Other commitments

 

 

32

 

 

274

 

 

255

 

 

37

 

 

 2

 

 

 —

 

 

600

Total

 

$

321

 

$

4,138

 

$

3,690

 

$

1,201

 

$

1,135

 

$

9,499

 

 

19,984

 

(1)Operating lease obligations are related to our 30-year land lease with the State of Oklahoma related to the Company's Kingfisher Facility, as well as other office, land and equipment leases. Refer to Note 6. “Leases.”

(2)Finance lease obligations are related to our finance lease of a building at our Early, Texas manufacturing facility with the City of Early and leases of certain office equipment with purchase options upon the end of lease terms which are accounted for as finance leases with various expiration dates. Refer to Note 6. “Leases.”

(3)Commitment fees on our Revolving Loan were calculated based on the unused portion of lender commitments, at the applicable commitment fee rate of 0.25%. See Note 7. “Senior Secured Credit Facility,” for interest requirements per the 2019 Credit Agreement.

(4)Purchase commitments primarily relate to our agreement with our suppliers for material and parts purchases to be used in the manufacturing of our systems. The purchase commitments represent open purchase orders to our suppliers.

Other Commitments

In the normal course of business, the Company has certain short-term purchase obligations and commitments for products and services, primarily related to purchases of materials used in the manufacturing of its systems. As of September  30, 2019 and December 31, 2018, the Company had commitments of approximately $4,805 and $18,998, respectively, related to these commitments.

In connection with the acquisition of Railtronix, the seller is entitled to certain performance-based cash awards totaling $2,500 upon the achievement of certain financial milestones. As of September  30, 2019, one milestone had been achieved and the Company paid and recognized $1,625 in June 2018 in other operating expense in the condensed consolidated statements of operations. However, as of September  30, 2019, the Company had not concluded that the remaining milestone will be achieved and thus has not recognized additional obligations in the condensed consolidated financial statements.

The Company has executed a guarantee of lease agreement with Solaris Energy Management, LLC, a related party of the Company, related to the rental of office space for the Company’s corporate headquarters. The total future guaranty

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under the guarantee of lease agreement with Solaris Energy Management, LLC is $9,477 as of September  30, 2019. Refer to Note 12. “Related Party Transactions” for additional information regarding related party transactions recognized and Note 6. “Leases” for operating lease discussion.

12.  Related Party Transactions

The Company recognizes certain costs incurred in relation to transactions with entities owned or partially owned by William A. Zartler, the Chief Executive Officer and Chairman of the Board. The costs incurred in connection with these services include rent paid for office space, travel services, personnel, consulting and administrative costs. For the three months ended September  30, 2019 and 2018, Solaris LLC paid $217 and $164, respectively, for these services. For the nine months ended September 30, 2019 and 2018, Solaris LLC paid $836 and $503, respectively, for these services. As of September  30, 2019 and December 31, 2018, the Company included $231 and $232, respectively, in prepaid expenses and other current assets on the condensed consolidated balance sheets. As of September  30, 2019 and December 31, 2018, the Company included $78 and $103,  respectively, of accruals to related parties in accrued liabilities on the condensed consolidated balance sheets.

These costs are primarily incurred in connection with the amended and restated administrative services agreement, dated May 17, 2017, between Solaris LLC and Solaris Energy Management, LLC, a company partially owned by William A. Zartler.

Payables Related to the Tax Receivable Agreement

In connection with the IPO, Solaris Inc. entered into the Tax Receivable Agreement with the TRA Holders on May 17, 2017. See Note 9. “Income Taxes” for further discussion of the impact of the Tax Receivable Agreement on Solaris Inc.

 

13.  Subsequent Events

Kingfisher Facility

The Company has received notice from the customer party to the Company’s agreement for sand storage and transloading at the Company’s Kingfisher Facility that the customer intends to terminate the agreement effective December 31, 2019. The remaining term of the agreement will provide for replacement volumes by which the transloading activity of a third party during the fourth quarter of 2019 can be used to offset existing minimum contracted volumes related to the agreement. The agreement was previously partially terminated in December 2018, at which point the Company received a $25,980 partial termination fee. As of September 30, 2019, $15,950 of the partial termination fee is reported as deferred revenue in the Company’s Condensed Consolidated Balance Sheets. The Company anticipates being paid $1,680 in 2020 after termination of the agreement.  Assuming termination occurs during the fourth quarter of 2019, deferred revenue of $17,630 will be recognized over the term of the remaining performance obligations of the Company, which would conclude on December 31, 2019. The Company is currently engaged in discussions with potential customers regarding utilization of capacity at the Kingfisher Facility. The Company will continue to assess the carrying values of the assets at the Kingfisher Facility and if circumstances lead the Company to believe they may not be recoverable, the Company may incur an impairment charge in the future.

 

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ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Solaris Oilfield Infrastructure, Inc. (either individually or together with its subsidiaries, as the context requires, “we,” “us,” “our,” “Solaris Inc.” or the “Company”). The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the accompanying financial statements and related notes. The following discussion contains “forward-looking statements” that reflect our plans, estimates, beliefs and expected performance. Our actual results may differ materially from those anticipated as discussed in these forward-looking statements as a result of a variety of risks and uncertainties, including those described above in “Cautionary Statement Regarding Forward-Looking Statements” included elsewhere in this Quarterly Report and “Risk Factors” included in the Annual Report on Form 10-K/A for the year ended December 31, 2018 as updated by our subsequent filings with the Securities and Exchange Commission (the “SEC”), all of which are difficult to predict. In light of these risks, uncertainties and assumptions, the forward-looking events discussed may not occur. We assume no obligation to update any of these forward-looking statements except as otherwise required by law.

Overview

Solaris LLC was formed in July 2014. Solaris Inc. was incorporated as a Delaware corporation in February 2017 for the purpose of completing an initial public offering of equity in May 2017 (the “IPO” or the “Offering”) and related transactions. On May 11, 2017, in connection with the IPO, Solaris Inc. became a holding company whose sole material asset consists of units in Solaris LLC (“Solaris LLC Units”). Solaris Inc. became the managing member of Solaris LLC and is responsible for all operational, management and administrative decisions relating to Solaris LLC’s business and consolidates the financial results of Solaris LLC and its subsidiaries.

Executive Summary

We design, manufacture, rent and service specialized equipment that helps oil and natural gas operators and their suppliers drive efficiencies and reduce costs during the completion phase of well development. The majority of our revenue is currently derived from the rental and service of our patented mobile proppant management systems that unload, store and deliver proppant used in hydraulic fracturing of oil and natural gas wells, as well as coordinating the delivery of proppant to the well site. Our systems are deployed in most of the active oil and natural gas basins in the United States.

In 2018 and early 2019, we introduced a new product line and product enhancements, which we believe will help us maintain and expand our total revenue opportunity in the United States completions equipment and service space. We introduced our mobile chemical management system to the market in late 2018 and we have begun commercializing the offering in 2019. Product enhancements introduced in 2018 include our AutoHopper technology, which we are deploying across our fleet to automate the delivery of proppant into the blender, and the latest version of our Solaris Lens™ software, which is available on our systems and allows customers to view the entire last mile proppant supply chain in real time.

Recent Trends and Outlook

Demand for our products and services is predominantly driven by the level of oil and natural gas well drilling and completion activity, which, in turn, is determined by the current and anticipated profitability of developing oil and natural gas reserves.

The Baker Hughes US Land rig count decreased 7% in third quarter 2019 sequentially from second quarter 2019 and was down 13% from third quarter 2018. The US land rig count continued to decrease in the fourth quarter 2019, down 10% as of October 18, 2019, from average third quarter 2019 levels. These recent declines have been partially driven by continued efficiency gains as a result of new technologies deployed in the oilfield that have reduced the time required to drill and complete oil and gas wells.

As a result of these decreased drilling and completion times, we believe oil and gas operators spent a disproportionate amount of their annual budgets in the first half of the year, which resulted in lower spending and

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activity that began in September and impacted third quarter results, but could also reduce the level of capital spending, and related equipment demand, in the fourth quarter of 2019. In addition, some oil and gas operators have recently committed to generate free cash flow and spend within budgets, a significant change from recent years where operators outspent their cash flow. 

Our system rental activity in 2019 has followed these overall trends. During the third quarter 2019 we averaged 115 fully utilized mobile proppant systems, which was down 7% sequentially from the second quarter 2019 and down 10% from third quarter 2018.

Our fleet currently consists of 166 mobile proppant management systems, which is up 14% from 146 systems a year ago, and 14 mobile chemical management systems. We do not expect to add any additional systems for the remainder of 2019.

How We Generate Revenue

We generate the majority of our revenue through the rental of our systems and related services, including transportation of our systems, transportation of proppant to the well site and field supervision and support. The system rental and provision of related services are performed under a variety of contract structures, primarily master service agreements as supplemented by individual work orders detailing statements of work, pricing agreements and specific quotes. The master service agreements generally establish terms and conditions for the provision of our systems and service on a well site, indemnification, damages, confidentiality, intellectual property protection and payment terms and provisions. The rentals and services are generally priced based on prevailing market conditions at the time the services are provided, giving consideration to the specific requirements and activity levels of the customer. We typically charge our customers for the rental of our systems and related services on a monthly basis.

In early 2018, we began generating revenue for our transloading services at our independent, transload facility in Oklahoma (the “Kingfisher Facility”). We generally charge our customers a throughput fee for rail-to-truck transloading and high-efficiency sand silo storage and transloading services at the Kingfisher Facility.

Finally, we generate revenue through our Railtronix® inventory management software. We generally charge our customers a throughput fee to monitor proppant that is loaded into a railcar, stored at a transload facility or loaded into a truck at either a transload facility or mine.

Costs of Conducting Our Business

The principal costs associated with operating our business are:

·

Cost of system rental (excluding depreciation and amortization);

·

Cost of system services (excluding depreciation and amortization);

·

Cost of transloading services (excluding depreciation and amortization);

·

Cost of software inventory management services (excluding depreciation and amortization);

·

Depreciation and amortization associated primarily with the costs to build our systems and the costs to develop rail and storage assets;

·

Selling, general and administrative expenses; and

·

Other operating expenses.

Our cost of system rental (excluding depreciation and amortization) consists primarily of the costs of maintaining our equipment, developing and maintaining our Solaris Lens software, as well as insurance and property taxes related to our equipment.

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Our cost of system services (excluding depreciation and amortization) consists primarily of direct labor costs, and related travel and lodging expenses, system transportation costs and proppant transportation costs. A large portion of our cost of system services (excluding depreciation and amortization) are variable based on the number of systems deployed with customers.

Our cost of transloading services (excluding depreciation and amortization) consists primarily of direct labor costs, fuel, utilities, and maintenance.

Our cost of software inventory management services (excluding depreciation and amortization) consists primarily of direct labor and software subscriptions.

Our depreciation and amortization expense primarily consists of the depreciation expense related to our systems and related manufacturing machinery and equipment as well as rail and transloading equipment. The costs to build our systems, including any upgrades, are capitalized and depreciated over a life ranging from three to 15 years. The costs to build our rail and transloading storage assets are capitalized and depreciated over a life of 15 to 30 years.

Our salaries, benefits and payroll taxes are comprised of the salaries and related benefits for several functional areas of our organization, including sales and commercial, research and development, accounting and corporate administrative.

Our selling, general and administrative expenses are comprised of the salaries and related benefits for several functional areas of our organization, including sales and commercial, research and development, accounting and corporate administrative, as well as office rent, marketing expenses and third-party professional service providers.

How We Evaluate Our Operations

We use a variety of qualitative, operational and financial metrics to assess our performance. Among other measures, management considers revenue, revenue days, fully utilized system count, tons transloaded, EBITDA and Adjusted EBITDA.

Revenue

We analyze our revenue by comparing actual monthly revenue to our internal projections for a given period and to prior periods to assess our performance. We also assess our revenue in relation to the number of systems we have deployed to customers and the amount of proppant and chemicals transloaded at our Kingfisher Facility from period to period.

Revenue Days

We view revenue days as an important indicator of our performance. We calculate revenue days as the combined number of days our sand and chemical systems earn revenue in a period. We assess our revenue days from period to period in relation to the number of sand and chemical systems we have available in our fleet.

Fully Utilized System Count

The fully utilized system count is calculated as the total number of revenue days divided by the number of days in the period. We view the fully utilized system count as the best measure to track utilization and changes in rental activity on a period-over-period basis as the majority of our systems are rented on a monthly basis.

Tons Transloaded

We view tons transloaded as an important indicator of our performance. We calculate the number of tons transloaded as the combined number of proppant tons and chemicals that are transloaded at our Kingfisher Facility in a period. We assess the number of tons transloaded from period to period in relation to prior periods and contracted minimum volumes.

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EBITDA and Adjusted EBITDA

We view EBITDA and Adjusted EBITDA as important indicators of performance. We define EBITDA as net income, plus (i) depreciation and amortization expense, (ii) interest expense and (iii) income tax expense, including franchise taxes. We define Adjusted EBITDA as EBITDA plus (i) stock-based compensation expense and (ii) certain non-cash items and any extraordinary, unusual or non-recurring gains, losses or expenses.

Note Regarding Non-GAAP Financial Measures

EBITDA and Adjusted EBITDA are not financial measures presented in accordance with accounting principles generally accepted in the United States (“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. Net income (loss) is the GAAP measure most directly comparable to EBITDA and Adjusted EBITDA. Our non-GAAP financial measures should not be considered as alternatives to the most directly comparable GAAP financial measure. 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 EBITDA or Adjusted EBITDA in isolation or as substitutes for an analysis of our results as reported under GAAP. Because EBITDA and Adjusted EBITDA 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.

 

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Results of Operations

Three Months Ended September 30, 2019 Compared to Three Months Ended September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

September 30, 

 

 

 

 

    

2019

    

2018

    

Change

 

 

(in thousands)

Revenue

 

 

  

 

 

  

 

 

  

System rental

 

$

36,638

 

$

42,031

 

$

(5,393)

System services

 

 

18,153

 

 

12,053

 

 

6,100

Transloading services

 

 

4,417

 

 

2,000

 

 

2,417

Inventory software services

 

 

396

 

 

602

 

 

(206)

Total revenue

 

 

59,604

 

 

56,686

 

 

2,918

Operating costs and expenses:

 

 

  

 

 

  

 

 

  

Cost of system rental (excluding $5,773 and $4,133 of depreciation and amortization for the three months ended September 30, 2019 and 2018, respectively, shown separately) (1)

 

 

2,838

 

 

1,949

 

 

889

Cost of system services (excluding $384 and $347 of depreciation and amortization for the three months ended September 30, 2019 and 2018, respectively, shown separately) (1)

 

 

21,072

 

 

13,906

 

 

7,166

Cost of transloading services (excluding $411 and $529 of depreciation and amortization for the three months ended September 30, 2019 and 2018, respectively, shown separately) (1)

 

 

652

 

 

597

 

 

55

Cost of inventory software services (excluding $193 and $193 of depreciation and amortization for the three months ended September 30, 2019 and 2018, respectively, shown separately)

 

 

160

 

 

191

 

 

(31)

Depreciation and amortization

 

 

6,908

 

 

5,328

 

 

1,580

Selling, general and administrative (excluding $147 and $126 of depreciation and amortization for the three months ended September 30, 2019 and 2018, respectively, shown separately)

 

 

4,933

 

 

3,869

 

 

1,064

Other operating expenses

 

 

248

 

 

56

 

 

192

Total operating costs and expenses

 

 

36,811

 

 

25,896

 

 

10,915

Operating income

 

 

22,793

 

 

30,790

 

 

(7,997)

Interest expense, net

 

 

(8)

 

 

(116)

 

 

108

Total other expense

 

 

(8)

 

 

(116)

 

 

108

Income before income tax expense

 

 

22,785

 

 

30,674

 

 

(7,889)

Provision for income taxes

 

 

(3,703)

 

 

(4,237)

 

 

534

Net income

 

 

19,082

 

 

26,437

 

 

(7,355)

Less: net income related to non-controlling interests

 

 

(7,684)

 

 

(13,418)

 

 

5,734

Net income attributable to Solaris

 

$

11,398

 

$

13,019

 

$

(1,621)

 

Revenue

System Rental Revenue. Our system rental revenue decreased $5.4 million, or 13%, to $36.6 million for the three months ended September 30, 2019 compared to $42.0 million for the three months ended September 30, 2018. This decrease was primarily due to a 11% decrease in mobile proppant systems on a fully utilized basis, due to lower rig count and hydraulic fracturing activities as a result of operating efficiencies in completion activities and substantial spend by oil and gas companies relative to their full year budgets.

System Services Revenue. Our system services revenue increased $6.1 million, or 50%, to $18.2 million for the three months ended September  30, 2019 compared to $12.1 million for the three months ended September 30, 2018. System services revenue increased $7.6 million due to an increase in services provided to coordinate proppant delivered into our systems, partially offset by a  decrease of $1.5 million in field technician support to maintain systems and transportation of systems between customer sites.

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Transloading Services Revenue. Our transloading services revenue increased $2.4 million,  or 120%, to $4.4 million for the three months ended September 30, 2019 compared to $2.0 million for the three months ended September 30, 2018. This increase was primarily due to recognition of $3.2 million of deferred revenue partially offset by a decrease in the number of tons transloaded at our Kingfisher Facility. We generally charge our customers a throughput fee for providing rail-to-truck transloading and high-efficiency sand silo storage and transloading services in relation to proppant and chemicals delivered to the Kingfisher Facility.

Inventory Software Services Revenue. Our inventory software services revenue decreased $0.2 million, or 33%, to $0.4 million for the three months ended September 30, 2019 compared to $0.6 million for the three months ended September 30, 2018, related to Railtronix inventory management software. We generally charge our customers a throughput fee to monitor proppant that is loaded into a railcar, stored at a transload facility or loaded into a truck.

Operating Expenses

Total operating costs and expenses for the three months ended September 30, 2019 and 2018 were $36.8 million and $25.9 million, respectively, which represented 62% and 46% of total revenue, respectively. Total operating costs and expenses increased year-over-year primarily as a result of an increase in the number of our systems where we coordinate proppant delivered into our systems, coupled with an increase in depreciation and amortization expense. Total operating costs as a percentage of total revenue increased as a result of an increase in system services expense in relation to proppant delivery coordination services provided. Additional details regarding the changes in operating expenses are presented below.

Cost of System Rental (excluding depreciation and amortization). Cost of system rental increased $0.9 million, or 47%, to $2.8 million for the three months ended September 30, 2019 compared to $1.9 million for the three months ended September  30, 2018, excluding depreciation and amortization expense. Cost of system rental as a percentage of system rental revenue was 8% and 5%  for the three months ended September  30, 2019 and 2018, respectively.  Cost of system rental increased primarily due to an increase in maintenance expense, in addition to ad valorem and other fixed costs as a result of an increase in the number of systems that were added to our fleet. The average number of mobile proppant systems in the fleet increased to 165 systems in the three months ended September  30, 2019 from 134 systems in the three months ended September  30, 2018.

Cost of system rental including depreciation and amortization expense increased $2.5 million, or 41%, to $8.6 million for the three months ended September 30, 2019 compared to $6.1 million for the three months ended September 30, 2018. This increase was primarily attributable to the increase in depreciation expense related to the additional systems that were manufactured and added to our fleet.

Cost of System Services (excluding depreciation and amortization). Cost of system services increased $7.2 million, or 52%, to $21.1 million for the three months ended September 30, 2019 compared to $13.9 million for the three months ended September 30, 2018. This increase was primarily due to an increase of $7.9 million in relation to services provided to coordinate proppant delivered to systems, partially offset by decreases in third-party trucking services of $0.5 million to transport incremental systems deployed to customers. For the three months ended September 30, 2019, the cost of system services as a percentage of system services revenue increased to 116% compared to 115% for the three months ended September 30, 2018.

Cost of system services including depreciation and amortization expense increased $7.2 million, or 51%, to $21.4 million for the three months ended September 30, 2019 compared to $14.3 million for the three months ended September 30, 2018. This increase was primarily attributable to the factors mentioned above.

Cost of Transloading Services (excluding depreciation and amortization). Cost of transloading services increased $0.1 million, or 17%, to $0.7 million for the three months ended September 30, 2019 compared to $0.6 million for the three months ended September 30, 2018 primarily due to increases in direct labor costs, fuel, utilities and maintenance related to transloading services activity at our Kingfisher Facility.

Cost of transloading services including depreciation and amortization expense decreased $0.1 million, or 9%, to $1.1 million for the three months ended September 30, 2019 compared to $1.1 million for the three months ended

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September 30, 2018 due to depreciation expense related to transloading facility and equipment, which commenced upon completion of the construction of the Kingfisher Facility in the third quarter of 2018.

Cost of Inventory Software Services (excluding depreciation and amortization). Cost of inventory software services, which remained consistent at $0.2 million for the three months ended September 30, 2019 and 2018, primarily includes labor and software subscription costs related to Railtronix inventory management software.

Cost of inventory software services including depreciation and amortization expense remained consistent at $0.4 million for the three months ended September 30, 2019 and 2018. Amortization consists of customer relationships, a non-competition agreement and software acquired in the acquisition of Railtronix.

Depreciation and Amortization. Depreciation and amortization increased $1.6 million, or 30%, to $6.9 million for the three months ended September 30, 2019 compared to $5.3 million for the three months ended September 30, 2018. This increase was primarily attributable to additional depreciation expense related to additional systems that were manufactured and added to our fleet and our transloading facility and equipment placed in service in 2018 and during the nine months ended September 30, 2019.

Selling, General and Administrative Expenses (excluding depreciation and amortization). Selling, general and administrative expenses increased $1.1 million, or 28%, to  $5.0 million for the three months ended September 30, 2019 compared to $3.9 million for the three months ended September 30, 2018 due primarily to an increase in stock-based compensation, labor and professional fees.

Other Operating Expenses. Other operating expenses for the three months ended September 30, 2019 and 2018 were primarily related to loss on disposal of assets. 

Provision for Income Taxes. During the three months ended September 30, 2019, we recognized a combined United States federal and state provision for income taxes of $3.7 million, a decrease of $0.5 million as compared to $4.2 million we recognized during the three months ended September 30, 2018. This decrease was attributable to lower operating income. The effective combined United States federal and state income tax rates were 14.80% and 13.98% for the three months ended September 30, 2019 and 2018, respectively. For the three months ended September 30, 2019 and 2018, our effective tax rate differed from the statutory rate primarily due to Solaris LLC’s pass-through treatment for United States federal income tax purposes.

Net Income

Net income decreased $7.4 million, or 28%, to $19.1 million for the three months ended September 30, 2019 compared to $26.4 million for the three months ended September 30, 2018, due to the changes in revenues and expenses discussed above.

Comparison of Non-GAAP Financial Measures

We view EBITDA and Adjusted EBITDA as important indicators of performance. We define EBITDA as net income, plus (i) depreciation and amortization expense, (ii) interest expense and (iii) income tax expense, including franchise taxes. We define Adjusted EBITDA as EBITDA plus (i) stock-based compensation expense and (ii) certain non-cash items and any extraordinary, unusual or non-recurring gains, losses or expenses.

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

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titled measures of other companies, thereby diminishing their utility. The following table presents a reconciliation of Net income to EBITDA and Adjusted EBITDA for each of the periods indicated.

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

 

 

 

 

September 30, 

 

 

 

 

    

2019

    

2018

    

Change

 

 

(in thousands)

Net income

    

$

19,082

    

$

26,437

    

$

(7,355)

Depreciation and amortization

 

 

6,908

 

 

5,328

 

 

1,580

Interest expense, net

 

 

 8

 

 

116

 

 

(108)

Income taxes (1)

 

 

3,703

 

 

4,237

 

 

(534)

EBITDA

 

$

29,701

 

$

36,118

 

$

(6,417)

Stock-based compensation expense (2)

 

 

1,225

 

 

338

 

 

887

Loss on disposal of assets

 

 

99

 

 

51

 

 

48

Severance

 

 

154

 

 

 —

 

 

154

Adjusted EBITDA

 

$

31,179

 

$

36,507

 

$

(5,328)


(1)

Federal and state income taxes.

(2)

Represents stock-based compensation expense related to restricted stock awards of $1.2 million and $0.3 million in the three months ended September 30, 2019 and 2018, respectively.

(3)

Other is primarily related to severance costs.

Three Months Ended September 30, 2019 Compared to Three Months Ended September 30, 2018: EBITDA and Adjusted EBITDA

EBITDA decreased $6.4 million to $29.7 million for the three months ended September 30, 2019 compared to $36.1 million for the three months ended September 30, 2018. Adjusted EBITDA decreased $5.3 million to $31.2 million for the three months ended September 30, 2019 compared to $36.5 million for the three months ended September 30, 2018. EBITDA and Adjusted EBITDA decreased 18% and 15% for the three months ended September 30, 2019 compared to the three months ended September 30, 2018, respectively. The decreases were primarily due to lower rig count and hydraulic fracturing activities as a result of operating efficiencies in completion activities and substantial spend by oil and gas companies relative to their full year budgets.

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Nine Months Ended September 30, 2019 Compared to Nine Months Ended September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

 

 

September 30, 

 

 

 

 

    

2019

    

2018

    

Change

 

 

(in thousands)

Revenue

 

 

  

 

 

  

 

 

  

System rental

 

$

113,726

 

$

104,563

 

$

9,163

System services

 

 

48,621

 

 

29,499

 

 

19,122

Transloading services

 

 

15,131

 

 

3,847

 

 

11,284

Inventory software services

 

 

1,351

 

 

1,950

 

 

(599)

Total revenue

 

 

178,829

 

 

139,859

 

 

38,970

Operating costs and expenses:

 

 

  

 

 

  

 

 

  

Cost of system rental (excluding $16,481 and $10,128 of depreciation and amortization for the nine months ended September 30, 2019 and 2018, respectively, shown separately)

 

 

7,737

 

 

5,050

 

 

2,687

Cost of system services (excluding $1,173 and $889 of depreciation and amortization for the nine months ended September 30, 2019 and 2018, respectively, shown separately)

 

 

56,366

 

 

34,691

 

 

21,675

Cost of transloading services and other (excluding $1,231 and $544 of depreciation and amortization for the nine months ended September 30, 2019 and 2018, respectively, shown separately)

 

 

2,051

 

 

1,464

 

 

587

Cost of inventory software services (excluding $579 and $598 of depreciation and amortization for the nine months ended September 30, 2019 and 2018, respectively, shown separately)

 

 

460

 

 

614

 

 

(154)

Depreciation and amortization

 

 

19,875

 

 

12,514

 

 

7,361

Selling, general and administrative (excluding $411 and $355 of depreciation and amortization for the nine months ended September 30, 2019 and 2018, respectively, shown separately)

 

 

13,967

 

 

12,662

 

 

1,305

Other operating expenses

 

 

529

 

 

1,752

 

 

(1,223)

Total operating costs and expenses

 

 

100,985

 

 

68,747

 

 

32,238

Operating income

 

 

77,844

 

 

71,112

 

 

6,732

Interest expense, net

 

 

(775)

 

 

(271)

 

 

(504)

Total other expense

 

 

(775)

 

 

(271)

 

 

(504)

Income before income tax expense

 

 

77,069

 

 

70,841

 

 

6,228

Provision for income taxes

 

 

(12,042)

 

 

(9,541)

 

 

(2,501)

Net income

 

 

65,027

 

 

61,300

 

 

3,727

Less: net income related to non-controlling interests

 

 

(28,036)

 

 

(31,754)

 

 

3,718

Net income attributable to Solaris

 

$

36,991

 

$

29,546

 

$

7,445

 

Revenue

System Rental Revenue. Our system rental revenue increased $9.2 million, or 9%, to $113.7 million for the nine months ended September 30, 2019 compared to $104.6 million for the nine months ended September 30, 2018. This increase was primarily due to a  9% increase in mobile proppant systems on a fully utilized basis, due to increasing demand for our systems and enhancements to our product offering.

System Services Revenue. Our system services revenue increased $19.1 million, or 65%, to $48.6  million for the nine months ended September  30, 2019 compared to $29.5 million for the nine months ended September  30, 2018. System services revenue increased $17.0 million due to an increase in services provided to coordinate proppant delivered into our systems, in addition to a $2.1 million increase in field technician support to maintain systems and transportation of systems between customer sites.

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Table of Contents

Transloading Services Revenue. Our transloading services revenue increased $11.3 million, or 297%, to $15.1 million for the nine months ended September 30, 2019 compared to $3.8 million for the nine months ended September 30, 2018. This increase was primarily due to recognition of $9.5 million of deferred revenue and an increase in the number of tons transloaded at our Kingfisher Facility. We generally charge our customers a throughput fee for providing rail-to-truck transloading and high-efficiency sand silo storage and transloading services in relation to proppant and chemicals delivered to the Kingfisher Facility.

Inventory Software Services Revenue. Our inventory software services revenue, which decreased $0.6 million, or 30% to $1.4 million for the nine months ended September 30, 2019 compared to $2.0 million for the nine months ended September 30, 2018, is related to Railtronix inventory management software. We generally charge our customers a throughput fee to monitor proppant that is loaded into a railcar, stored at a transload facility or loaded into a truck.

Operating Expenses

Total operating costs and expenses for the nine months ended September 30, 2019 and 2018 were $101.0 million and $68.7 million, respectively, which represented 56% and 49% of total revenue, respectively. Total operating costs and expenses increased year-over-year primarily as a result of the deployment of additional systems to our customers and services thereof, coupled with the related increase in depreciation and amortization expense. Total operating costs as a percentage of total revenue increased as a result of an increase in system services expense in relation to proppant delivery coordination services provided. Additional details regarding the changes in operating expenses are presented below.

 Cost of System Rental (excluding depreciation and amortization). Cost of system rental increased $2.6 million, or 51%, to $7.7 million for the nine months ended September 30, 2019 compared to $5.1 million for the nine months ended September  30, 2018, excluding depreciation and amortization expense. Cost of system rental as a percentage of system rental revenue was 7% and 5% for the nine months ended September  30, 2019 and 2018, respectively.  Cost of system rental increased primarily due to an increase in ad valorem and other fixed costs as a result of an increase in the number of systems that were added to our fleet. The average number of systems deployed to customers increased to 117 systems in the nine months ended September  30, 2019 from 107 systems in the nine months ended September  30, 2018.

Cost of system rental including depreciation and amortization expense increased $9.0 million, or 59%, to $24.2 million for the nine months ended September 30, 2019 compared to $15.2 million for the nine months ended September 30, 2018. This increase was primarily attributable to the increase in systems that were deployed to customers and an increase in depreciation expense related to the additional systems that were manufactured and added to our fleet.

Cost of System Services (excluding depreciation and amortization). Cost of system services increased $21.7 million, or 63%, to $56.4 million for the nine months ended September 30, 2019 compared to $34.7 million for the nine months ended September 30, 2018. This increase was primarily due to an increase of $17.3 million in relation to services provided to coordinate proppant delivered to systems. Cost of system services also increased due to an increase in field labor and related costs of $2.1 million, coupled with increased third-party trucking services of $1.4 million to transport incremental systems deployed to customers. The increase in field labor and related costs was driven by an increase in the number of field technicians required to support the increased number of systems deployed during the nine months ended September 30, 2019. For the nine months ended September 30, 2019, the cost of system services as a percentage of system services revenue decreased to 116% compared to 118% for the nine months ended September 30, 2018.

Cost of system services including depreciation and amortization expense increased $22.0 million, or 62%, to $57.5 million for the nine months ended September 30, 2019 compared to $35.6 million for the nine months ended September 30, 2018. This increase was primarily attributable to the factors mentioned above, as well as an increase in depreciation expense related to additional light-duty field trucks that we purchased to support our increased activity.

Cost of Transloading Services (excluding depreciation and amortization). Cost of transloading services increased $0.6 million, or 40%, to $2.1 million for the nine months ended September 30, 2019 compared to $1.5 million for the nine months ended September 30, 2018 primarily due to increases in direct labor costs, fuel, utilities and maintenance related to increased transloading services activity at our Kingfisher Facility.

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Cost of transloading services including depreciation and amortization expense increased $1.3 million, or 65%, to $3.3 million for the nine months ended September 30, 2019 compared to $2.0 million for the nine months ended September 30, 2018 due to depreciation expense related to transloading facility and equipment, which commenced upon completion of the construction of the Kingfisher Facility in the third quarter of 2018.

Cost of Inventory Software Services (excluding depreciation and amortization). Cost of inventory software services, which decreased $0.1 million, or 17%, to $0.5 million for the nine months ended September 30, 2019 compared to $0.6 million for the nine months ended September 30, 2018, primarily includes labor and software subscription costs related to Railtronix inventory management software.

Cost of inventory software services including depreciation and amortization expense decreased $0.2 million, or 17%, to $1.0 million for the nine months ended September 30, 2019 compared to $1.2 million for the nine months ended September 30, 2018. This decrease was primarily attributable to the labor and software subscription costs. Amortization consists of customer relationships, a non-competition agreement and software acquired in the acquisition of Railtronix.

Depreciation and Amortization. Depreciation and amortization increased $7.4 million, or 59%, to $19.9 million for the nine months ended September 30, 2019 compared to $12.5 million for the nine months ended September 30, 2018. This increase was primarily attributable to additional depreciation expense related to additional systems that were manufactured and added to our fleet and our transloading facility and equipment placed in service in 2018.

Selling, General and Administrative Expenses (excluding depreciation and amortization). Selling, general and administrative expenses increased $1.3 million, or 10%, to $14.0 million for the nine months ended September 30, 2019 compared to $12.7 million for the nine months ended September 30, 2018 due primarily to an increase in stock-based compensation, salaries, benefits and payroll taxes and professional fees.

Other Operating Expenses. Other operating expenses decreased $1.3 million, or 72%, to $0.5 million for the nine months ended September 30, 2019 compared to $1.8 million for the nine months ended September 30, 2018. Other operating expenses in the nine months ended September 30, 2019 were primarily related to $0.4 million loss on disposal of assets. Other operating expenses in the nine months ended September 30, 2018 were primarily related to certain performance-based cash awards totaling $1.7 million in connection with the purchase of Railtronix upon the achievement of certain financial milestones.

Provision for Income Taxes. During the nine months ended September 30, 2019, we recognized a combined United States federal and state provision for income taxes of $12.0 million, an increase of $2.5 million as compared to $9.5 million we recognized during the nine months ended September 31, 2018. This increase was attributable to higher operating income. The effective combined United States federal and state income tax rates were 14.88% and 13.54% for the nine months ended September 30, 2019 and 2018, respectively. For the nine months ended September 30, 2019 and 2018, our effective tax rate differed from the statutory rate primarily due to Solaris LLC’s pass-through treatment for United States federal income tax purposes.

Net Income

Net income increased $3.7 million to $65.0 million for the nine months ended September 30, 2019 compared to $61.3 million for the nine months ended September 30, 2018, due to the changes in revenues and expenses discussed above.

Comparison of Non-GAAP Financial Measures

We view EBITDA and Adjusted EBITDA as important indicators of performance. We define EBITDA as net income, plus (i) depreciation and amortization expense, (ii) interest expense and (iii) income tax expense, including franchise taxes. We define Adjusted EBITDA as EBITDA plus (i) stock-based compensation expense and (ii) certain non-cash items and any extraordinary, unusual or non-recurring gains, losses or expenses.

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

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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 Net income to EBITDA and Adjusted EBITDA for each of the periods indicated.

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended

 

 

 

 

 

September 30, 

 

 

 

 

    

2019

    

2018

    

Change

 

 

(in thousands)

Net income

    

$

65,027

    

$

61,300

    

$

3,727

Depreciation and amortization

 

 

19,875

 

 

12,514

 

 

7,361

Interest expense, net

 

 

775

 

 

271

 

 

504

Income taxes (1)

 

 

12,042

 

 

9,541

 

 

2,501

EBITDA

 

$

97,719

 

$

83,626

 

$

14,093

Stock-based compensation expense (2)

 

 

3,265

 

 

2,200

 

 

1,065

Loss on disposal of assets

 

 

383

 

 

77

 

 

306

Severance

 

 

154

 

 

 —

 

 

154

Non-recurring cash bonuses (3)

 

 

 —

 

 

1,679

 

 

(1,679)

IPO bonuses (4)

 

 

 —

 

 

896

 

 

(896)

Adjusted EBITDA

 

$

101,521

 

$

88,478

 

$

13,939


(1)

Federal and state income taxes.

(2)

Represents stock-based compensation expense related to restricted stock awards of $3.3 million and $2.2 million in the nine months ended September 30, 2019 and 2018, respectively.

(3)

Certain performance-based cash awards paid in connection with the purchase of Railtronix upon the achievement of certain financial milestones.

(4)

Represents stock-based compensation expense related to restricted stock awards with one-year vesting of $0.9 million in the nine months ended September 30, 2018 that were granted to certain employees and consultants in connection with the IPO.

 

Nine Months Ended September 30, 2019 Compared to Nine Months Ended September 30, 2018: EBITDA and Adjusted EBITDA

EBITDA increased $14.1 million to $97.7 million for the nine months ended September 30, 2019 compared to $83.6 million for the nine months ended September 30, 2018. Adjusted EBITDA increased $13.0 million to $101.5 million for the nine months ended September 30, 2019 compared to $88.5 million for the nine months ended September 30, 2018. EBITDA and Adjusted EBITDA increased 17% and 15% for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018, respectively. The increases were primarily due to an increase in the number of systems deployed to customers due to increasing demand for our systems and enhancements to our product offering.

 

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Liquidity and Capital Resources

Overview

Our primary sources of liquidity to date have been capital contributions from our founding investors, cash flows from operations, borrowings under our credit agreements and proceeds from the IPO and the November 2017 Offering. Our primary uses of capital have been capital expenditures to expand and enhance our proppant and chemical management system fleets, construct the Kingfisher Facility, acquire our manufacturing facility and certain intellectual property and acquire the assets of Railtronix. We strive to maintain financial flexibility and proactively monitor potential capital sources, including equity and debt financing, to meet our investment and target liquidity requirements and to permit us to manage the cyclicality associated with our industry.

On October 9, 2018, Solaris Inc. filed a universal shelf registration statement on Form S-3 (the “Universal Shelf”) with the SEC. Under the Universal Shelf, Solaris Inc. may offer and sell up to $500 million of Class A common stock, preferred stock, debt securities or any combination of such securities during the three-year period that commenced upon the Universal Shelf becoming effective on October 16, 2018. Additionally, certain stockholders of the Company (the “Selling Stockholders”) may offer and sell up to an aggregate of 18,366,612 shares of Class A common stock under the Universal Shelf. Under the Universal Shelf, Solaris Inc. may periodically offer one or more types of securities in amounts, at prices and on terms announced, if and when the securities are ever offered. Solaris Inc. will not receive any proceeds, if any, from the sale of shares of Class A common stock by the Selling Stockholders. Alternatively, the Selling Stockholders from time to time may sell shares of Class A common stock pursuant to an exemption under Rule 144 of the Securities Act.

We intend to finance most of our capital expenditures, contractual obligations and working capital needs with our current cash balance, cash generated from future operations and borrowings under our 2019 Credit Agreement (as defined in “—Debt Agreements”). We continuously evaluate our capital expenditures and the amount we ultimately spend will depend on a number of factors, including expected industry activity levels and company initiatives. We believe that our operating cash flow and available borrowings under our 2019 Credit Agreement will be sufficient to fund our operations for at least the next 12 months.

As of September 30, 2019, cash totaled $51.7 million.

Cash Flows

The following table summarizes our cash flows for the periods indicated:

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

 

 

September 30, 

 

Change

 

 

2019

 

2018

 

2019 vs. 2018

 

 

(in thousands)

Net cash provided by operating activities

    

$

88,549

    

$

57,539

 

$

31,010

Net cash used in investing activities

 

 

(32,166)

 

 

(124,859)

 

 

92,693

Net cash used in financing activities

 

 

(29,754)

 

 

5,976

 

 

(35,730)

Net change in cash

 

$

26,629

 

$

(61,344)

 

$

87,973

 

Analysis of Cash Flow Changes for Nine Months Ended September 30, 2019 Compared to Nine Months Ended September 30, 2018

Operating Activities. Net cash provided by operating activities was $88.5 million for the nine months ended September 30, 2019, compared to net cash provided by operating activities of $57.5 million for the nine months ended September 30, 2018. The increase of $31.0 million in operating cash flow was primarily attributable to changes in working capital items.

Investing Activities. Net cash used in investing activities was $32.2 million for the nine months ended September 30, 2019, compared to $124.9 million for the nine months ended September 30, 2018. The decrease in investing activities of $92.7 million is primarily due to a decrease in the manufacturing rate of new proppant systems and completion of construction of the Kingfisher Facility in the third quarter of 2018. For the nine months ended September

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30, 2019, $32.5 million of investing activities were capital expenditures related to manufacturing new systems, including work in process, offset by a $0.3 million decrease in vehicles due to sales of light duty vehicles. For the nine months ended September 30, 2018, $111.7 million of investing activities were capital expenditures related to manufacturing new systems, $13.8 million related to the construction of our Kingfisher Facility and $3.1 million related to the purchase of light duty vehicles to support the service of our systems.

Financing Activities. Net cash used in financing activities was $29.8 million for the nine months ended September 30, 2019, compared to $6.0 million for the nine months ended September 30, 2018. The increase in financing activities of $35.7 million was primarily related to quarterly dividends of $14.3 million, $13.0 million to repay borrowings under the 2019 Credit Agreement (as defined in “—Debt Agreements”), $1.4 million for payments under insurance premium financing, and $1.1 million of payments related to vesting of stock-based compensation.

Net cash provided by financing activities of $6.0 million for the nine months ended September 30, 2018 was primarily related to $8.0 million in proceeds from borrowings under the 2018 Credit Agreement (as defined in “—Debt Agreements”), partially offset by $1.1 million of payments related to vesting of stock-based compensation and $1.0 million of debt issuance costs in connection with the 2018 Credit Agreement.

Debt Agreements

Senior Secured Credit Facility

On April 26, 2019, Solaris LLC entered into an Amended and Restated Credit Agreement (the “2019 Credit Agreement”) by and among Solaris LLC, as borrower, each of the lenders party thereto and Wells Fargo Bank, National Association, as administrative agent.  The 2019 Credit Agreement replaced, in its entirety, Solaris LLC’s 2018 Credit Agreement (as defined herein). The 2019 Credit Agreement consists of an initial $50.0 million revolving loan commitment (the “Loan”) with a $25.0 million uncommitted accordion option to increase the Loan availability to $75.0 million. The term of the 2019 Credit Agreement expires on April 26, 2022

Our obligations under the Loan are generally secured by a pledge of substantially all of the assets of Solaris LLC and its subsidiaries, and such obligations are guaranteed by Solaris LLC’s domestic subsidiaries other than Immaterial Subsidiaries (as defined in the 2019 Credit Agreement). We have the option to prepay the loans at any time without penalty.

Borrowings under the 2019 Credit Agreement bear interest at either LIBOR or an alternate base rate plus an applicable margin, and interest is payable quarterly. The applicable margin ranges from 1.75% to 2.50% for Eurodollar loans and 0.75% to 1.50% for alternate base rate loans, in each case depending on our total leverage ratio. The 2019 Credit Agreement requires that we pay a quarterly commitment fee on undrawn amounts of the Loan, ranging from 0.25% to 0.375% depending upon the total leverage ratio.

The 2019 Credit Agreement requires that we maintain ratios of (a) consolidated EBITDA to interest expense of not less than 2.75 to 1.00, (b) senior indebtedness to consolidated EBITDA of not more than 2.50 to 1.00 and (c) the sum of 100% of eligible accounts, inventory and fixed assets to the total revolving exposure of not less than 1.00 to 1.00 when the total leverage ratio is greater than 2.00 to 1.00 and total revolving exposure under the Loan exceeds $3.0 million. For the purpose of these tests, certain items are subtracted from indebtedness and senior indebtedness. EBITDA, as defined in the 2019 Credit Agreement, excludes certain noncash items and any extraordinary, unusual or non-recurring gains, losses or expenses.

The 2019 Credit Agreement also requires that we prepay any outstanding borrowings under the Loan in the event our total leverage ratio is greater than 1.00 to 1.00 and our consolidated cash balance exceeds $20.0 million, taking into account certain adjustments. Capital expenditures are not restricted unless borrowings under the Loan exceed $5.0 million for any 180 consecutive day period, in which case capital expenditures will be permitted up to $100.0 million plus any unused availability for capital expenditures from the immediately preceding fiscal year.

As of September 30, 2019, we had no borrowings under the 2019 Credit Agreement outstanding and ability to draw $50.0 million.

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As of September 30, 2019, we were in compliance with all covenants in accordance with the 2019 Credit Agreement.

Contractual Obligations

We had no material changes in our contractual commitments and obligations during the nine months ended September 30, 2019 from the amounts listed under Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Contractual Obligations” in the Company’s Annual Report on Form 10-K/A. See Note 7. “Senior Secured Credit Facility” to our condensed consolidated financial statements for additional information.

Income Taxes

Solaris Inc. is a corporation and, as a result, is subject to United States federal, state and local income taxes. For the three months ended September 30, 2019 and 2018, we recognized a combined United States federal and state provision for income taxes of $3.7 million and $4.2 million, respectively. For the nine months ended September 30, 2019 and 2018, we recognized a combined United States federal and state provision for income taxes of $12.0 million and $9.5 million, respectively.

Solaris LLC is treated as a partnership for United States federal income tax purposes and therefore does not pay federal income tax on its taxable income. Instead, the Solaris LLC members are liable for United States federal income tax on their respective shares of the Company’s taxable income reported on the members’ United States federal income tax returns.

Our revenues are derived through transactions in several states, which may be subject to state and local taxes. Accordingly, we have recorded a liability for state and local taxes that management believes is adequate for activities as of September 30, 2019 and December 31, 2018.

We are subject to a franchise tax imposed by the State of Texas. The franchise tax rate is 1%, calculated on taxable margin. Taxable margin is defined as total revenue less deductions for cost of goods sold or compensation and benefits in which the total calculated taxable margin cannot exceed 70% of total revenue. Expenses related to Texas franchise tax were approximately $299,000 and $174,000 for the three months ended September 30, 2019 and 2018, respectively. Expenses related to Texas franchise tax were approximately $758,000 and  $508,000 for the nine months ended September 30, 2019 and 2018, respectively.

We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events included in the consolidated financial statements. Under this method, we determine deferred tax assets and liabilities on the basis of the differences between the book value and tax bases of assets and liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period in which the enactment date occurs.

We recognize deferred tax assets to the extent we believe these assets are more-likely-than-not to be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent results of operations.

We record uncertain tax positions on the basis of a two-step process in which (1) we determine whether it is more-likely-than-not the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions meeting the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50% likely to be realized upon ultimate settlement with the related tax authority. For the nine months ended September 30, 2019, the Company has recorded an uncertain tax benefit for the treatment of certain costs incurred in connection with the IPO and the November 2017 Offering.

Interest and penalties related to income taxes are included in the benefit (provision) for income taxes in our consolidated statement of operations. We have not incurred any significant interest or penalties related to income taxes in any of the periods presented.

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See Note 9. “Income Taxes” to our condensed consolidated financial statements for additional information.

Payables Related to the Tax Receivable Agreement

In connection with the IPO, Solaris Inc. entered into the Tax Receivable Agreement with the TRA Holders on May 17, 2017. This agreement generally provides for the payment by Solaris Inc. to each TRA Holder of 85% of the net cash savings, if any, in United States federal, state and local income tax and franchise tax that Solaris Inc. actually realizes (computed using simplifying assumptions to address the impact of state and local taxes) or is deemed to realize in certain circumstances in periods after the IPO as a result of (i) certain increases in tax basis that occur as a result of Solaris Inc.’s acquisition (or deemed acquisition for United States federal income tax purposes) of all or a portion of such TRA Holder's Solaris LLC Units in connection with the IPO or pursuant to the exercise of the Redemption Right or the Call Right (each as defined in the Solaris LLC’s Second Amended and Restated Limited Liability Company Agreement (the “Solaris LLC Agreement”)) and (ii) imputed interest deemed to be paid by Solaris Inc. as a result of, and additional tax basis arising from, any payments Solaris Inc. makes under the Tax Receivable Agreement. Solaris Inc. will retain the benefit of the remaining 15% of these cash savings.

See Note 9. “Income Taxes” to our condensed consolidated financial statements for additional information.

Critical Accounting Policies and Estimates

The preparation of financial statements requires the use of judgments and estimates. Our critical accounting policies are described below to provide a better understanding of how we develop our assumptions and judgments about future events and related estimates and how they can impact our financial statements. A critical accounting estimate is one that requires our most difficult, subjective or complex estimates and assessments and is fundamental to our results of operations.

We base our estimates on historical experience and on various other assumptions we believe to be reasonable according to the current facts and circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We believe the following are the critical accounting policies used in the preparation of our combined financial statements, as well as the significant estimates and judgments affecting the application of these policies. This discussion and analysis should be read in conjunction with our condensed consolidated financial statements and related notes included in this report.

Revenue Recognition

In determining the appropriate amount of revenue to be recognized as we fulfill our obligations under the agreement, the following steps must be performed at contract inception: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations, including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) we satisfy each performance obligation.

Revenues from system rental consist primarily of fixed monthly fees charged to customers for the use of our patented mobile proppant management systems that unload, store and deliver proppant and chemicals at oil and natural gas well sites, which is considered to be our performance obligation. Contracts with customers are typically on thirty- to sixty-day payment terms. Revenues are recognized over time as the performance obligations are satisfied under the terms of the customer contract. We determined that the performance obligation is satisfied over time as the customer simultaneously receives and consumes the benefits provided by the entity’s performance of services, typically as our systems are used by the customer. We measure progress using an input method based on resources consumed or expended relative to the total resources expected to be consumed or expended. We typically charge our customers for the rental of our systems on a monthly basis under agreements requiring the rental of a minimum number of systems for a period of twelve months. The Company is typically entitled to short fall payments if such minimum contractual obligations are not maintained by our customers. Minimum contractual obligations have been maintained and thus the Company has not recognized revenues related to shortfalls on such take or pay contractual obligations to date.

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Revenues from system services consist primarily of the fees charged to customers for services including mobilization and transportation of our systems, field supervision and support and services coordinating proppant delivery to systems, each of which are considered to be separate performance obligations. Contracts with customers are typically on thirty- to sixty-day payment terms. When the Company provides system services including field supervision and support, we determined that the performance obligation is satisfied over time as the customer simultaneously receives and consumes the benefits provided by the entity’s performance of the services, typically based on fixed weekly or monthly contractual rates for field supervision and support and when the Company provides services coordinating proppant delivery. We measure progress using an input method based on resources consumed or expended relative to the total resources expected to be consumed or expended. When the Company provides mobilization and transportation of our systems on behalf of our customers, we determined that the performance obligation is satisfied at a point in time when the system has reached its intended destination.

Revenues from transloading services consist primarily of the fees charged to customers for transloading proppant at our transloading facility, which is considered to be our performance obligation. Transloading services operations commenced in January 2018. We provide rail-to-truck transloading and high-efficiency sand silo storage and transloading services at the facility. Contracts with customers are typically on thirty- to sixty-day payment terms. Revenues are typically recognized over time as the customer simultaneously receives and consumes the benefits provided by the entity’s performance of the transloading service based on a throughput fee per ton rate for proppant delivered to and transloaded at the facility. We measure progress based on the proppant delivered and transloaded at the facility. Under our agreements at the facility, quarterly minimum throughput volumes are required and the Company is entitled to short fall payments if such minimum quarterly contractual obligations are not maintained. These shortfalls are based on fixed minimum volumes at a fixed rate and are recognized over time as throughput volumes transloaded are below minimum throughput volumes required. The Company recorded $221 and 522 of shortfall revenue during the three and nine months ended September 30, 2019, respectively.

Revenues from inventory software services consist primarily of the fees charged to customers for the use of our Railtronix inventory management software, which is considered to be our performance obligation. Revenues are recognized over time as the customer simultaneously receives and consumes the benefits provided by the entity’s performance based on a throughput fee to monitor proppant that is loaded into a railcar, stored at a transload facility or loaded into a truck.

Deferred Revenue

Deferred revenue consists of a $25,980 partial termination payment fee received in December 2018 in accordance with a contract modification which is accounted for prospectively. The partial termination payment fee represents the distinct unsatisfied portion of a contract to provide transloading services and are considered part of the transaction price and will be allocated to the remaining performance obligations under the contract. Deferred revenues in the condensed consolidated balance sheets were $15,950 and $25,458 as of September 30, 2019 and December 31, 2018, respectively, which will be recognized as Revenue from transloading services. The Company recognized $3,203 and $9,508 of deferred revenue as Revenue from transloading services in the condensed consolidated statements of operations for the three and nine months ended September 30, 2019, respectively. Refer to Note 13. “Subsequent Events” for termination information on this agreement and recognition of the remaining deferred revenue. No deferred revenue was recorded or recognized as revenue during the three and nine months ended September 30, 2018.

Property, Plant and Equipment

Property, plant and equipment are stated at cost, or fair value for assets acquired, less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful service lives of the assets. Systems that are in the process of being manufactured are considered property, plant and equipment. However, the systems in process do not depreciate until they are fully completed. Systems in process are a culmination of material, labor and overhead.

The costs of ordinary repairs and maintenance are charged to expense as incurred, while significant enhancements, including upgrades or overhauls, are capitalized. These enhancements include upgrades to various components of the

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system and to equipment at our manufacturing facility that will either extend the life or improve the utility and efficiency of the systems, plant and equipment. These enhancements include:

·

Our patented AutoHopper technology is being added to our proppant systems and is compatible with standard pressure pumping companies’ equipment. The technology uses sensors and machine learning to automatically control the amount of sand delivered from our mobile proppant management system silos to the blender, eliminating the need for dedicated personnel historically required to run our system.

·

Our patent-pending mobile chemical management system can store and deliver up to six different chemicals with significantly improved inventory control, in a smaller footprint and with less personnel when compared to traditional chemical handling methods.

·

Our patent-pending non-pneumatic loading option provides additional proppant transportation flexibility for our customers, allowing them to use belly-dump trucks in addition to the industry standard pneumatic trucks to fill and maintain inventory in our proppant management systems. This patent-pending non-pneumatic loading option is compatible with our existing fleet with minimal modification.

·

Manufacturing plant improvements include upgrades to overhead cranes and the addition of new column bays and trunnions that improve the manufacturing flow, as well as improvements in the paint booths. These improvements increase productivity by reducing labor hours, while improving safety.

The determination of whether an expenditure should be capitalized or expensed requires management judgment in the application of how the costs benefit future periods, relative to our capitalization policy. Costs that increase the value or materially extend the life of the asset are capitalized and depreciated over the remaining useful life of the asset. When property and equipment are sold or retired, the cost and related accumulated depreciation are removed from the accounts and any gain or loss is reflected in the consolidated statements of operations.

Impairment of Long-Lived and Other Intangible Assets

Long-lived assets, which include property, plant and equipment and identified intangible assets, comprise a significant amount of our total assets. We make judgments and estimates in conjunction with the carrying value of these assets, including amounts to be capitalized, depreciation and amortization methods, estimated useful lives and impairment.

The carrying values of these assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. An impairment loss is recorded in the period in which it is determined that the carrying amount is not recoverable based on estimated future undiscounted cash flows. We estimate the fair value of these intangible and fixed assets using an income approach. This requires us to make long-term forecasts of its future revenues and costs related to the assets subject to review. These forecasts require assumptions about demand for the Company’s products and services, future market conditions and technological developments. The financial and credit market volatility directly impacts our fair value measurement through our income forecast. Although we have made our best estimates of these factors based on current conditions, it is reasonably possible that changes could occur in the near term, including, but not limited to: sustained declines in worldwide rig counts below current analysts’ forecasts, collapse of spot and futures prices for oil and natural gas, significant deterioration of external financing for our customers, higher risk premiums or higher cost of equity, or any other significant adverse economic news, which could adversely affect our estimates requiring a provision for impairment.

The Company has received notice from its customer to the agreement for sand storage and transloading at the Company’s Kingfisher Facility that the customer intends to terminate the agreement effective December 31, 2019.  The Company will continue to assess the carrying values of the assets at the Kingfisher Facility and if circumstances lead the Company to believe they may not be recoverable, the Company may incur an impairment charge in the future – See Note 13. “Subsequent Events”.  There was no impairment for the three and nine months ended September 30, 2019 and 2018.

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Leases

The Company accounts for leases in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 842, Leases (“ASC Topic 842”), which the Company adopted under ASU No. 2016-02 “Leases (Topic 842)” effective January 1, 2019. The Company applied ASC Topic 842 to all leases existing at or commencing after January 1, 2019 and elected the package of transition practical expedients for expired or existing contracts, which does not require reassessment of: (1) whether any of our contracts are or contain leases, (2) lease classification and (3) initial direct costs. The Company also elected the practical expedient to adopt the new lease requirements through a cumulative effect adjustment in the period of adoption. As a result of the adoption of ASC Topic 842 on January 1, 2019, the Company recorded operating ROU assets of $8,503, operating lease liabilities of $9,016 and a cumulative effect adjustment to retained earnings for operating leases of $532.

We determine if an arrangement is a lease at inception. The Company made the election to not apply the recognition requirements in ASC Topic 842 to short-term leases (i.e., leases of twelve months or less). Instead, the Company recognizes the lease payments in profit or loss on a straight-line basis over the lease term. Operating leases are included in operating lease ROU assets, current portion of operating lease liabilities, and operating lease liabilities, net of current in the Company’s condensed consolidated balance sheets. Finance leases are included in property and equipment, current portion of finance lease liabilities, and finance lease liabilities, net of current in the Company’s condensed consolidated balance sheets. 

ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. As most of the Company’s leases do not provide an implicit rate, we use our incremental borrowing rate in determining the present value of lease payments based on the information available at the commencement date. Our incremental borrowing rate reflects the estimated rate of interest that we would pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. We use the implicit rate when readily determinable. The ROU asset also includes any lease payments made and excludes lease incentives received. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

Goodwill

Goodwill represents the excess of the purchase price of acquisitions, or fair value of contributed assets, over the fair value of the net assets acquired and consists of synergies in combining operations and other intangible assets which do not qualify for separate recognition. We evaluate goodwill for impairment annually, as of October 31, or more often as facts and circumstances warrant. The recoverability of the carrying value is assessed based on expected future profitability and undiscounted future cash flows of the acquisitions and their contribution to our overall operations. These types of analyses contain uncertainties because they require us to make judgments and assumptions regarding future profitability, industry factors, planned strategic initiatives, discount rates and other factors. Events or circumstances which could indicate a potential impairment include (but are not limited to) a significant sustained reduction in worldwide oil and natural gas prices or drilling; a significant sustained reduction in profitability or cash flow of oil and natural gas companies or drilling contractors; a sustained reduction in the market capitalization of the Company; a significant sustained reduction in capital investment by drilling companies and oil and natural gas companies; or a significant sustained increase in worldwide inventories of oil or natural gas. There was no impairment for the three and nine months ended September 30, 2019 and 2018.

Stock-Based Awards

We follow the fair value recognition provisions in accordance with GAAP. Under the fair value recognition provisions, stock-based compensation cost is measured at the grant date based on the fair value of the award and is amortized to compensation expense on a straight-line basis over the awards’ vesting period, which is generally the requisite service period. We have historically and consistently calculated fair value using the Black-Scholes option-pricing model. This valuation approach involves significant judgments and estimates, including estimates regarding our future operations, price variation and the appropriate risk-free rate of return. Our estimates of these variables are made

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for the purpose of using the valuation model to determine an expense for each reporting period and are not subsequently adjusted. We recognize expense related to the estimated vesting of our performance share units granted.

Income Taxes

We routinely evaluate the realizability of our deferred tax assets by assessing the likelihood that our deferred tax assets will be recovered based on all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, estimates of future taxable income, tax planning strategies and results of operations. Estimating future taxable income is inherently uncertain and requires judgment. In projecting future taxable income, we consider our historical results and incorporate certain assumptions, including revenue growth and operating margins, among others. As of September 30, 2019, and December 31, 2018, we had $56.5 million and $58.1 million of deferred tax assets, respectively. We expect to realize future tax benefits related to the utilization of these assets. If we determine in the future that we will not be able to fully utilize all or part of these deferred tax assets, we would record a valuation allowance through earnings in the period the determination was made, which would have an adverse effect on our results of operations and earnings in future periods.

Payables Related to the Tax Receivable Agreement

As described in Note 9. “Income Taxes”  to our condensed consolidated financial statements, Solaris Inc. is a party to the Tax Receivable Agreement under which it is contractually committed to pay the TRA Holders 85% of the calculated net cash savings in United States federal, state and local income tax and franchise tax that Solaris Inc. anticipates realizing in future years from certain increases in tax basis and certain tax benefits attributable to imputed interest as a result of Solaris Inc.’s acquisition (or deemed acquisition for United States federal income tax purposes) of Solaris LLC Units in connection with the IPO or pursuant to an exercise of the Redemption Right or the Call Right (each as defined in the Solaris LLC Agreement). 

The projection of future taxable income involves significant judgment. Actual taxable income may differ from our estimates, which could significantly impact the liability relating to the Tax Receivable Agreement. We have determined it is more-likely-than not that we will be able to utilize all of our deferred tax assets subject to the Tax Receivable Agreement; therefore, we have recorded a liability under the Tax Receivable Agreement related to the tax savings Solaris Inc. may realize from certain increases in tax basis and certain tax benefits attributable to imputed interest as a result of Solaris Inc.’s acquisition (or deemed acquisition for United States federal income tax purposes) of Solaris LLC Units in connection with the IPO or pursuant to an exercise of the Redemption Right or the Call Right (each as defined in the Solaris LLC Agreement). If we determine the utilization of these deferred tax assets is not more-likely-than-not in the future, our estimate of amounts to be paid under the Tax Receivable Agreement would be reduced. In this scenario, the reduction of the liability under the Tax Receivable Agreement would result in a benefit to our condensed consolidated statement of operations.

Recent Accounting Pronouncements

See Note 2. “Summary of Significant Accounting Policies – Accounting Standards Recently Adopted” to our condensed consolidated financial statements as of June 30, 2019, for a discussion of recent accounting pronouncements.

Under the Jumpstart Our Business Startups Act (the “JOBS Act”), we meet the definition of an “emerging growth company,” which allows us to have an extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act, however, we elected to opt out of such exemption (this election is irrevocable).

Off Balance Sheet Arrangements

We have no material off balance sheet arrangements. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such financing arrangements.

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Item 3.Quantitative and Qualitative Disclosures about Market Risk

Market risk is the risk of loss arising from adverse changes in market rates and prices. Currently, our market risks relate 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.

Commodity Price Risk

The market for our services 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 exploration and production and oilfield services industries. We do not currently intend to hedge our indirect exposure to commodity price risk. 

Interest Rate Risk

We are subject to interest rate risk on a portion of our long-term debt under the 2019 Credit Agreement. As of September 30, 2019, however, we had no outstanding borrowings under our Revolving Credit Agreement and therefore a change in interest rates as of such date would not have resulted in increased or decreased interest expense.

 

Credit Risk

The majority of our accounts receivable have payment terms of 60 days or less. As of September  30,  2019,  four customers collectively accounted for 50% of our total accounts receivable. As of December 31, 2018, three customers collectively accounted for 40% of our total accounts receivable. We mitigate the associated credit risk by performing credit evaluations and monitoring the payment patterns of our customers. The inability or failure of our significant customers to meet their obligations to us or their insolvency or liquidation may adversely affect our financial results.

Item 4.Controls and Procedures

Disclosure Controls and Procedures

In accordance with Exchange Act Rules 13a-15 and 15d-15, we have evaluated, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of September  30, 2019. Our disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed by us in reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure and is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. As a result of the determination of a material weakness in the Company’s internal control over financial reporting as described more fully in the Company’s Form 10-K/A for the fiscal year ended December 31, 2018 filed with the SEC on July 26, 2019 and the Company’s Form 10-Q/A for the three months ended March 31, 2019,  filed with the SEC on July 26, 2019, management has concluded that the Company’s disclosure controls and procedures were not effective as of September  30, 2019.

Management based its conclusion on the fact that the material weakness in disclosure controls and procedures and internal control over financial reporting that had existed December 31, 2018, as disclosed in the Company’s Annual Report on Form 10-K/A, for the fiscal year ended December 31, 2018 filed with the SEC on July 26, 2019 and in the Company’s Quarterly Report on Form 10-Q/A, for the period ended March 31, 2019 filed with the SEC on July 26, 2019 had not been remediated as of September 30, 2019, as the Company was in the process of testing of operating effectiveness of the remediation efforts taken by the Company which are discussed below.

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Remediation

The Company’s remediation efforts have included (i) new controls over the reconciliation and rollforward of equity and tax accounts, (ii) added levels of management review procedures and (iii) additional training for the personnel involved in the reconciliation processes and controls. The actions taken by the Company were subject to ongoing senior management review and Audit Committee oversight and were completed during the third quarter of 2019. Management continues to evaluate and work to improve its internal controls over financial reporting.  As a result of these efforts, as of the date of the filing of this report, Management believes it has implemented measures sufficient to remediate the material weakness identified above.  

However, remedial controls must operate for a sufficient period of time for a definitive conclusion, through testing, that the deficiencies have been fully remediated and, as such, we can give no assurance that the measures we have undertaken have fully remediated the material weakness that we have identified or that additional material weaknesses will not arise in the future.  As management continues to evaluate and improve internal control over financial reporting, we may decide to take additional measures to address control deficiencies, or in appropriate circumstances determine to modify the design of the Company’s internal controls.

Changes in Internal Control over Financial Reporting

Subject to these remediation efforts, that we implemented after June  30, 2019, there have been no significant changes in the Company’s internal control over financial reporting during the period covered by this Quarterly Report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1.        Legal Proceedings

Due to the nature of our business, we may become, from time to time, involved in routine litigation or subject to disputes or claims related to our business activities. In the opinion of our management, there are no pending litigation, disputes or claims against us which, if decided adversely, will have a material adverse effect on our financial condition, cash flows or results of operations.

Item 1A.      Risk Factors

Factors that could materially adversely affect our business, financial condition, operating results or liquidity and the trading price of our Class A common stock are described under the caption “Risk Factors” in our Annual Report on Form 10-K/A for the year ended December 31, 2018, as filed with the SEC on July 26, 2019. There have been no material changes to the risk factors previously disclosed under the caption “Risk Factors” in our Annual Report on Form 10-K/A for the year ended December 31, 2018. This information should be considered carefully, together with other information in this report and other reports and materials we file with the SEC.

Item 2.        Unregistered Sales of Equity Securities and Use of Proceeds

Unregistered Sales of Equity Securities

None.

Issuer Purchases of Equity Securities

The following table presents the total number of shares of our Class A common stock that we purchased during the three months ended September  30, 2019 and the average price paid per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Number of

 

Maximum Dollar

 

 

 

 

 

 

 

 

Shares Purchased as

 

Value of Shares

 

 

Total Number of

 

 

Average Price

 

Part of Publicly

 

that May Yet be

 

 

Shares

 

 

Paid Per

 

Announced

 

Purchased Under

Period

 

Purchased

 

 

Share

 

Plan

 

the Plan

July 1 - July 31

 

 —

 

 

$

 —

 

 —

 

 

N/A

August 1 - August 31

 

27,641

 

 

 

13.69

 

 —

 

 

N/A

September 1 - September 30

 

 —

 

 

 

 —

 

 —

 

 

N/A

Total

 

27,641

 

 

$

13.69

 

 —

 

 

N/A

 

(1)Represents shares of Class A common stock withheld for the payment of withholding taxes upon the vesting of restricted stock.

Item 3.Defaults upon Senior Securities

None.

Item 4.Mine Safety Disclosures

None.

Item 5.Other Information

None.

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Item 6.Exhibits

Exhibit No.

 

Description

 

 

 

3.1

 

Amended and Restated Certificate of Incorporation of Solaris Oilfield Infrastructure, Inc. (incorporated by reference to Exhibit 3.1 to the Registrant’s Form 8-K (File No. 001-38090) filed with the Commission on May 23, 2017).

 

 

 

3.2

 

Amended and Restated Bylaws of Solaris Oilfield Infrastructure, Inc. (incorporated by reference to Exhibit 3.2 to the Registrant’s Form 8-K (File No. 001-38090) filed with the Commission on May 23, 2017).

 

 

 

31.1*

 

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

31.2*

 

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

32.1**

 

Certification of Chief Executive Officer pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

32.2**

 

Certification of Chief Financial Officer pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

101.INS*

 

XBRL Instance Document.

 

 

 

101.SCH*

 

XBRL Taxonomy Extension Schema Document.

 

 

 

101.CAL*

 

XBRL Taxonomy Extension Calculation Linkbase Document.

 

 

 

101.DEF*

 

XBRL Taxonomy Extension Definition Linkbase Document.

 

 

 

101.LAB*

 

XBRL Taxonomy Extension Labels Linkbase Document.

 

 

 

101.PRE*

 

XBRL Taxonomy Extension Presentation Linkbase Document.


*     Filed herewith.

**   Furnished herewith. Pursuant to SEC Release No. 33‑8212, this certification will be treated as “accompanying” this Quarterly Report on Form 10‑Q and not “filed” as part of such report for purposes of Section 18 of the Exchange Act or otherwise subject to the liability of Section 18 of the Exchange Act, and this certification will not be deemed to be incorporated by reference into any filing under the Securities Act, except to the extent that the registrant specifically incorporates it by reference.

 

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SIGNATURES

Pursuant to the requirements 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.

 

 

 

 

 

 

 

SOLARIS OILFIELD INFRASTRUCTURE, INC.

 

 

October 30, 2019

By:

/s/ William A. Zartler

 

 

William A. Zartler

 

 

Chairman and Chief Executive Officer

 

 

(Principal Executive Officer)

 

 

 

 

 

 

 

 

 

 

 

 

 

October 30, 2019

By:

/s/ Kyle S. Ramachandran

 

 

Kyle S. Ramachandran

 

 

President and Chief Financial Officer

 

 

(Principal Financial Officer)

 

49


Dates Referenced Herein   and   Documents Incorporated by Reference

This ‘10-Q’ Filing    Date    Other Filings
2/25/25
4/26/22
12/31/1910-K,  5
Filed on:10/30/198-K
10/25/19
10/18/19
For Period end:9/30/19
9/26/19
9/19/19
7/26/1910-K/A,  10-Q/A
6/30/1910-Q
6/26/19
6/14/19
4/26/19
3/31/1910-Q,  10-Q/A
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3/22/19
1/1/19
12/31/1810-K,  10-K/A
10/16/18EFFECT
10/9/18S-3
9/30/1810-Q
6/30/1810-Q
3/31/1810-Q
1/19/188-K
1/1/18
11/13/174,  424B4,  EFFECT
5/17/173,  4,  4/A,  8-K
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