UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM ~~10‑Q~~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~~June 30, ~~2018~~2019

☐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~~001-38090

SOLARIS OILFIELD INFRASTRUCTURE, INC.

(Exact name of registrant as specified in its charter)


Delaware		~~81‑5223109~~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~~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 31, 2018,~~July 26, 2019, the registrant had ~~27,387,612~~31,640,013 shares of Class A common stock, $0.01 par value per share, and ~~19,746,455~~15,939,169 shares of Class B common stock, $0.00 par value per share, outstanding.

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SOLARIS OILFIELD INFRASTRUCTURE, INC.

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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 ~~service~~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 ~~proppant management~~ 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;~~enhancements and expand our product and service offerings;

changes in market price and availability of materials;

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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 ~~rail industry or the rail lines~~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~~10-K/A for the year ended December 31, ~~2017,~~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.

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PART 1: FINANCIAL INFORMATION

Item 1: Financial Statements

SOLARIS OILFIELD INFRASTRUCTURE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In ~~thousands)~~thousands, except per share amounts)

(Unaudited)


	September 30,		December 31,		June 30,		December 31,
	2018		2017		2019		2018
Assets
Current assets:
Cash	$	2,077	$	63,421	$	29,719	$	25,057
Accounts receivable, net		34,578		12,979		44,343		39,746
Prepaid expenses and other current assets		8,473		3,622		5,785		5,492
Inventories		8,575		7,532		8,639		10,470
Total current assets		53,703		87,554		88,486		80,765
Property, plant and equipment, net		269,033		151,163		314,196		296,538
Operating lease right-of-use assets						8,191		—
Goodwill		17,236		17,236		17,236		17,236
Intangible assets, net		4,735		5,335		4,151		4,540
Deferred tax assets		26,588		25,512		59,765		58,074
Other assets		1,529		260		701		1,454
Total assets	$	372,824	$	287,060	$	492,726	$	458,607
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	5,993	$	5,000	$	2,756	$	9,127
Accrued liabilities		15,408		15,468		15,688		12,658
Current portion of insurance premium financing		874		—
Current portion of capital lease obligations		35		33
Current portion of deferred revenue						12,990		12,990
Current portion of operating lease liabilities						587		—
Current portion of finance lease liabilities						30		35
Other current liabilities		75		—		1,562		515
Total current liabilities		22,385		20,501		33,613		35,325
Senior secured credit facility		8,000		—		—		13,000
Capital lease obligations, net of current portion		162		179
Deferred revenue, net of current						6,164		12,468
Operating lease liabilities, net of current						8,077		—
Finance lease liabilities, net of current						147		154
Payables related to Tax Receivable Agreement		52,866		24,675		68,015		56,149
Other long-term liabilities		663		145		527		633
Total liabilities		84,076		45,500		116,543		117,729
Commitments and contingencies (Note 12)
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, 26,607 issued and 26,516 outstanding as of September 30, 2018 and 19,026 issued and 19,010 outstanding as of December 31, 2017		266		190
Class B common stock, $0.00 par value, 180,000 shares authorized, 20,110 shares issued and outstanding as of September 30, 2018 and 26,811 issued and outstanding as of December 31, 2017		—		—
Class A common stock, $0.01 par value, 600,000 shares authorized, 31,040 issued and 30,905 outstanding as of June 30, 2019 and 27,091 issued and 27,000 outstanding as of December 31, 2018						309		271
Class B common stock, $0.00 par value, 180,000 shares authorized, 15,940 shares issued and outstanding as of June 30, 2019 and 19,627 issued and outstanding as of December 31, 2018						—		—
Additional paid-in capital		126,251		121,727		192,734		164,086
Retained earnings		33,182		3,636		54,284		35,507
Treasury stock (at cost), 91 shares and 16 shares as of September 30, 2018 and December 31, 2017, respectively		(1,410)		(261)
Treasury stock (at cost), 135 shares and 91 shares as of June 30, 2019 and December 31, 2018, respectively						(2,144)		(1,414)
Total stockholders' equity attributable to Solaris		158,289		125,292		245,183		198,450
Non-controlling interest		130,459		116,268		131,000		142,428
Total stockholders' equity		288,748		241,560		376,183		340,878
Total liabilities and stockholders' equity	$	372,824	$	287,060	$	492,726	$	458,607

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 OPERATIONS

(In thousands, except per share amounts)

(Unaudited)


	Three Months Ended				Nine Months Ended				Three Months Ended				Six Months Ended
	September 30,				September 30,				June 30,				June 30,
	2018		2017		2018		2017		2019		2018		2019		2018
Revenue:
Proppant management system rental	$	42,031	$	15,062	$	104,563	$	34,560
Proppant management system services		12,053		3,416		29,499		7,631
System rental									$	39,740	$	35,127	$	77,088	$	62,532
System services										19,031		9,937		30,468		17,446
Transloading services		2,000		—		3,847		—		4,881		1,397		10,714		1,847
Proppant inventory software services		602		—		1,950		—
Inventory software services										449		694		955		1,348
Total revenue		56,686		18,478		139,859		42,191		64,101		47,155		119,225		83,173

Operating costs and expenses:
Cost of proppant management system rental (excluding $4,133 and $1,523, and $10,128 and $3,748 of depreciation and amortization for the three and nine months ended September 30, 2018 and 2017, respectively, shown separately) (1)		1,949		641		5,050		1,588
Cost of proppant management system services (excluding $347 and $129, and $889 and $283 of depreciation and amortization for the three and nine months ended September 30, 2018 and 2017, respectively, shown separately) (1)		13,906		3,933		34,691		8,640
Cost of transloading services (excluding $529 and $544 of depreciation and amortization for the three and nine months ended September 30, 2018, shown separately) (1)		597		—		1,464		—
Cost of proppant inventory software services (excluding $193 and $598 of depreciation and amortization for the three and nine months ended September 30, 2018, shown separately)		191		—		614		—
Cost of system rental (excluding $5,481 and $3,359 and $10,707 and $5,995 of depreciation and amortization for the three and six months ended June 30, 2019 and 2018, respectively, shown separately) (1)										2,552		1,683		4,899		3,101
Cost of system services (excluding $391 and $305 and $789 and $542 of depreciation and amortization for the three and six months ended June 30, 2019 and 2018, respectively, shown separately) (1)										21,675		11,679		35,294		20,785
Cost of transloading services (excluding $411 and $10 and $820 and $15 of depreciation and amortization for the three and six months ended June 30, 2019 and 2018, respectively, shown separately) (1)										689		535		1,399		867
Cost of inventory software services (excluding $193 and $193 and $386 and $405 of depreciation and amortization for the three and six months ended June 30, 2019 and 2018, respectively, shown separately)										165		167		300		423
Depreciation and amortization		5,328		1,742		12,514		4,276		6,622		3,984		12,967		7,186
Salaries, benefits and payroll taxes (1)		2,182		2,942		7,972		5,687		3,235		3,169		5,577		5,790
Selling, general and administrative (excluding $126 and $90, and $355 and $245 of depreciation and amortization for the three and nine months ended September 30, 2018 and 2017, respectively, shown separately)		1,687		1,176		4,690		3,653
Selling, general and administrative (excluding $146 and $117 and $265 and $229 of depreciation and amortization for the three and six months ended June 30, 2019 and 2018, respectively, shown separately)										1,771		1,123		3,457		3,003
Other operating expenses		56		(38)		1,752		3,770		69		19		282		1,696
Total operating costs and expenses		25,896		10,396		68,747		27,614		36,778		22,359		64,175		42,851
Operating income		30,790		8,082		71,112		14,577		27,323		24,796		55,050		40,322
Interest expense, net(2)		(116)		(27)		(271)		(71)		(656)		(71)		(767)		(155)
Other expense		—		(32)		—		(119)
Total other expense		(116)		(59)		(271)		(190)		(656)		(71)		(767)		(155)
Income before income tax expense		30,674		8,023		70,841		14,387		26,667		24,725		54,283		40,167
Provision for income taxes		(4,237)		(617)		(9,541)		(1,137)		(4,158)		(3,277)		(8,339)		(5,304)
Net income		26,437		7,406		61,300		13,250		22,509		21,448		45,944		34,863
Less: net income related to Solaris LLC		—		—		—		(3,665)
Less: net income related to non-controlling interests		(13,418)		(6,027)		(31,754)		(8,049)		(9,234)		(10,851)		(20,352)		(18,336)
Net income attributable to Solaris	$	13,019	$	1,379	$	29,546	$	1,536	$	13,275	$	10,597	$	25,592	$	16,527

Earnings per share of Class A common stock - basic (2)	$	0.49	$	0.13	$	1.13	$	0.14
Earnings per share of Class A common stock - diluted (2)	$	0.49	$	0.12	$	1.12	$	0.14
Earnings per share of Class A common stock - basic									$	0.42	$	0.40	$	0.85	$	0.64
Earnings per share of Class A common stock - diluted									$	0.42	$	0.40	$	0.85	$	0.63

Basic weighted-average shares of Class A common stock outstanding (2)		26,197		10,100		25,216		10,100
Diluted weighted-average shares of Class A common stock outstanding (2)		26,329		10,563		25,380		10,552
Basic weighted-average shares of Class A common stock outstanding										30,609		25,541		29,326		24,717
Diluted weighted-average shares of Class A common stock outstanding										30,644		25,711		29,387		24,897

(1)

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


Cost of proppant management system rental	$	—	$	—	$	5	$	—
Cost of proppant management system services		51		—		132		—
Cost of system rental									$	10	$	—	$	14	$	5
Cost of system services										52		41		116		81
Cost of transloading services		1		—		1		—		4		—		7		—
Salaries, benefits and payroll taxes		286		1,412		3,002		2,097		1,112		1,205		1,903		2,716
Stock-based compensation expense	$	338	$	1,412	$	3,140	$	2,097	$	1,178	$	1,246	$	2,040	$	2,802

~~(2)~~

~~Represents earnings per share of Class A common stock and weighted-average shares of Class A common stock outstanding for the period following the May 17, 2017 Initial Public Offering.~~

~~The accompanying notes are an integral part~~(2)Interest expense includes $528 of ~~these financial statements.~~

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~~SOLARIS OILFIELD INFRASTRUCTURE, INC.~~

~~CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN~~ ~~STOCKHOLDERS’~~ ~~EQUITY~~unamortized debt issuance costs written-off in the three and six months ended June 30, 2019 in connection with the amended and restated 2019 Credit Agreement.

~~(In thousands)~~

~~(Unaudited)~~

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

$
—

$
121,727

$
3,636

16

(261)

$
116,268

$
241,560
Exchange of B shares for A shares

6,701

67

(6,701)

—

16,518

—

—

—

(16,585)

—
Deferred tax asset and payables related to Tax Receivable Agreement from the exchange of Solaris LLC Units and shares of Class B common stock

—

—

—

—

(18,115)

—

—

—

—

(18,115)
Stock option exercises

327

3

—

—

1,279

—

1

(9)

(341)

932
Stock-based compensation

—

—

—

—

4,151

—

—

—

—

4,151
Vesting of restricted stock

569

6

—

—

631

—

74

(1,140)

(637)

(1,140)
Other

—

—

—

—

60

—

—

—

—

60
Net income

—

—

—

—

—

29,546

—

—

31,754

61,300
Balance at September 30, 2018

26,607

$
266

20,110

$
—

$
126,251

$
33,182

91

$
(1,410)

$
130,459

$
288,748

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, except per share amounts)

(Unaudited)


	Six Months Ended June 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


	Six Months Ended June 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

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				For the Six Months Ended
	September 30,				June 30,
	2018		2017		2019		2018
Cash flows from operating activities:
Net income	$	61,300	$	13,250	$	45,944	$	34,863
Adjustment to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		12,514		4,276		12,967		7,186
Loss on disposal of asset		222		451		284		62
Stock-based compensation		3,140		2,097		2,040		2,802
Amortization of debt issuance costs		218		35		665		139
Deferred income tax expense		9,000		1,059		7,880		4,944
Other		651		(19)		(169)		253
Changes in assets and liabilities:
Changes in operating assets and liabilities:
Accounts receivable		(21,599)		(5,033)		(4,597)		(14,125)
Prepaid expenses and other assets		(3,667)		(3,625)		1,990		(4,621)
Inventories		(8,575)		(6,675)		(3,296)		(6,973)
Accounts payable		441		4,504		(4,661)		2,032
Accrued liabilities		3,894		2,679		4,696		2,036
Deferred revenue						(6,304)		—
Net cash provided by operating activities		57,539		12,999		57,439		28,598
Cash flows from investing activities:
Investment in property, plant and equipment		(125,013)		(49,015)		(28,717)		(86,155)
Investment in intangible assets		(6)		(34)		—		(6)
Cash received from insurance proceeds		160		—		38		59
Net cash used in investing activities		(124,859)		(49,049)		(28,679)		(86,102)
Cash flows from financing activities:
Payments under capital leases		(21)		(20)
Payments under finance leases						(18)		(14)
Payments under insurance premium financing		(841)		—		(932)		(403)
Payments under notes payable		—		(451)
Proceeds from stock option exercises		932		—		294		836
Payments related to purchase of treasury stock		(1,140)		—		(730)		—
Proceeds from borrowings under the senior secured credit facility		8,000		3,000
Repayment of credit facility		—		(5,500)
Proceeds from pay down of promissory note related to membership units		—		4,303
Repayment of senior secured credit facility						(13,000)		—
Payments related to debt issuance costs		(1,014)		(111)		(197)		(954)
Proceeds from issuance of Class A common stock sold in initial public offering, net of offering costs		—		111,075
Distributions paid to unitholders		—		(25,818)
Distribution and dividend paid to Solaris LLC unitholders and Class A common shareholders						(9,515)		—
Other		60		—		—		60
Net cash provided by financing activities		5,976		86,478
Net cash used in financing activities						(24,098)		(475)

Net (decrease) increase in cash		(61,344)		50,428
Net decrease in cash						4,662		(57,979)
Cash at beginning of period		63,421		3,568		25,057		63,421
Cash at end of period	$	2,077	$	53,996	$	29,719	$	5,442

Non-cash activities
Investing:
Capitalized depreciation in property, plant and equipment	$	501	$	492	$	372	$	319
Property and equipment additions incurred but not paid at period-end		6,309		3,135		829		5,805
Financing:
Insurance premium financing		1,552		—		1,812		1,471
Accrued interest from notes receivable issued for membership units		—		109
Cash paid for:
Interest		118		96		183		61
Income taxes		314		45
Income Taxes						663		308

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 atand chemicals used in hydraulic fracturing of oil and natural gas ~~well sites.~~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.~~logistics, which includes coordinating proppant delivery to systems.

The systems are deployed in ~~many~~most of the ~~most~~ active oil and natural gas basins in the United States, including the Permian Basin, ~~the~~ Eagle Ford Shale, ~~the~~ SCOOP/STACK ~~Formations, the~~formations, Haynesville Shale, ~~and the~~Rockies, Marcellus and Utica ~~Shales.~~Shales and Bakken formation.

We ~~also~~ 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~~services. Commercial operations at the ~~facility. Commercial operations~~Kingfisher Facility commenced in January 2018 and we completed ~~initial phase one~~ 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 ~~PropView®~~Solaris Lens™ inventory management systems. Our customers ~~rely on this~~use data from our software solutions to manage distribution of proppant and chemicals throughout their supply chain.

~~Organization~~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 six months ended June 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. ~~(“Solaris~~(either individually or together with its subsidiaries, as the context requires, “Solaris Inc.” or the “Company”) ~~was incorporated in February 2017 for~~is the ~~purpose of completing an initial public offering in order to operate the business~~managing member of Solaris Oilfield Infrastructure, LLC (“Solaris LLC”)~~. Our initial public offering (“IPO” or the “Offering”) was completed on May 17, 2017.~~

~~In connection with the closing of the IPO, 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. 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 (loss) attributable to the holders of Solaris Inc.’s Class A common ~~stock.~~stock

~~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 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, 2018 and 2017 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 for the year ended December 31, 2017.~~

As described in Note 1 – Organization and Background of Business, the Company is the sole managing member for Solaris LLC and consolidates entities in which it has a controlling financial interest. The financial statements for periods prior to the IPO have been adjusted to combine the previously separate entities for presentation purposes.

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Thus, for periods prior to the completion of the Offering, the accompanying condensed consolidated financial statements include the historical financial position and results of operations of Solaris LLC and its subsidiaries. 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

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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 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 atof 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 earned but 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~~June 30, ~~2018~~2019 and December 31, ~~2017.~~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. Detail reviews are performed related to net realizable value, 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~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~2017.~~

~~Business Combinations~~

The Company accounts for business combinations using the acquisition method of accounting. Under this method, acquired assets, including separately identifiable intangible assets and any assumed liabilities, are recorded at their acquisition date estimated fair value. The excess of purchase price over the fair value amounts assigned to the assets acquired and liabilities assumed represents the goodwill amount resulting from the acquisition. Determining the fair value of assets acquired and liabilities assumed involves the use of significant estimates and assumptions. Additional information regarding the Company’s business combinations is presented in Note 3 – Business Combinations.

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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
~~Proppant management systems~~Systems and related equipment		Up to 15 years
Machinery and equipment		3-10 years
Furniture and fixtures		5 years
Computer hardware		~~3 years~~
~~Computer~~ and software		~~5-10~~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 ~~and the cost of construction in process at our Kingfisher Facility~~ are considered property, plant and equipment. However, the systems ~~and construction in process~~ do not depreciate until they are fully completed. Systems ~~and construction~~ in process are a culmination of material, labor and overhead.

Expenditures for maintenance and repairs are charged against income ~~(loss)~~ 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

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

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 described further in Note 3,~~, 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 based on estimates the Company believes are reasonable. The Company recorded amortization expense of ~~$195~~$194 and $1$195 for the three months ended ~~September~~June 30, ~~2018~~2019 and ~~2017,~~2018, respectively. The Company recorded amortization expense of ~~$606~~$389 and $3$411 for the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~2017,~~2018, respectively.

Identified intangible assets by major classification consist of the following:


			Accumulated		Net Book				Accumulated		Net Book
	Gross		Amortization		Value		Gross		Amortization		Value
As of September 30, 2018:
As of June 30, 2019:
Customer relationships	$	4,703	$	(560)	$	4,143	$	4,703	$	(1,064)	$	3,639
Software acquired in the acquisition of Railtronix		346		(41)		305		346		(78)		268
Non-competition agreement		225		(37)		188		225		(71)		154
Patents and other		114		(15)		99		114		(24)		90
Total identifiable intangibles	$	5,388	$	(653)	$	4,735	$	5,388	$	(1,237)	$	4,151

As of December 31, 2017:
As of December 31, 2018:
Customer relationships	$	4,703	$	(36)	$	4,667	$	4,703	$	(727)	$	3,976
Software acquired in the acquisition of Railtronix		346		(3)		343		346		(54)		292
Non-competition agreement		225		(3)		222		225		(49)		176
Patents and other		108		(5)		103		114		(18)		96
Total identifiable intangibles	$	5,382	$	(47)	$	5,335	$	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.

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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 a business over the estimated fair value of the identifiable assets acquired and liabilities assumed. As of ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017,~~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 (See Note 3 – Business Combinations).~~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~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~2017.~~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~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~2017.~~2018.

Revenue Recognition

The Company accounts for revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers, which the Company adopted effective January 1, 2018. The Company applied ASC Topic 606 to all contracts with customers and did not elect practical expedients upon adoption of the standard. No cumulative adjustment to accumulated earnings was required as a result of this adoption, and the adoption did not have a material impact on our condensed consolidated financial statements as no material arrangements prior to the adoption were impacted under the new pronouncement.

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.

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ofgas well sites, which ~~are~~is considered to be ~~separate~~our performance ~~obligations.~~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.

Revenues from ~~proppant management~~ 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. Revenues are recognized over time as the performance obligations are satisfied under the terms of the customer contract. We determined that the performance obligation for system services including field supervision and support 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 ~~one of~~ 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 $301 of shortfall revenue during the six months ended June 30, 2019.

Revenues from ~~proppant~~ 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. ~~The Railtronix inventory management software was acquired in December 2017.~~ 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 $19,154 and $25,458 as of June 30, 2019 and December 31, 2018, respectively, which will be recognized as Revenue from transloading services over the remaining two-year term of the modified agreement. The Company recognized $3,170 and $6,304 of deferred revenue as Revenue from transloading services in the condensed consolidated statements of operations for the three and six months ended June 30, 2019, respectively. No deferred revenue was recorded or recognized as revenue during the three and six months ended June 30, 2018.

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Unbilled Receivables

Revenues recognized in advance of invoice issuance create assets referred to as “unbilled receivables.” These assets are presented on a combined basis with accounts receivable and are converted to accounts receivable once billed.

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 ~~estimated~~ fair values on the date of grant. The Company recognizes expense on a straight-line basis over the awards’ vesting period, which is generally the requisite service period.

Solaris LLC previously sponsored a stock-based management compensation program called the 2015 Membership Unit Option Plan (the “Plan”). Solaris LLC accounted for the units under the Plan as compensation cost measured at the fair value of the award on the date of grant using the Black-Scholes option-pricing model.

In connection with the Offering, the options granted under the Plan were modified by a conversion into options under the Solaris Long-Term Incentive Plan (the “LTIP”). Refer also to Note 9 – Equity.

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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. ~~For the three months ended September 30, 2018 and 2017,~~There were no research and development costs ~~were $0~~for the three and ~~$1, respectively. For the nine~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~2017, research and development costs were $0 and $197, respectively.~~2018.

Financial Instruments

The carrying value of the Company’s financial instruments, consisting of cash, accounts receivable, notes receivable, accounts payable, insurance premium financing and accrued expenses, 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 ~~values~~value as the debt bears interest at a variable rate which is reflective of current rates otherwise available to the Company. As of ~~September~~June 30, ~~2018,~~2019, we had ~~$8,000 of~~no borrowings under the 2018 Credit Agreement ~~(defined thereafter)~~(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~~June 30, ~~2018~~2019 and ~~2017,~~2018, we recognized a combined United States federal and state provision for income taxes of ~~$4,237~~$4,158 and ~~$617,~~$3,277, respectively. For the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~2017,~~2018, we recognized a combined United States federal and state provision for income taxes of ~~$9,541~~$8,339 and ~~$1,137,~~$5,304, respectively.

On December 22, 2017, Public Law No. 115-97, commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”) was enacted into law. The provisions of the Tax Act that impact us include, but are not limited to, (1) reducing the United States federal corporate income tax rate from 35% to 21%, (2) temporary bonus depreciation will allow for full expensing of certain qualified property acquired after September 27, 2017, (3) limitations on the maximum deduction for net operating loss (NOL) carryforwards generated in tax years beginning after December 31, 2017, to 80 percent of a taxpayer’s taxable income and (4) elimination of certain business deductions and credits, including the deduction for entertainment expenditures. In conjunction with the Tax Act, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (SAB 118), which allows us to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. We previously reported provisional amounts of the income tax effects of the Tax Act for which the accounting was incomplete, but a reasonable estimate could be determined. During the three months ended September 30, 2018, our accounting for the income tax effects of the Tax Act was completed without material changes to the previously provided estimates.

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.

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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~~June 30, ~~2018~~2019 and December 31, ~~2017.~~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 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.

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 ~~10 – Income Taxes~~9. “Income Taxes” for additional information regarding income taxes.

Payable Related to ~~Related Parties Pursuant to~~the Tax Receivable Agreement

In connection with the ~~IPO,~~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 ~~existing~~ 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~~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 ~~Notice~~Right or the Call Right (each as defined in Solaris LLC’s Second Amended and Restated Limited Liability Company ~~Agreement)~~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~~June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, Solaris Inc. recorded a payable related to the Tax Receivable Agreement of ~~$52,866~~$68,015 and ~~$24,675,~~$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.~~Holders during the six months ended June 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.

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The Company maintains insurance which may cover in whole or in part certain environmental expenditures. As of ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, there were no environmental matters deemed probable.

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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 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 Adopted~~

In February 2017, the Financial Accounting Standards Board (the “FASB”) issued ASU No. 2017‑05, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610‑20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets ("ASU 2017‑05"). ASU 2017‑05 clarifies the scope of Subtopic 610‑20 and adds guidance for partial sales of nonfinancial assets. Subtopic 610‑20 was issued in May 2014 as part of ASU No. 2014‑09, Revenue from Contracts with Customers (Topic 606) and provides guidance for recognizing gains and losses from the transfer of nonfinancial assets in contracts with noncustomers. The amendments in ASU 2017‑05 clarify that a financial asset is within the scope of Subtopic 610‑20 if it meets the definition of an in substance nonfinancial asset. The amendments also clarify that nonfinancial assets within the scope of Subtopic 610‑20 may include nonfinancial assets transferred within a legal entity to a counterparty. The amendments in ASU 2017‑05 are effective at the same time as the amendments in ASU 2014‑09, which are effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Early adoption is permitted for interim or annual reporting periods beginning after December 15, 2016. An entity may elect to apply the amendments in ASU 2017‑05 either retrospectively to each period presented in the financial statements in accordance with the guidance on accounting changes (retrospective approach) or retrospectively with a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption (modified retrospective approach). The Company adopted ASU 2017-05 during the quarter ended March 31, 2018 using the modified retrospective approach. Adoption of this ASU did not impact the Company’s opening balance of retained earnings as of January 1, 2018 as our reported results did not differ under the new revenue standard and the previous guidance.

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash ("ASU 2016-18"). ASU 2016-18 is intended to add and clarify guidance on the classification and presentation of restricted cash on the statement of cash flows. ASU 2016-18 requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company adopted ASU 2016-18 during the quarter ended March 31, 2018, which did not have an impact on the condensed consolidated financial statements.

In August 2016, the FASB issued ASU 2016‑15, Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments ("ASU 2016-15"), seeking to eliminate diversity in practice related to how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments in ASU 2016‑15 address eight specific cash flow issues and apply to all entities, including both business entities and not-for-profit entities that are required to present a statement of cash flows under FASB ASC 230, Statement of Cash Flows. The amendments in ASU 2016‑15 are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company adopted ASU 2016-15 during the quarter ended March 31, 2018, which did not have an impact on the condensed consolidated financial statements.

Accounting Standards Recently Issued But Not Yet Adopted

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820), Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”), which modifies the disclosure requirements in Topic 820, Fair Value Measurement, by removing certain disclosure requirements related to the fair value hierarchy, modifying existing disclosure requirements related to measurement uncertainty and adding new

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disclosure requirements, such as disclosing the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and disclosing the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The amendments in ASU 2018-13 are effective for all entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. We are currently in the process of evaluating the impact, if any, that ASU 2018-13 will have on our condensed consolidated financial statements.

In ~~February~~June 2016, the FASB issued ASU No. ~~2016‑02, Leases~~2016-13, Financial Instruments – Credit Losses (Topic ~~842)~~326), ~~as part~~Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which replaces the incurred loss impairment methodology under current GAAP with a methodology that reflects expected credit losses and requires consideration of a ~~joint project with~~broader range of reasonable and supportable information to inform credit loss estimates. ASU 2016-13 requires the International Accounting Standards Board to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. To satisfy the foregoing objective, the FASB is creating Topic 842, Leases, which supersedes Topic 840. Under the new guidance,use of a ~~lessee will be required to recognize assets and liabilities~~forward-looking expected credit loss model for ~~capital and operating leases with lease terms of more than 12 months. Additionally, this ASU will require disclosures to help investors~~accounts receivables, loans and other financial ~~statement users better understand the amount, timing, and uncertainty of cash flows arising from leases, including qualitative and quantitative requirements.~~instruments. For public business entities, the amendments are effective for fiscal years beginning after December 15, ~~2018,~~2019, including interim periods within those fiscal years, with early adoption permitted. ~~In July 2018, the FASB issued~~Adoption of ASU ~~No. 2018-11, Leases (Topic 842), Targeted Improvements (“ASU 2018-11”), which provides an optional practical expedient to adopt the new lease requirements~~2016-13 will be applied using a modified-retrospective approach through a ~~cumulative effect~~cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. We are currently in the ~~period~~process of ~~adoption. The Company plans to apply the new optional transition guidance.~~

~~The Company has determined its portfolio of leased assets and is reviewing all related contracts to determine~~evaluating the impact, ~~the adoption~~if any, that ASU 2016-13 will have on ~~its~~our condensed consolidated financial statements and related disclosures. Solaris anticipates the adoption of this standard will significantly impact its condensed consolidated financial statements, systems, processes and controls. While the Company cannot currently estimate the quantitative effect that ASU 2016-02 will have on its condensed consolidated financial statements, the adoption will increase asset and liability balances on the consolidated balance sheets due to the required recognition of right-of-use assets and corresponding right-of-use liabilities.statements.

3. ~~Business Combinations~~

On December 6, 2017 the Company completed its acquisition of substantially all of the assets of Railtronix, a leading provider of real-time inventory management solutions for proppant mining, rail shipping and transloading operations, for $9,505 including $5,000 cash consideration, and $4,505 equity consideration of 279,655 Solaris LLC Units and 279,655 shares of Class B common stock. The equity consideration was based on the closing price of our Class A common stock on December 6, 2017 of $16.11.

The purchase price was allocated based on the fair value of $4,697, $225 and $346 for identifiable intangible assets including customer relationships, a non-competition agreement and software, respectively. The amount of consideration in excess of the fair value of identifiable intangible assets of $4,237 was recognized as goodwill. The valuations to derive the allocation of purchase price included a multi period excess earnings valuation method, with or without valuation method, and relief from royalty valuation method estimates using estimates for future cash flows from customer relationships, return on workforce, customer attrition, working capital assumptions, income taxes, competition, costs saved through owning the asset and risk adjusted discount rates.

The goodwill recognized is attributable to expected customer growth as well as expected synergies of integrating Railtronix with the Company’s PropView inventory management system, which we believe will uniquely position the Company to provide critical supply chain data to help our customers improve the reliability of proppant supply, save time and reduce the delivered cost of proppant by monitoring key data points and performance indicators. A portion of goodwill is expected to be deductible for corporate income tax purposes.

The actual impact of this acquisition was an increase to “Total revenues” of $602 and $1,950 and an increase to “Net income” of $218 and a decrease to “Net income” of $941 in the condensed consolidated statement of operations for the three and nine months ended September 30, 2018, respectively. The unaudited pro forma results presented below have been prepared to give the effect of the acquisition discussed above on our results of operations for the three and

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nine months ended September 30, 2017 as if it had been consummated on January 1, 2016. The unaudited pro forma results do not purport to represent what our actual results of operations would have been if the acquisition had been completed on such date or to project our results of operation for any future date or period.

For the Three Months Ended

For the Nine Months Ended

September 30, 2017

September 30, 2017

Actual

Pro Forma

Actual

Pro Forma
Pro forma (unaudited)

Total revenues

$
18,478

$
19,030

$
42,191

$
43,601
Net income

7,406

7,558

13,250

13,343

Certain contingent performance-based cash awards totaling $2,500 are also payable to the seller upon the achievement of certain financial milestones. One milestone was completed and $1,625 was recognized and paid in the quarter ending March 31, 2018 and is recorded in other operating expense. The Company has not yet concluded that it is probable that the remaining milestones will be achieved and thus has not recognized the additional $875 obligation in the condensed consolidated financial statements.

4. Prepaid Expenses and Other Current Assets

Prepaid expenses and other currents assets were comprised of the following at ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017:~~2018:


	September 30,		December 31,		June 30,		December 31,
	2018		2017		2019		2018
Prepaid purchase orders	$	4,945	$	2,731	$	1,602	$	2,802
Prepaid insurance		1,015		389		1,853		576
Deposits		701		261		1,053		882
Other assets		1,812		241		1,277		1,232
Prepaid expenses and other current assets	$	8,473	$	3,622	$	5,785	$	5,492

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4. Property, Plant and Equipment

Property, plant and equipment was comprised of the following at ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017:~~2018:


	September 30,		December 31,		June 30,		December 31,
	2018		2017		2019		2018
Proppant management systems and related equipment	$	224,862	$	116,307
Proppant management systems in process		8,881		6,043
Systems and related equipment					$	283,186	$	258,179
Systems in process						16,452		11,245
Transloading facility and equipment		40,344		—		40,253		40,218
Transloading facility construction in process		—		28,729
Computer and related equipment		4,649		2,455
Computer hardware and software						1,661		1,606
Machinery and equipment		5,223		4,396		5,173		5,126
Vehicles		7,706		4,577		8,217		8,334
Buildings		4,035		3,251		4,339		4,280
Land		611		578		612		612
Furniture and fixtures		274		91		284		282
Property, plant and equipment, gross		296,585		166,427		360,177		329,882
Less: accumulated depreciation		(27,552)		(15,264)		(45,981)		(33,344)
Property, plant and equipment, net	$	269,033	$	151,163	$	314,196	$	296,538

Depreciation expense for the three months ended ~~September~~June 30, 2019 and 2018 was $6,428 and ~~2017 was $5,133 and $1,741,~~$3,789, respectively, of which ~~$4,133~~$5,481 and ~~$1,523~~$3,359 is attributable to cost of ~~proppant management~~ system rental, ~~$347~~$391 and ~~$129~~$305 is attributable to cost of ~~proppant management~~ system services, ~~$529~~$411 and $0$10 is attributable to cost of transloading services

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and ~~$124~~$145 and ~~$89~~$115 is attributable to selling, general and administrative expenses, respectively. Depreciation expense for the ~~nine~~six months ended ~~September~~June 30, 2019 and 2018 was $12,578 and ~~2017 was $11,908 and $4,273,~~$6,775, respectively, of which ~~$10,128~~$10,707 and ~~$3,748~~$5,995 is attributable to cost of ~~proppant management~~ system rental, ~~$889~~$789 and ~~$283~~$542 is attributable to cost of ~~proppant management~~ system services, ~~$544~~$820 and $0$15 is attributable to cost of transloading services and ~~$347~~$262 and ~~$242~~$223 is attributable to selling, general and administrative expenses, respectively. The Company capitalized ~~$182~~$186 and ~~$172~~$179 of depreciation expense associated with machinery and equipment used in the manufacturing of its systems for the three months ended ~~September~~June 30, ~~2018~~2019 and ~~2017,~~2018, respectively. The Company capitalized ~~$501~~$372 and ~~$492~~$319 of depreciation expense associated with machinery and equipment used in the manufacturing of its systems for the ~~nine~~six months ended ~~September~~June 30, 2019 and 2018, ~~and 2017,~~ respectively.

In July 2017, the Company acquired a lease for $250 in connection with the Kingfisher Facility described in Note 12. Refer to Note 12 – Commitments and Contingencies. The Kingfisher Facility is recognized in property, plant and equipment as Transloading facility and equipment.

6.5. Accrued Liabilities

Accrued liabilities were comprised of the following at ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017:~~2018:


	September 30,		December 31,		June 30,		December 31,
	2018		2017		2019		2018
Property, plant and equipment	$	3,660	$	7,612	$	783	$	2,153
Employee related expenses		5,777		4,829		2,724		4,500
Selling, general and administrative		852		1,507		1,059		944
Cost of revenue		3,233		825		8,950		2,702
Excise, franchise and sales taxes		1,200		608		1,228		1,461
Ad valorem taxes		577		15		873		774
Other		109		72		71		124
Accrued liabilities	$	15,408	$	15,468	$	15,688	$	12,658

~~7. Capital~~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.

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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 ~~capital~~finance lease. The lease expires on February 25, 2025. The ~~capital~~finance lease obligation is payable in monthly installments ~~of $3~~ including imputed ~~interest at a rate of 3.25%.~~interest. The Company also leases certain office equipment with purchase options upon the end of lease terms which are accounted for as ~~capital~~finance leases with various expiration dates. As of ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, the Company had property, plant and equipment under ~~capital~~finance leases with a cost of $299 and ~~$294, respectively, and~~ accumulated depreciation of ~~$80~~$96 and ~~$64,~~$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		Six Months Ended
	June 30, 2019		June 30, 2019
Operating lease cost (1) (2)	$	297	$	593

Finance lease cost
Amortization of ROU assets		8		16
Interest on lease liabilities		1		2
Total finance lease cost	$	9	$	18

(1)

Includes short term leases.

(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 June 30, 2019, respectively. Operating lease costs of $370, $39 and $184 were reported in Selling, general and administrative, Cost of system services and Cost of transloading services for the six months ended June 30, 2019, respectively. No variable lease costs were recognized during the three and six months ended June 30, 2019.

Future ~~principal~~ minimum lease payments under ~~capital lease agreements are as follows~~non-cancellable operating leases as of ~~September 30, 2018:~~December 31, 2018 were as follows:

Amount
2018 (remainder of)

$
9
2019

35
2020

35
2021

33
2022

33
Thereafter

73
Total payments

218
Less: amount representing imputed interest at 3.25%

(21)
Present value of payments

197
Less: current portion

(35)
Capital lease obligation, net of current portion

$
162


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

1716

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


Year Ending December 31,	Operating Leases		Finance Leases
2019 (remainder of)	$	486	$	22
2020		1,116		35
2021		1,060		33
2022		1,091		33
2023		1,100		33
Thereafter		9,463		40
Total future minimum lease payments		14,316		196
Less: effects of discounting		(5,652)		(19)
Total lease liabilities	$	8,664	$	177

Supplemental cash flow information related to leases was as follows:


	Three Months Ended		Six Months Ended
	June 30, 2019		June 30, 2019
Supplemental Cash Flows Information
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	394	$	633
Financing cash flows from finance leases		9		18

Other information related to leases was as follows:


	June 30,
	2019
Weighted Average Remaining Lease Term
Operating leases		14.0 years
Finance leases		5.6 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 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.

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

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

On January 19, 2018, weSolaris LLC entered into a credit agreement (the “2018 Credit Agreement”) by and among the Company, as borrower, each of the lenders party thereto and Woodforest National Bank, as administrative agent (the “Administrative Agent”). The 2018 Credit Agreement replaced, in its entirety, the Company’s prior credit facility, as amended on May 17, 2017, by and among the Company, as borrower, each of the lenders party thereto and the Administrative Agent. The 2018 Credit Agreement consistswhich 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”). No lender has any obligation to increase its own revolving credit commitment. The Advance Loan amortizes beginning in April 2019 and each of the Loans matures on January 19, 2022. Our obligations under the Loans are generally secured by a pledge of substantially all of the assets of the Company and its subsidiaries, and such obligations are guaranteed by our domestic subsidiaries other than Immaterial Subsidiaries (as defined in the 2018 Credit Agreement). We have the option to prepay the loans at any time without penalty.

The 2018 Credit Agreement permits extensions of credit under the Advance Loan through the end of April 2019 and under the Revolving Loan until January 19, 2022. Borrowings under the Revolving Loan are limited by both commitments and a borrowing base determined monthly by calculating percentages of the eligible accounts and the eligible inventory, provided that the portion of the borrowing base attributable to eligible inventory cannot exceed 35% of the entire borrowing base. Borrowings under the Advance Loan are not to exceed 80% of the then current net orderly liquidation value of the applicable equipment or facility build out or the applicable equipment constructed or acquired which is then subject to the liens securing the Loans.

As of ~~September 30,~~December 31, 2018 we had ~~$8,000~~$13,000 of borrowings outstanding ~~borrowings~~ under the 2018 Credit Agreement. ~~We have subsequently drawn an additional $2,000~~During the three and ~~have availability to borrow approximately $10,000 under the Revolving Loan~~six months ended June 30, 2019, all outstanding borrowings were repaid and ~~$50,000 under the Advance Loan.~~as of June 30, 2019.

Borrowings under the 2018 Credit Agreement ~~bear~~bore interest at one-month LIBOR plus an applicable margin and interest iswere payable monthly. The applicable margin ~~ranges~~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 ~~5.11%~~5.49%, for the three ~~and nine~~ months ended ~~September~~June 30, ~~2018.~~2019 and a weighted average interest rate of 5.49%, for the six months ended June 30, 2019. The 2018 Credit Agreement ~~requires~~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.

The 2018 Credit Agreement ~~requires~~required that we maintain ratios of (a) indebtedness to consolidated EBITDA of not more than 3.50 to 1.00, which stepped down to 3.25 to 1.00 beginning April 1, 2018 and 3.00 to 1.00 beginning October 1, 2018, and (b) senior indebtedness to consolidated EBITDA of not more than 2.50 to 1.00, which stepped down to 2.25 to 1.00 beginning April 1, 2018 and 2.00 to 1.00 beginning October 1, 2018. For the purpose of these tests, there iswas subtracted from indebtedness and senior indebtedness, respectively, an amount equal to the lesser of ~~$10.0 million~~$10,000 or 50% of unrestricted cash and cash equivalents of ~~the Company~~Solaris LLC and its subsidiaries. EBITDA, as defined in the 2018 Credit Agreement, ~~excludes~~excluded certain noncash items and any extraordinary, unusual or non-recurring gains, losses or expenses.

~~The 2018 Credit Agreement also requires that we maintain~~8. Equity

Dividends

On June 26, 2019, Solaris Inc. paid a ~~ratio~~quarterly cash dividend of ~~consolidated EBITDA~~$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 ~~fixed charges~~all Solaris LLC unitholders as of ~~not less than 1.25~~June 14, 2019, $3,164 of which was paid to ~~1.00. Capital Expenditures are permitted up to $225.0 million for~~Solaris Inc. Solaris Inc. used the fiscal year ending December 31, 2018, and $75.0 million for fiscal year ending December 31, 2019 and each fiscal year thereafter. In addition, for fiscal years beginning on January 1, 2020, any unused availability for capital expendituresproceeds from the ~~immediately preceding fiscal year may be carried forward~~distribution to pay the ~~subsequent year; provided, however that we are permitted~~dividend to ~~make any capital expenditures in an amount equal~~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 ~~of equity contributions made~~from the distribution to pay the ~~Company used~~dividend to ~~fund such capital expenditures.~~

~~As of September 30, 2018, we were in compliance will~~ all ~~covenants in accordance with our 2018 Credit Agreement.~~

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~~9. Equity~~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

~~Effective May 17, 2017, both the Board of Directors of Solaris Inc. (the “Board”) and the holder of all Solaris Inc.’s then-outstanding equity interests adopted the LTIP~~The Company’s long-term incentive plan for ~~the benefit of~~ employees, directors and consultants of the Company and its ~~affiliates. The LTIP~~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.

~~In connection with the IPO, the options granted under the Plan were converted into options under the LTIP.~~ A total of 591,261 options to purchase Class A common stock of the Company ~~were~~have been issued to employees, directors and consultants under the LTIP at an exercise price of $2.87 per option ~~had~~and a weighted average grant date fair value of $12.04 per option and had the same fair value as immediately prior to the conversion. The vesting terms from the options under the LTIP were accelerated from the previous vesting terms under the Plan such that, twenty-five percent (25%) of theoption. All options were ~~considered~~ vested ~~upon the conversion, an additional 25% of the options vested on July 24, 2017 and the remaining options vested on~~by November 13, 2017. As of ~~September~~June 30, ~~2018, 419,078~~2019, 522,285 options have been exercised, 33,346 forfeited and ~~138,837~~35,630 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~~six months ended ~~September~~June 30, 2019 and 2018, the Company did not recognize stock-based compensation expense on options. For the three and nine months ended September 30, 2017, the Company recognized $110 and $268 of stock-based compensation expense on options, respectively, in salaries, benefits and payroll taxes in the condensed consolidated statements of operations.

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. ~~86,544 shares and 88,664 shares of~~The following table further summarizes activity related to restricted stock ~~were granted during~~for the three and ~~nine~~six months ended ~~September~~June 30, ~~2018, respectively. 297,371 shares~~2019 and 642,891 shares of restricted stock vested during the three and nine months ended September 30, 2018, respectively. 223,988 shares and 246,331 shares of restricted stock were forfeited during the three and nine months ended September 30, 2018, respectively. As of September 30, 2018, 417,707 shares of restricted stock are issued and are outstanding. 1,497 shares, 215,892 shares, 182,046 shares and 18,273 shares of restricted stock vest in 2018, 2019, 2020 and 2021, respectively.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

For the three months ended ~~September~~June 30, ~~2018,~~2019, the Company recognized ~~$51, $1~~$10, $52, $4 and ~~$286~~$1,112 of stock-based compensation expense on restricted stock in cost of ~~proppant management~~system rental, cost of system services, cost of transloading services and salaries, benefits and payroll taxes, respectively, in the condensed consolidated statements of operations and ~~$194~~$59 within property, plant and equipment, net in the condensed consolidated balance sheets. For the ~~nine~~six months ended ~~September~~June 30, ~~2018,~~2019, the Company recognized ~~$5, $132, $1~~$14, $116, $7 and ~~$3,002~~$1,903 of stock-based compensation expense on restricted stock in cost of ~~proppant management~~ system rental, cost of ~~proppant management~~ system services, cost of transloading services and salaries, benefits and payroll taxes, ~~respectively, in the condensed consolidated statements of~~

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respectively, in the condensed consolidated statements of operations and ~~$1,011~~$96 within property, plant and equipment, net in the condensed consolidated balance sheets. ~~For the three and nine months ended September~~Compensation expense includes adjustment for forfeitures as incurred. As of June 30, ~~2017, the Company recognized $1,302 and $1,829~~2019, 739,731 shares of ~~stock-based compensation expense on~~ restricted stock ~~respectively,~~are issued and are outstanding. 141,882 shares, 310,956 shares, 152,361 shares and 134,532 shares of restricted stock vest in ~~salaries, benefits~~2019, 2020, 2021 and ~~payroll taxes in the condensed consolidated statements of operations.~~2022, respectively.

~~Notes receivable from unit-holders~~

Solaris LLC’s Limited Liability Company Agreement authorized Solaris LLC to issue Solaris LLC Units at a value of $100 per unit to Solaris LLC’s employees in exchange for a promissory note. As of September 30, 2018 and December 31, 2017, there were no outstanding borrowings related to Solaris LLC Units issued to non-executive officer employees and consultants under promissory notes. In 2017 there were no additional Solaris LLC Units issued in exchange for promissory notes. During the nine months ended September 30, 2017, certain employees paid off their applicable promissory notes of $3.8 million and $453 of accrued interest in cash for previously assigned 38,508 units.

~~Earnings(Loss)~~Earnings Per Share

Basic earnings per share of Class A common stock is computed by dividing net income attributable to Solaris ~~for periods following the IPO and reorganization transactions completed in connection therewith,~~ 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.

~~There were no shares of Class A or Class B common stock outstanding prior to the IPO; therefore, no earnings per share information has been presented for any period prior to that date.~~

The following table sets forth the calculation of earnings per share, or EPS, for the three and ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~2017:~~2018:


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended June 30,				Six Months Ended June 30,
Basic net income per share:	2018		2017		2018		2017		2019		2018		2019		2018
Numerator
Net income attributable to Solaris	$	13,019	$	1,379	$	29,546	$	1,536	$	13,275	$	10,597	$	25,592	$	16,527
Less income attributable to participating securities (1)		(251)		(104)		(1,042)		(108)		(322)		(415)		(575)		(722)
Net income attributable to common stockholders	$	12,768	$	1,275	$	28,504	$	1,428	$	12,953	$	10,182	$	25,017	$	15,805

Denominator
Weighted average number of unrestricted outstanding common shares used to calculate basic net income per share		26,197		10,100		25,216		10,100		30,609		25,541		29,326		24,717
Effect of dilutive securities:
Stock options (2)		132		463		164		452		35		170		61		180
Diluted weighted-average shares of Class A common stock outstanding used to calculate diluted net income per share		26,329		10,563		25,380		10,552		30,644		25,711		29,387		24,897

Earnings per share of Class A common stock - basic	$	0.49	$	0.13	$	1.13	$	0.14	$	0.42	$	0.40	$	0.85	$	0.64
Earnings per share of Class A common stock - diluted	$	0.49	$	0.12	$	1.12	$	0.14	$	0.42	$	0.40	$	0.85	$	0.63

~~(1)~~

~~The Company’s restricted shares of common stock are participating securities.~~

~~(2)~~

The three months ended September 30, 2018 and 2017 include 132 shares and 463 shares, respectively, of Class A common stock resulting from an assumed exercise of the stock options in the calculation of the denominator for diluted earnings per common share as these shares were dilutive. The nine months ended September 30, 2018 and 2017 include 164 shares and 452

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

(2) The three months ended June 30, 2019 and 2018 include 35 shares and 170 shares, respectively, of Class A common stock resulting from an assumed exercise of the stock options in the calculation of the denominator for diluted earnings per common share as these shares were dilutive. The six months ended June 30, 2019 and 2018 include 61 shares and 180 shares, respectively, of Class A common stock resulting from an assumed exercise of the stock options in the calculation of the denominator for diluted earnings per common share as these shares were dilutive.

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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:~~antidilutive upon conversion:


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended June 30,				Six Months Ended June 30,
	2018		2017		2018		2017		2019		2018		2019		2018
Class B common stock		20,398		32,366		21,085		32,366		16,202		20,703		17,450		21,434
Restricted stock awards		195		132		524		12		231		569		71		632
Total		20,593		32,498		21,609		32,378		16,433		21,272		17,521		22,066

~~10.~~

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9. Income Taxes

Income Taxes

~~The Company~~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 ~~Company,~~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.

On December 22, 2017, Public Law No. 115-97, commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”) was enacted into law. The provisions of the Tax Act that impact us include, but are not limited to, (1) reducing the United States federal corporate income tax rate from 35% to 21%, (2) temporary bonus depreciation that allow for full expensing of certain qualified property acquired after September 27, 2017, (3) limitations on the maximum deduction for net operating loss (NOL) carryforwards generated in tax years beginning after December 31, 2017, to 80 percent of a taxpayer’s taxable income and (4) elimination of certain business deductions and credits, including the deduction for entertainment expenditures. In conjunction with the Tax Act, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (SAB 118), which allows us to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. We previously reported provisional amounts of the income tax effects of the Tax Act for which the accounting was incomplete, but a reasonable estimate could be determined. During the three months ended September 30, 2018, our accounting for the income tax effects of the Tax Act was completed without material changes to the previously provided estimates.

The effective combined United States federal and state income tax rates were ~~13.98%~~15.40% and ~~6.68%~~13.08% for the three months ended ~~September~~June 30, ~~2018~~2019 and ~~2017,~~2018, respectively. The effective combined United States federal and state income tax rates were ~~13.54%~~15.30% and ~~7.91%~~13.06% for the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~2017,~~2018, respectively. For the three and ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~2017,~~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 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 aan 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~~June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, the Company’s uncertain tax benefits totaling ~~$797~~$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~~June 30, ~~2018,~~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;~~expense notwithstanding the fact that, as of ~~September~~June 30, ~~2018,~~2019, the Company has not accrued any penalties or interest.

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Payables Related to the Tax Receivable Agreement

As of ~~September~~June 30, ~~2018,~~2019, our liability under the Tax Receivable Agreement was ~~$52,866,~~$68,015, 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’s Amended and Restated Limited Liability Company~~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

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Solaris ~~LLC’s Amended and Restated Limited Liability Company~~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.

~~11.~~10. Concentrations

For the three months ended ~~September~~June 30, ~~2018, two~~2019, three customers accounted for 13%, 12% and ~~10%~~11% of the Company’s revenue. For the three months ended ~~September~~June 30, ~~2017,~~2018, three customers accounted for 18%, 11%, and 10% of the Company’s revenue. For the six months ended June 30, 2019, four customers accounted for ~~21%~~14%, ~~15%~~12%, ~~14%,~~11% and 11% of the Company’s revenue. For the ~~nine~~six months ended ~~September~~June 30, 2018, ~~three~~two customers accounted for ~~16%, 10%~~18% and ~~10% of the Company’s revenue. For the nine months ended September 30, 2017, four customers accounted for 26%, 15%, 12% and 10%~~11% of the Company’s revenue. As of ~~September~~June 30, ~~2018, two~~2019, four customers accounted for 19%, 14%, 10% and ~~12%~~10% of the Company’s accounts receivable. As of December 31, ~~2017, four~~2018, three customers accounted for ~~23%,~~ 20%, 10% and 10% of the Company’s accounts receivable.

For the three months ended ~~September~~June 30, ~~2018, two suppliers~~2019, one supplier accounted for ~~17% and~~ 12% of the Company’s total purchases. For the three months ended ~~September~~June 30, ~~2017, one supplier~~2018, two suppliers accounted for ~~10%~~16% and 16% of the Company’s total purchases. For the ~~nine~~six months ended ~~September~~June 30, ~~2018, two suppliers~~2019, no supplier accounted for ~~14% and 12%~~10% or more of the Company’s total purchases. For the ~~nine~~six months ended ~~September~~June 30, ~~2017, one supplier~~2018, two suppliers accounted for ~~10%~~13% and 11% of the Company’s total purchases. As of ~~September~~June 30, ~~2018, two~~2019, four suppliers accounted for ~~28%~~17%, 16%, 12% and ~~12%~~10% of the Company’s accounts payable. As of December 31, ~~2017, three suppliers~~2018, one supplier accounted for ~~17%, 11% and 10%~~13% of the Company’s accounts payable.

~~12.~~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.

~~Operating Leases~~

The ~~Company leases land and equipment under operating leases which expire~~table below provides estimates of the timing of future payments that we are contractually obligated to make based on agreements in place at ~~various dates through February 2047.~~

June 30, 2019:

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~~The Company’s future minimum payments under non-cancelable operating leases are as follows:~~

Year Ending December 31,

Amount
2018 (remainder of)

$
179
2019

539
2020

442
2021

357
2022

335
Thereafter

6,181
Total minimum lease payments

$
8,033


	For the Year Ending December 31,
	2019		2020		2021		2022		2023		Thereafter		Total
	(in thousands)
Operating lease obligations (1)	$	486	$	1,116	$	1,060	$	1,091	$	1,100	$	9,463	$	14,316
Finance lease obligations (2)		22		35		33		33		33		40		196
Commitment fees on Revolving Loan (3)		67		125		125		40		—		—		357
Purchase commitments (4)		6,797		—		—		—		—		—		6,797
Other commitments		60		259		239		25		—		—		583
Total	$	7,432	$	1,535	$	1,457	$	1,189	$	1,133	$	9,503		22,249

~~The above amounts include $6.4 million of commitments~~(1)Operating lease obligations are related to aour 30-year land lease with the State of Oklahoma related to the ~~Company’s~~Company's Kingfisher Facility, ~~further described below.~~ 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.

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(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~~June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, the Company had commitments of approximately ~~$32,099~~$6,797 and ~~$33,600,~~$18,998, respectively, related to these commitments.

On July 27, 2017, Solaris Logistics, LLC, a wholly owned subsidiary of Solaris LLC, entered into a seven-year customer contract with an exploration and production company, which became effective in January 2018, to provide proppant transloading services at the Kingfisher Facility.

Certain performance-based cash awards of $1,875 and performance-based equity awards in the form of 156,250 shares of restricted stock were granted in connection with construction of the Kingfisher Facility and were both contingent upon performance obligations including certain construction milestones which have been met. As such, $0 and $1,875 have been recognized as accrued liabilities in the condensed consolidated balance sheets as of September 30, 2018 and December 31, 2017, respectively, and of which $500 and $1,375 has been settled in January 2018 and September 2018, respectively. Certain other performance-based cash awards contingent upon final costs of construction have been estimated to be $1,204 as of September 30, 2018 and have been recognized as accrued liabilities in the condensed consolidated balance sheets. The 156,250 shares of restricted stock granted in connection with construction of the Kingfisher Facility vested in July 2018.

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~~June 30, ~~2018,~~2019, one milestone had been achieved and the Company paid and recognized $1,625 in ~~March~~June 2018 in other operating expense in the condensed consolidated statements of operations. However, as of ~~September~~June 30, ~~2018,~~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 under the guarantee of lease agreement with Solaris Energy Management, LLC is ~~$2,612~~$9,724 as of ~~September~~June 30, ~~2018.~~2019. Refer to Note ~~13 – Related~~12. “Related Party ~~Transactions~~Transactions” for additional information regarding related party transactions ~~recognized.~~recognized and Note 6. “Leases” for operating lease discussion.

~~13.~~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. These costs include rent paid for office space, travel services, personnel, consulting and administrative costs. For the three months ended ~~September~~June 30, ~~2018~~2019 and ~~2017,~~2018, Solaris LLC paid ~~$164~~$341 and ~~paid $152~~$320, respectively, for these services of which $11 and $23 was included in salaries, benefits and payroll taxes, and $153 and $129 was included in selling, general and administrative expenses in the condensed consolidated statements of operations, respectively.services. For the ~~nine~~six months ended ~~September~~June 30, 2019 and 2018, ~~and 2017,~~

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Solaris LLC paid ~~$503~~$619 and ~~$865~~$534, respectively, for these ~~services~~services. As of ~~which $31~~June 30, 2019 and ~~$452 was~~December 31, 2018, the Company included ~~in salaries, benefits~~$231 and ~~payroll taxes, and $356 and $359 were included in selling, general and administrative expenses in the condensed consolidated statements of operations,~~$232, respectively, ~~and $314 and $55 was included~~ in prepaid expenses and other current assets on the condensed consolidated balance sheets. As of ~~September~~June 30, 2019 and December 31, 2018, the Company included ~~$136~~$71 and $103, respectively, of accruals to related parties in ~~prepaid expenses and other current assets~~accrued liabilities on the condensed consolidated balance sheets.

These costs are primarily incurred in connection with the administrative services agreement, dated November 22, 2016, between Solaris LLC and Solaris Energy Management, LLC, ~~(“SEM”),~~ a company partially owned by William A. ~~Zartler (as amended, the “Amended Services Agreement”).~~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 ~~10 – Income Taxes~~9. “Income Taxes” for further discussion of the impact of the Tax Receivable Agreement on Solaris Inc.

~~14. Subsequent Events~~

~~Universal Shelf~~

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 $500,000 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. expects to use net proceeds, if any, from an offering under the Universal Shelf for general corporate purposes, including to fund the Company’s capital program. Solaris Inc. will not receive any proceeds, if any, from the sale of shares of Class A common stock by the Selling Stockholders.

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

Unless the context requires otherwise, references in this report to “Solaris,” the "Company," "we," "us," and "our" refer to (i) Solaris Oilfield Infrastructure, LLC (“Solaris LLC”) and its consolidated subsidiaries prior to the completion of our initial public offering and (ii) Solaris Oilfield Infrastructure, Inc. ~~("Solaris~~(either individually or together with its subsidiaries, as the context requires, “we,” “us,” “our,” “Solaris Inc.~~") and its consolidated subsidiaries following~~” or the ~~completion of our initial public offering.~~“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 ~~on Form 10-Q~~ and “Risk Factors” included in the Annual Report on Form ~~10-K~~10-K/A for the year ended December 31, ~~2017~~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.

~~Our Predecessor and Solaris~~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.

~~Overview~~Executive Summary

We ~~are an independent provider of supply chain management~~design, manufacture, rent and ~~logistics solutions designed to~~service specialized equipment that helps oil and natural gas operators and their suppliers drive efficiencies and reduce costs ~~for~~during the ~~oil~~completion phase of well development. The majority of our revenue is currently derived from the rental and natural gas industry. Our solutions include high-efficiency mobile and permanent infrastructure that increases proppant throughput capacity at critical junctures in the supply chain, as well as software solutions designed to optimize how proppant is dispatched across the supply chain.

~~We manufacture and provide~~service of our patented mobile proppant management systems that unload, store and deliver proppant atused in hydraulic fracturing of oil and natural gas ~~well sites. Our systems reduce our customers’ cost and time to complete~~ wells, ~~by improving the efficiency of proppant logistics,~~ as well as ~~enhancing~~coordinating the delivery of proppant to the well site safety. In addition, we operate an independent, transload facility in Oklahoma (the “Kingfisher Facility”) that integrates our supply chain management and drives additional proppant logistics efficiencies for our customers. Our customers include oil and natural gas exploration and production (“E&P”) companies, such as EOG Resources, Inc., Devon Energy, Apache Corporation and WPX Energy Inc., as well as oilfield service companies, such as ProPetro Holding Corp, Schlumberger Limited, Halliburton Company, BJ Services and Keane Group, Inc.site. Our systems are deployed in ~~many~~most of the ~~most~~ active oil and natural gas basins in the United States, including the Permian Basin, ~~the~~ Eagle Ford Shale, ~~the~~ SCOOP/STACK formations, ~~the~~ Haynesville Shale, ~~and the~~Rockies, Marcellus and Utica ~~Shales. Since commencing operations~~Shales and Bakken formation.

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 ~~April 2014, we have grown~~the United States completions equipment and service space. We introduced our ~~fleet from two systems to 152 systems.~~

~~Our~~ mobile ~~proppant~~chemical management system ~~is designed to address the challenges associated with transferring large quantities of proppant~~ to the well site, including the cost and management of last mile logistics, which we define as the transportation of proppant from the transload terminal or regional proppant mine to the well site. Today’s horizontal well completion designs require between 400 and 1,000 truckloads of proppant delivered to the well site per well which creates bottlenecksmarket in the storage, handling and delivery of proppant. Our patented systems typically provide 2.5 million pounds of vertical proppant storage capacity in a footprint that is considerably smaller than traditional or competing well site proppant storage equipment. Our systems have the ability to unload up to 24 pneumatic proppant trailers simultaneously. In addition, 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. Importantly, the proppant

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storage silos in our systems can be filled from trucks while simultaneously delivering proppant on-demand directly to the blender for hydraulic fracturing operations. Accordingly, our systems can maintain high rates of proppant delivery for extended periods of time, which helps achieve a greater number of frac stages per day, driving a reduction in our customers’ costs. Our systems also reduce the amount of truck demurrage, or wait time, at the well site which can result in significant cost savings for our customers. Additionally, our systems are scalablelate 2018 and we have ~~experienced increased demand for~~begun commercializing the offering in 2019. Product enhancements introduced in 2018 include our ~~larger capacity system,~~AutoHopper technology, which ~~utilizes 12 silos per location. This added buffer provides~~we are deploying across our ~~customers with additional on-site storage, which helps further alleviate logistics bottlenecks upstream~~fleet to automate the delivery of proppant into the ~~well site.~~

~~In July 2018, we completed initial phase one rail~~blender, and ~~storage construction at~~ the ~~Kingfisher Facility,~~latest version of our Solaris Lens™ software, which is ~~operated by Solaris in Kingfisher County, Oklahoma. The Kingfisher Facility is located central~~available on our systems and allows customers to view the ~~active SCOOP/STACK plays and we believe it is the only independent, unit-train capable, high speed transload facility in Oklahoma. Solaris provides transloading services for~~entire last mile proppant ~~and other completion related consumables at the Kingfisher Facility.~~

The Kingfisher Facility is located on a 300-acre parcel of land, directly on the Union Pacific Railroad with a 30-year land lease with the State of Oklahoma. The facility is designed to service multiple large volume customers with dedicated storage and large loop tracks, and currently has over 45,000 feet of rail track and 30,000 tons of vertical storage in six silos with individual capacity of 5,000 tons per silo. The facility services manifest and unit-trains and also provides direct rail-to-truck transloading.

In December 2017, the Company completed its acquisition of substantially all of the assets of Railtronix, LLC, a leading provider of real-time inventory management solutions for proppant mining, rail shipping and transloading operations (“Railtronix”). We have integrated Railtronix into our business, including linking the Railtronix® and PropView® inventory management systems in connection with commencing transloading operations at our Kingfisher Facility. We can now provide our customers with full visibility across their supply chain ~~– from the mine to well site.~~in real time.

Recent Trends and Outlook

Demand for our products and services is predominantly influenced by the level of oil and natural gas well drilling and completion activity, ~~by E&P companies,~~ which, in turn, depends largely on the current and anticipated profitability of developing oil and natural gas reserves. More specifically, demand for our products and services is driven by demand for proppant and chemicals, which, in turn, is primarily driven by advancements in oil and natural gas drilling and well completion technology and techniques, such as horizontal drilling and hydraulic ~~fracturing, which~~fracturing. These advancements have made the extraction of oil and natural gas increasingly cost-effective in formations that historically would have been uneconomic to ~~develop.~~

~~Though~~develop, thereby increasing the number of active rigs in North America has declined from the highs in late 2014 as a result of the downturn in hydrocarbon prices, as well as drilling efficiencies, the industry has witnessed an increase in demand for drillingwells and ~~completion activity beginning in the third quarter of 2016 and continuing today as hydrocarbon prices have recovered somewhat.~~ stages that are completed.

According to the Baker Hughes’ ~~North American~~ Rig Count, the average number of active ~~total~~land-based drilling rigs in the United States ~~reached a low of 404, as reported on May 27, 2016, but has since increased by more than 164%~~was up 18% year over year in 2018 to ~~1,068~~1,013 average active rigs, ~~as reported on October 26, 2018. We expect this demand to continue to~~following a 76% year-over-year increase ~~as E&P companies increase drilling and completion activities over the long-term. However, temporary industry challenges related to pipeline capacity constraints and customer budget limitations~~ in the near-term may reduce overall industry activity levels which could impact our results. Turning to 2019, we expect these industry challenges to abate as customer budgets are refreshed and offtake capacity expands.

We expect to benefit from increased horizontal drilling as well as other long-term macro industry trends that improve drilling economics such as (i) greater rig efficiencies that result in more wells drilled per rig in a given period, (ii) increased complexity and service intensity of well completions, including longer wellbore laterals, more and larger fracturing stages and higher proppant usage per well and (iii) accelerating completion rates through “zipper fracs,” or the process of completing multiple adjacent wells simultaneously.

While we do not currently anticipate any shortages in the supply of the proppant used in hydraulic fracturing operations, supplies of high-quality raw frac sand, the most prevalent proppant historically used in the industry, are limited to select areas, predominantly in western Wisconsin and limited areas of Minnesota and Illinois. Accordingly,

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~~transportation costs often represent~~average active land rigs in 2017. In the second quarter of 2019, the average United States Land Baker Hughes’ Rig Count dropped 5% sequentially following a ~~significant portion~~7% sequential decline in the first quarter of ~~our customer’s~~2019.

While the drilling rig count is generally a fair indicator of the overall ~~product cost,~~oil and ~~transferring large quantities of proppant~~natural gas activity level in the United States, continued advancements in drilling rig and hydraulic fracturing efficiency have contributed to an increase in the ~~well site presents a~~ number of ~~challenges, including~~wells and stages completed. According to Coras Research, LLC, the number of wells completed in 2018 increased over 20% from 2017 and the number of stages completed increased over 30% year-over-year. This combination of increased drilling activity and efficiency contributed to an increase of over 35% in total United States proppant demand from 2017 to 2018. Most recently, Coras Research, LLC estimated the number of wells and stages completed in the second quarter of 2019 increased 5-7% from the first quarter of 2019 and is up slightly year-over-year.

While drilling and completion activity has been relatively flat in 2019 versus 2018, a continued stable oil price environment could allow the total number of well completions to increase year-over-year. Such increases may also be driven by continued pressure pumping efficiency gains, a drawdown of drilled, but uncompleted well inventories and a continued transition towards manufacturing-style development activity by exploration and production (“E&P”) companies. Examples of E&P development activity trends include “zipper fracs” (the process of completing multiple adjacent wells simultaneously), “leap frogging” (forward staging equipment and supplies to prepare for completion activity) and continuous completion cycles, which drives cost efficiencies and management of last mile logistics. Additionally, increased focus on cost control and increased health, safety and environmental regulation has created numerous operational challenges that cannot be addressed with labor intensive proppant storage equipment,increases demand for completion-related consumables such as ~~those~~proppant and chemicals. One potential risk of these efficiency gains is that ~~utilize individual containers for on-site proppant storage and handling.~~

During 2017 and 2018, numerous regional sand mine developments were announced and several have commenced operations with proximity to several active oil and gas basins, including the Permian Basin, the Eagle Ford Shale, the SCOOP/STACK formations and the Haynesville Shale. While these regional mines reduce the total distance between mine and destination, there are frequently increased transportation complexities as several buffers are removed from the supply chain, including rail cars and transloading facilities. As a result, we believe the demand for ~~our solutions, including large, mobile inventory capacity at the well site~~completions-related equipment and ~~remote inventory monitoring data along the supply chain will increase~~services could be reduced as ~~additional local mines are brought on line.~~less equipment could be required to complete a similar or higher number of wells.

These ~~supply and demand~~industry trends have contributed to our significant growth ~~since our formation~~ in ~~April 2014. Since commencing operations we have grown our~~recent years. Our fleet ~~to 152~~currently consists of 164 mobile proppant management systems, which is up 25% from 131 systems a year ago, and eight mobile chemical management systems, which did not exist as a product offering a year ago.

We also significantly increased the number of ~~days~~ our systems ~~earn revenue. Our total system revenue days increased~~deployed to ~~11,848 in~~customers year-over-year. In the three months ended ~~September~~June 30, ~~2018 from 4,564 in~~2019, we averaged 123 mobile proppant systems on a fully utilized basis, which was up 14% compared to the three months ended ~~September~~June 30, ~~2017, an increase of approximately 160%. Our total system revenue days increased to 29,371 in~~2018. In the ~~nine~~six months ended ~~September~~June 30, ~~2018 from 10,566 in~~2019, we averaged 118 mobile proppant systems on a fully utilized basis, which was up 22% compared to the ~~nine~~six months ended ~~September~~June 30, ~~2017, an increase~~2018.

Table of ~~approximately 178%.~~Contents

The number of systems in our fleet increased to an average of 131.7 during the three months ended September 30, 2018 from an average of 49.8 during the three months ended September 30, 2017, an increase of approximately 164%. The average number of systems deployed to customers increased to 128.8 in the three months ended September 30, 2018 from 49.6 in the three months ended September 30, 2017, an increase of approximately 160%.

How We Generate Revenue

We generate the majority of our revenue ~~primarily~~ 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 ~~rentals~~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 on a monthly basis.

In early 2018, we began generating revenue for our transloading ~~service~~services at our ~~Kingfisher Facility.~~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. We expect that a significant portion of the transloading revenue that we generate in ~~2018~~2019 will be related to ~~one~~the customer contract that ~~requires~~was amended in December 2018, requiring the customer to deliver minimum quarterly volumes to the ~~facility,~~Kingfisher Facility, as well as volumes from additional customers.

Finally, we generate revenue through our ~~Railtronix~~Railtronix® inventory management software. ~~We acquired the assets of Railtronix in December 2017.~~ 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.~~truck at either a transload facility or mine.

Costs of Conducting Our Business

The principal costs associated with operating our business are:

Cost of ~~proppant management~~ system rental (excluding depreciation and amortization);

Cost of ~~proppant management~~ system services (excluding depreciation and amortization);

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Cost of transloading ~~operations and~~ 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;

Salaries, benefits and payroll taxes;

Selling, general and administrative expenses; and

Other operating expenses.

Our cost of ~~proppant management~~ 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.

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

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

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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 3three 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, ~~manufacturing administrative,~~ accounting and corporate administrative.

Our selling, general and administrative expenses are comprised primarily of 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 ~~proppant management~~ 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 ~~proppant management~~sand and chemical systems we have available in our fleet.

Fully Utilized System Count

~~Table~~The fully utilized system count is calculated as the total number of ~~Contents~~

revenue days divided 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.

EBITDA and Adjusted EBITDA

We view EBITDA and Adjusted EBITDA as important indicators of performance. We define EBITDA as net income, ~~(loss),~~ 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) ~~noncash~~certain non-cash items and any extraordinary, unusual or non-recurring gains, losses or expenses.

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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.

~~Factors Impacting Comparability of Our Financial Results~~

Our future results of operations may not be comparable to the historical results of operations of our accounting predecessor, Solaris LLC, for the periods presented, primarily for the reasons described below.

~~Corporate Reorganization~~

The historical condensed consolidated financial statements included in this report are based on the financial statements of our accounting predecessor, Solaris LLC, prior to our corporate reorganization consummated in connection with the IPO. As a result, the historical consolidated financial data may not give you an accurate indication of what our actual results would have been if the corporate reorganization had been completed at the beginning of the periods presented or of what our future results of operations are likely to be. In connection with the IPO and the transactions related thereto, Solaris Inc. became a holding company whose sole material asset consists of Solaris LLC Units. Solaris Inc. is 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.

In addition, in connection with the IPO, Solaris Inc. entered into a tax receivable agreement (the “Tax Receivable Agreement”) with the existing members of Solaris LLC (collectively, the “Original Investors”) (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. 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 series of reorganization transactions completed on May 17, 2017 (the “Reorganization Transactions”) or pursuant to the exercise of the Redemption Right or the Call Right (each as defined in Solaris LLC’s Amended and Restated Limited Liability Company Agreement) and (ii) imputed interest deemed to be paid by Solaris

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Inc. as a result of, and additional tax basis arising from, any payments Solaris Inc. makes under the Tax Receivable Agreement. Solaris will retain the benefit of the remaining 15% of these cash savings.

We anticipate that we will account for the effects of these increases in tax basis and associated payments under the Tax Receivable Agreement arising from any future redemptions of Solaris LLC Units from our Original Investors as follows:

~~we will record an increase in deferred tax assets for the estimated income tax effects of the increases in tax basis based on enacted federal and state tax rates at the date of the redemption;~~

to the extent we estimate that we will not realize the full benefit represented by the deferred tax asset, based on an analysis that will consider, among other things, our expectation of future earnings, we will reduce the deferred tax asset with a valuation allowance; and

we will record 85% of the estimated realizable tax benefit as an increase to our payables associated with the future payments due under the Tax Receivable Agreement and the remaining 15% of the estimated realizable tax benefit as an increase to additional paid-in capital.

All of the effects of changes in any of our estimates after the date of the exchange will be included in net income for the period in which those changes occur. Similarly, the effect of subsequent changes in the enacted tax rates will be included in net income for the period in which the change occurs.

~~Fleet Growth~~

We have experienced significant growth over the past four years. Since commencing operations in April 2014, we have grown our fleet from two systems to 152 systems and increased the number of major oil and gas basins in which our systems are deployed. We have increased our system revenue days by more than 6,709% from the second quarter of 2014 to the third quarter of 2018, representing a 170% compound annual growth rate. The increase in total system revenue days is attributable to both an increase in the number of systems available for rental and an increase in the rate at which our systems are utilized.

~~Public Company Expenses~~

Following the completion of the IPO, we incurred direct, incremental general and administrative (“G&A”) expenses as a result of being a publicly traded company, including, but not limited to, costs associated with hiring new personnel, implementation of compensation programs that are competitive with our public company peer group, annual and quarterly reports to stockholders, tax return preparation, independent auditor fees, investor relations activities, registrar and transfer agent fees, incremental director and officer liability insurance costs and incremental director compensation. These direct, incremental G&A expenses are not included in our results of operations prior to the IPO.

~~Income Taxes~~

Solaris Inc. is a corporation and, as a result, is subject to United States federal, state and local income taxes. Although Solaris LLC is subject to franchise tax in the State of Texas (at less than 1% of modified pre-tax earnings) it passes through its taxable income to its owners, including Solaris Inc., for United States federal and other state and local income tax purposes and thus is not generally subject to United States federal income tax or other state or local income taxes. Accordingly, the financial data attributable to Solaris LLC prior to the IPO contains no provision for United States federal income tax or income taxes in any state or locality other than franchise tax in the State of Texas.

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Results of Operations

Three Months Ended ~~September~~June 30, ~~2018~~2019 Compared to Three Months Ended ~~September~~June 30, ~~2017~~2018


	Three Months Ended						Three Months Ended
	September 30,						June 30,
	2018		2017		Change		2019		2018		Change
	(in thousands)						(in thousands)
Revenue
Proppant management system rental	$	42,031	$	15,062	$	26,969
Proppant management system services		12,053		3,416		8,637
System rental							$	39,740	$	35,127	$	4,613
System services								19,031		9,937		9,094
Transloading services		2,000		—		2,000		4,881		1,397		3,484
Proppant inventory software services		602		—		602
Inventory software services								449		694		(245)
Total revenue		56,686		18,478		38,208		64,101		47,155		16,946
Operating costs and expenses:
Cost of proppant management system rental (excluding $4,133 and $1,523 of depreciation and amortization for the three months ended September 30, 2018 and 2017, respectively, shown separately)		1,949		641		1,308
Cost of proppant management system services (excluding $347 and $129 of depreciation and amortization for the three months ended September 30, 2018 and 2017, respectively, shown separately)		13,906		3,933		9,973
Cost of transloading services (excluding $529 of depreciation and amortization for the three months ended September 30, 2018, shown separately)		597		—		597
Cost of proppant inventory software services (excluding $193 of depreciation and amortization for the three months ended September 30, 2018, shown separately)		191		—		191
Cost of system rental (excluding $5,481 and $3,359 of depreciation and amortization for the three months ended June 30, 2019 and 2018, respectively, shown separately) (1)								2,552		1,683		869
Cost of system services (excluding $391 and $305 of depreciation and amortization for the three months ended June 30, 2019 and 2018, respectively, shown separately) (1)								21,675		11,679		9,996
Cost of transloading services (excluding $411 and $10 of depreciation and amortization for the three months ended June 30, 2019 and 2018, respectively, shown separately) (1)								689		535		154
Cost of inventory software services (excluding $193 of depreciation and amortization for the three months ended June 30, 2019 and 2018, respectively, shown separately)								165		167		(2)
Depreciation and amortization		5,328		1,742		3,586		6,622		3,984		2,638
Salaries, benefits and payroll taxes		2,182		2,942		(760)		3,235		3,169		66
Selling, general and administrative (excluding $126 and $90 of depreciation and amortization for the three months ended September 30, 2018 and 2017, respectively, shown separately)		1,687		1,176		511
Selling, general and administrative (excluding $146 and $117 of depreciation and amortization for the three months ended June 30, 2019 and 2018, respectively, shown separately)								1,771		1,123		648
Other operating expenses		56		(38)		94		69		19		50
Total operating costs and expenses		25,896		10,396		15,500		36,778		22,359		14,419
Operating income		30,790		8,082		22,708		27,323		24,796		2,527
Interest expense, net		(116)		(27)		(89)		(656)		(71)		(585)
Other income (expense)		—		(32)		32
Total other expense		(116)		(59)		(57)		(656)		(71)		(585)
Income before income tax expense		30,674		8,023		22,651		26,667		24,725		1,942
Provision for income taxes		(4,237)		(617)		(3,620)		(4,158)		(3,277)		(881)
Net income		26,437		7,406		19,031		22,509		21,448		1,061
Less: net income related to non-controlling interests		(13,418)		(6,027)		(7,391)		(9,234)		(10,851)		1,617
Net income attributable to Solaris	$	13,019	$	1,379	$	11,640	$	13,275	$	10,597	$	2,678

Revenue

~~Proppant Management~~ System Rental Revenue. Our ~~proppant management~~ system rental revenue increased ~~$26.9~~$4.6 million, or ~~178%~~13%, to ~~$42.0~~$39.7 million for the three months ended ~~September~~June 30, ~~2018~~2019 compared to ~~$15.1~~$35.1 million for the three months ended ~~September~~June 30, ~~2017.~~2018. This increase was primarily due to a ~~160%~~14% increase in ~~the number of revenue days, or 7,284 days, coupled with an increase in rental rates charged to customers~~mobile proppant systems on a fully utilized basis, due to increasing demand for our systems and enhancements to our product offering.

~~Proppant Management~~ System Services Revenue. Our ~~proppant management~~ system services revenue increased ~~$8.7~~$9.1 million, or ~~256%~~92%, to ~~$12.1~~$19.0 million for the three months ended ~~September~~June 30, ~~2018~~2019 compared to ~~$3.4~~$9.9 million for the three months ended ~~September~~June 30, ~~2017. Proppant management system~~2018. System services revenue ~~related~~increased $8.1 million due to an increase in the number of our systems where we coordinate proppant delivered into our systems, in addition to a $1.0 million increase in field ~~technicians~~technician support to maintain systems and transportation of systems between customer sites.

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transportation increased as a result of the increasing number of systems we have deployed. Once systems are deployed, the Company provides services to maintain such systems on-site for customers and to coordinate the transportation of systems between customer sites. Proppant management system services revenue also increased in relation to services provided to coordinate proppant delivered to systems, which have not been previously provided in the three months ended September 30, 2017.

Transloading Services Revenue. Our transloading services revenue ~~of $2.0~~increased $3.5 million, or 250%, to $4.9 million for the three months ended ~~September~~June 30, ~~2018 is related~~2019 compared to ~~transloading services~~$1.4 million for the three months ended June 30, 2018. This increase was primarily due to recognition of $3.2 million of deferred revenue and an increase in the number of tons transloaded at our Kingfisher ~~Facility, which commenced in January 2018.~~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.

~~Proppant~~ Inventory Software Services Revenue. Our ~~proppant~~ inventory ~~system~~software services revenue, ~~of $0.6~~which decreased $0.2 million, or 29% to $0.4 million for the three months ended ~~September~~June 30, 2019 compared to $0.7 million for the three months ended June 30, 2018, is related to ~~the~~ Railtronix ~~assets acquired in December 2017.~~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~~June 30, 2019 and 2018 ~~and 2017~~ were ~~$25.9~~$36.8 million and ~~$10.4~~$22.4 million, respectively, which represented ~~46%~~57% and ~~56%~~47% 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, ~~as well as the commencement of transloading services at our Kingfisher Facility,~~ coupled with the related increase in depreciation and amortization expense. Total operating costs as a percentage of total revenue ~~decreased~~increased as a result of ~~economies of scale~~an increase in ~~our operations.~~system services expense in relation to proppant delivery coordination services provided. Additional details regarding the changes in operating expenses are presented below.

Cost of ~~Proppant Management~~ System Rental (excluding depreciation and amortization). Cost of ~~proppant management~~ system rental increased ~~$1.3~~$0.9 million, or ~~217%~~53%, to ~~$1.9~~$2.6 million for the three months ended ~~September~~June 30, ~~2018~~2019 compared to ~~$0.6~~$1.7 million for the three months ended ~~September~~June 30, ~~2017,~~2018, excluding depreciation and amortization expense. Cost of ~~proppant management~~ system rental as a percentage of ~~proppant management~~ system rental revenue was 5%6% and 4%5% for the three months ended ~~September~~June 30, ~~2018~~2019 and ~~2017,~~2018, respectively. Cost of ~~proppant management~~ system rental increased primarily due to an increase in the number of systems that were added to our fleet and deployed to customers. The average number of mobile proppant systems deployed to customers increased to ~~128.8~~123 systems in the three months ended ~~September~~June 30, ~~2018~~2019 from ~~49.6~~108 systems in the three months ended ~~September~~June 30, ~~2017.~~2018.

Cost of ~~proppant management~~ system rental including depreciation and amortization expense increased ~~$3.9~~$3.0 million, or ~~181%~~59%, to ~~$6.1~~$8.0 million for the three months ended ~~September~~June 30, ~~2018~~2019 compared to ~~$2.2~~$5.0 million for the three months ended ~~September~~June 30, ~~2017.~~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.~~systems that were manufactured and added to our fleet.

Cost of ~~Proppant Management~~ System Services (excluding depreciation and amortization). Cost of ~~proppant management~~ system services increased $10.0 million, or ~~256%~~85%, to ~~$13.9~~$21.7 million for the three months ended ~~September~~June 30, ~~2018~~2019 compared to ~~$3.9~~$11.7 million for the three months ended ~~September~~June 30, ~~2017.~~2018. This increase was primarily due to an increase of $8.4 million in ~~the number~~relation to services provided to coordinate proppant delivered to systems. Cost of ~~systems deployed~~system services also increased due to ~~customers as referenced above, which resulted in~~ an increase in field labor and related costs of $0.8 million, coupled with increased third-party trucking services of ~~$4.4~~$0.7 million to transport incremental systems deployed to ~~customers, coupled with increased field labor and related costs of $4.1 million.~~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 three months ended ~~September~~June 30, 2018. In addition, the Company coordinated third-party trucking services of $0.9 million related to the transportation of proppant to systems, which were not provided in the three months ended September 30, 2017.

2019. For the three months ended ~~September~~June 30, ~~2018,~~2019, the cost of ~~proppant management~~ system services as a percentage of ~~proppant management~~ system services revenue ~~remained consistent with~~decreased to 114% compared to 118% for the three months ended ~~September~~June 30, ~~2017 at 115%.~~

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2018.

Cost of ~~proppant management~~ system services including depreciation and amortization expense increased ~~$10.2~~$10.1 million, or ~~251%~~84%, to ~~$14.3~~$22.1 million for the three months ended ~~September~~June 30, ~~2018~~2019 compared to ~~$4.1~~$12.0 million for the three months ended ~~September~~June 30, ~~2017.~~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 ~~of $0.6~~increased $0.2 million, or 40%, to $0.7 million for the three months ended ~~September~~June 30, 2019 compared to $0.5 million for the three months ended June 30, 2018 primarily ~~includes~~due to increases in direct labor costs, fuel, utilities and maintenance related to increased transloading services activity at our Kingfisher ~~Facility, which commenced in January 2018.~~Facility.

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Cost of transloading services including depreciation and amortization expense ~~was~~increased $0.6 million, or 102%, to $1.1 ~~million.~~million for the three months ended June 30, 2019 compared to $0.5 million for the three months ended June 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 ~~Proppant~~ Inventory Software Services (excluding depreciation and amortization). Cost of ~~proppant~~ inventory software services, ofwhich remained consistent at $0.2 million for the three months ended ~~September~~June 30, 2019 and 2018, primarily includes labor and software subscription costs related to ~~the~~ Railtronix ~~software acquired in December 2017.~~inventory management software.

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

Depreciation and Amortization. Depreciation and amortization increased ~~$3.6~~$2.6 million, or ~~212%~~65%, to ~~$5.3~~$6.6 million for the three months ended ~~September~~June 30, ~~2018~~2019 compared to ~~$1.7~~$4.0 million for the three months ended ~~September~~June 30, ~~2017.~~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 ~~related transloading~~ equipment placed in service in ~~2018.~~2018 and during the six months ended June 30, 2019.

Salaries, Benefits and Payroll Taxes. Salaries, benefits and payroll taxes, ~~decreased $0.7 million, or 24%, to $2.2~~which remained consistent at $3.2 million for the three months ended ~~September~~June 30, 2019 and 2018, ~~compared to $2.9 million for the three months ended September 30, 2017. The decrease was due to a decrease in~~primarily includes corporate personnel labor costs and stock-based compensation expense ~~of $1.1 million primarily due~~related to ~~the May 2018 vesting of~~ restricted stock awards ~~with one-year vesting~~ that were granted to certain employees and ~~consultants in connection with the IPO. This decrease is partially offset by an increase of $0.4 million due to additions in corporate personnel to support public company and growth needs.~~consultants.

Selling, General and Administrative Expenses (excluding depreciation and amortization). Selling, general and administrative expenses increased ~~$0.5~~$0.7 million, or ~~42%~~64%, to ~~$1.7~~$1.8 million for the three months ended ~~September~~June 30, ~~2018~~2019 compared to ~~$1.2~~$1.1 million for the three months ended ~~September~~June 30, ~~2017~~2018 due primarily to an increase ~~of $0.2 million~~ in ~~office rent.~~professional fees.

Other Operating Expenses. Other operating expenses infor the three months ended ~~September~~June 30, 2019 and 2018 were related to ~~losses~~loss on ~~the~~ disposal of ~~light duty vehicles used to support the service of our systems. Other operating expenses in~~assets.

Provision for Income Taxes. During the three months ended ~~September~~June 30, ~~2017 were primarily related to a change in payables related to the Tax Receivable Agreement, partially offset by losses on disposal of field equipment and non-recurring transaction costs.~~

~~Income Tax Expenses.~~ ~~For the three months ended September 30, 2018 and 2017,~~2019, we recognized a combined United States federal and state provision for income taxes of $4.2 million, ~~and $0.6 million, respectively.~~

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. During the three months ended September 30, 2018, we recognized a provision for income taxes of $174,000, an increase of ~~$143,000~~$0.9 million as compared to ~~$31,000~~$3.3 million we recognized during the three months ended ~~September~~June 30, ~~2017.~~2018. This increase was ~~primarily~~ attributable to ~~an increase in operations between the applicable periods.~~

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higher operating income.

Net Income

Net income increased ~~$19.0~~$1.1 million to ~~$26.4~~$22.5 million for the three months ended ~~September~~June 30, ~~2018~~2019 compared to ~~$7.4~~$21.4 million for the three months ended ~~September~~June 30, ~~2017,~~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 ~~noncash~~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						Three months ended
	September 30,						June 30,
	2018		2017		Change		2019		2018		Change
	(in thousands)						(in thousands)
Net income	$	26,437	$	7,406	$	19,031	$	22,509	$	21,448	$	1,061
Depreciation and amortization		5,328		1,742		3,586		6,622		3,984		2,638
Interest expense, net		116		27		89		656		71		585
Income taxes (1)		4,237		617		3,620		4,158		3,277		881
EBITDA	$	36,118	$	9,792	$	26,326	$	33,945	$	28,780	$	5,165
IPO bonuses (2)		—		617		(617)		—		307		(307)
Stock-based compensation expense (3)		338		795		(457)		1,178		939		239
Change in payables related to Tax Receivable Agreement		—		(83)		83
Loss on disposal of assets		51		41		10		71		23		48
Other (4)		—		36		(36)
Adjusted EBITDA	$	36,507	$	11,198	$	25,309	$	35,194	$	30,049	$	5,145

(1)

Federal and state income taxes.

(2)

Represents stock-based compensation expense related to restricted stock awards with one-year vesting of ~~$0.6~~$0.3 million in the three months ended ~~September~~June 30, ~~2017~~2018 that were granted to certain employees and consultants in connection with the IPO.

(3)

Represents stock-based compensation expense related to restricted stock awards ~~with three-year vesting~~ of ~~$0.3~~$1.2 million and ~~$0.7~~$0.9 million in the three months ended ~~September~~June 30, 2019 and 2018, ~~and 2017, respectively, and $0.1 million in the three months ended September 30, 2017 related to the options issued under the Plan.~~

~~(4)~~

~~Non-recurring transaction costs in the three months ended September 30, 2017.~~respectively.

Three Months Ended ~~September~~June 30, ~~2018~~2019 Compared to Three Months Ended ~~September~~June 30, ~~2017:~~2018: EBITDA and Adjusted EBITDA

EBITDA increased ~~$26.3~~$5.2 million to ~~$36.1~~$33.9 million for the three months ended ~~September~~June 30, ~~2018~~2019 compared to ~~$9.8~~$28.8 million for the three months ended ~~September~~June 30, ~~2017.~~2018. Adjusted EBITDA increased ~~$25.3~~$5.2 million to ~~$36.5~~$35.2 million for the three months ended ~~September~~June 30, ~~2018~~2019 compared to ~~$11.2~~$30.0 million ~~and~~ for the three months ended ~~September~~June 30, ~~2017.~~2018. EBITDA and Adjusted EBITDA increased ~~269%~~18% and ~~226%, respectively,~~17% for the three months ended ~~September~~

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June 30, ~~2018~~2019 compared to the three months ended ~~September~~June 30, ~~2017.~~2018, respectively. The increases were primarily due to an increase in the number of systems deployed ~~to customers, as well as an increase in the rental rates charged~~ to customers due to increasing demand for our systems and enhancements to our product offering.

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~~Nine~~Six Months Ended ~~September~~June 30, ~~2018~~2019 Compared to ~~Nine~~Six Months Ended ~~September~~June 30, ~~2017~~2018


	Nine Months Ended						Six Months Ended
	September 30,						June 30,
	2018		2017		Change		2019		2018		Change
	(in thousands)						(in thousands)
Revenue
Proppant management system rental	$	104,563	$	34,560	$	70,003
Proppant management system services		29,499		7,631		21,868
System rental							$	77,088	$	62,532	$	14,556
System services								30,468		17,446		13,022
Transloading services		3,847		—		3,847		10,714		1,847		8,867
Proppant inventory software services		1,950		—		1,950
Inventory software services								955		1,348		(393)
Total revenue		139,859		42,191		97,668		119,225		83,173		36,052
Operating costs and expenses:
Cost of proppant management system rental (excluding $10,128 and $3,748 of depreciation and amortization for the nine months ended September 30, 2018 and 2017, respectively, shown separately)		5,050		1,588		3,462
Cost of proppant management system services (excluding $889 and $283 of depreciation and amortization for the nine months ended September 30, 2018 and 2017, respectively, shown separately)		34,691		8,640		26,051
Cost of transloading services (excluding $544 of depreciation and amortization for the nine months ended September 30, 2018, shown separately)		1,464		—		1,464
Cost of proppant inventory software services (excluding $598 of depreciation and amortization for the nine months ended September 30, 2018, shown separately)		614		—		614
Cost of system rental (excluding $10,707 and $5,995 of depreciation and amortization for the six months ended June 30, 2019 and 2018, respectively, shown separately)								4,899		3,101		1,798
Cost of system services (excluding $789 and $542 of depreciation and amortization for the six months ended June 30, 2019 and 2018, respectively, shown separately)								35,294		20,785		14,509
Cost of transloading services and other (excluding $820 and $15 of depreciation and amortization for the six months ended June 30, 2019 and 2018, respectively, shown separately)								1,399		867		532
Cost of proppant inventory software services (excluding $386 and $405 of depreciation and amortization for the six months ended June 30, 2019 and 2018, respectively, shown separately)								300		423		(123)
Depreciation and amortization		12,514		4,276		8,238		12,967		7,186		5,781
Salaries, benefits and payroll taxes		7,972		5,687		2,285		5,577		5,790		(213)
Selling, general and administrative (excluding $355 and $245 of depreciation and amortization for the nine months ended September 30, 2018 and 2017, respectively, shown separately)		4,690		3,653		1,037
Selling, general and administrative (excluding $265 and $229 of depreciation and amortization for the six months ended June 30, 2019 and 2018, respectively, shown separately)								3,457		3,003		454
Other operating expenses		1,752		3,770		(2,018)		282		1,696		(1,414)
Total operating costs and expenses		68,747		27,614		41,133		64,175		42,851		21,324
Operating income		71,112		14,577		56,535		55,050		40,322		14,728
Interest expense, net		(271)		(71)		(200)		(767)		(155)		(612)
Other expense		—		(119)		119
Total other expense		(271)		(190)		(81)		(767)		(155)		(612)
Income before income tax expense		70,841		14,387		56,454		54,283		40,167		14,116
Provision for income taxes		(9,541)		(1,137)		(8,404)		(8,339)		(5,304)		(3,035)
Net income		61,300		13,250		48,050		45,944		34,863		11,081
Less: net income related to Solaris LLC		—		(3,665)		3,665
Less: net income related to non-controlling interests		(31,754)		(8,049)		(23,705)		(20,352)		(18,336)		(2,016)
Net income attributable to Solaris	$	29,546	$	1,536	$	28,010	$	25,592	$	16,527	$	9,065

Revenue

~~Proppant Management~~ System Rental Revenue. Our ~~proppant management~~ system rental revenue increased ~~$70.0~~$14.6 million, or ~~202%~~23%, to ~~$104.6~~$77.1 million for the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 compared to ~~$34.6~~$62.5 million for the ~~nine~~six months ended ~~September~~June 30, ~~2017.~~2018. This increase was primarily due to a ~~178%~~22% increase in ~~the number of revenue days, or 18,805 days, coupled with an increase in rental rates charged to customers~~mobile proppant systems on a fully utilized basis, due to increasing demand for our systems and enhancements to our product offering.

~~Proppant Management~~ System Services Revenue. Our ~~proppant management~~ system services revenue increased ~~$21.9~~$13.0 million, or ~~288%~~75%, to ~~$29.5~~$30.5 million for the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 compared to ~~$7.6~~$17.4 million for the ~~nine~~six months ended ~~September~~June 30, ~~2017. Proppant management system~~2018. System services revenue ~~related~~increased $9.4 million due to an increase in the number of our systems where we coordinate proppant delivered into our systems, in addition to a $3.6 million increase in field ~~technicians~~technician support to maintain systems and transportation ~~increased as a result of the increasing number~~ of systems ~~we have deployed. Once systems are deployed,~~between customer sites.

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the Company provides services to maintain such systems on-site for customers and to coordinate the transportation of systems between customer sites. Proppant management system services revenue also increased in relation to services provided to coordinate proppant delivered to systems, which have not been previously provided in the nine months ended September 30, 2018.

Transloading Services Revenue. Our transloading services revenue ~~of $3.8~~increased $8.9 million, or 494%, to $10.7 million for the ~~nine~~six months ended ~~September~~June 30, ~~2018 is related~~2019 compared to ~~transloading services~~$1.8 million for the six months ended June 30, 2018. This increase was primarily due to recognition of $6.3 million of deferred revenue and an increase in the number of tons transloaded at our Kingfisher ~~Facility, which commenced in January 2018.~~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.

~~Proppant~~ Inventory Software Services Revenue. Our ~~proppant~~ inventory ~~system~~software services revenue, ~~of $2.0~~which decreased $0.3 million, or 23% to $1.0 million for the ~~nine~~six months ended ~~September~~June 30, 2019 compared to $1.3 million for the six months ended June 30, 2018, is related to ~~the~~ Railtronix ~~assets acquired in December 2017.~~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~~six months ended ~~September~~June 30, 2019 and 2018 ~~and 2017~~ were ~~$68.7~~$64.2 million and ~~$27.6~~$42.9 million, respectively, which represented ~~49%~~54% and ~~65%~~52% 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, ~~as well as the commencement of transloading services at our Kingfisher Facility,~~ coupled with the related increase in depreciation and amortization expense. Total operating costs as a percentage of total revenue ~~decreased~~increased as a result of ~~economies of scale~~an increase in ~~our operations. Other operating expenses are primarily related~~system services expense in relation to non-recurring charges, including certain performance-based cash awards and the IPO. Excluding other operating expense, total operating costs and expenses for the nine months ended September 30, 2018 and 2017 were $67.0 million and $23.8 million, respectively, which represented 48% and 57% of total revenue, respectively.proppant delivery coordination services provided. Additional details regarding the changes in operating expenses are presented below.

Cost of ~~Proppant Management~~ System Rental (excluding depreciation and amortization). Cost of ~~proppant management~~ system rental increased ~~$3.5~~$1.8 million, or ~~219%~~58%, to ~~$5.1~~$4.9 million for the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 compared to ~~$1.6~~$3.1 million for the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2018, excluding depreciation and amortization expense. Cost of ~~proppant management~~ system rental as a percentage of ~~proppant management~~ system rental revenue was 6% and 5% for the ~~nine~~six months ended ~~September~~June 30, 2019 and 2018, ~~and 2017.~~respectively. Cost of ~~proppant management~~ system rental increased primarily due to an increase in the number of systems that were added to our fleet and deployed to customers. The average number of systems deployed to customers increased to ~~107.4~~118 systems in the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 from ~~38.7~~97 systems in the ~~nine~~six months ended ~~September~~June 30, ~~2017.~~2018.

Cost of ~~proppant management~~ system rental including depreciation and amortization expense increased ~~$9.8~~$6.5 million, or ~~184%~~72%, to ~~$15.2~~$15.6 million for the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 compared to ~~$5.3~~$9.1 million for the ~~nine~~six months ended ~~September~~June 30, ~~2017.~~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.~~systems that were manufactured and added to our fleet.

Cost of ~~Proppant Management~~ System Services (excluding depreciation and amortization). Cost of ~~proppant management~~ system services increased ~~$26.1~~$14.5 million, or ~~303%~~70%, to ~~$34.7~~$35.3 million for the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 compared to ~~$8.6~~$20.8 million for the ~~nine~~six months ended ~~September~~June 30, ~~2017.~~2018. This increase was primarily due to an increase of $9.4 million in ~~the number~~relation to services provided to coordinate proppant delivered to systems. Cost of ~~systems deployed~~system services also increased due to ~~customers as referenced above, including~~ an increase in field labor and related costs of $2.0 million, coupled with increased third-party trucking services of ~~$10.7~~$2.1 million to transport incremental systems deployed to ~~customers, coupled with increased field labor and related costs of $11.6 million.~~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~~six months ended ~~September~~June 30, ~~2018. Cost of proppant management system services also increased in relation to services provided to coordinate proppant delivered to systems, which had not been previously provided in~~2019. For the ~~nine~~six months ended ~~September~~June 30, ~~2017.~~

~~For the nine months ended September 30, 2018,~~2019, the cost of ~~proppant management~~ system services as a percentage of ~~proppant management~~ system services revenue ~~increased~~decreased to ~~118%~~116% compared to ~~113%~~119% for the ~~nine~~six months ended

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~~September~~ June 30, 2017. Cost of proppant management system services as a percentage of proppant management system services revenue has primarily increased as a result of higher prices paid for third-party trucking services necessary to support our systems, in addition to coordinating delivery of proppant to our systems deployed to customers due to increasing demand for such services corresponding to increased industry activity levels not previously provided.2018.

Cost of ~~proppant management~~ system services including depreciation and amortization expense increased ~~$26.7~~$14.8 million, or ~~299%~~69%, to ~~$35.6~~$36.1 million for the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 compared to ~~$8.9~~$21.3 million for the ~~nine~~six months ended ~~September~~June 30, ~~2017.~~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 ~~of $1.5~~increased $0.5 million, or 56%, to $1.4 million for the ~~nine~~six months ended ~~September~~June 30, 2019 compared to $0.9 million for the six months ended June 30, 2018 primarily ~~includes~~due to increases in direct labor costs, fuel, utilities and maintenance related to increased transloading services activity at our Kingfisher ~~Facility, which commenced in January 2018.~~Facility.

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Cost of transloading services including depreciation and amortization expense ~~was $2.0 million.~~increased $1.3 million, or 152%, to $2.2 million for the six months ended June 30, 2019 compared to $0.9 million for the six months ended June 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 ~~Proppant~~ Inventory Software Services (excluding depreciation and amortization). Cost of ~~proppant~~ inventory software services, ~~of $0.6~~which decreased $0.1 million, or 25%, to $0.3 million for the ~~nine~~six months ended ~~September~~June 30, 2019 compared to $0.4 million for the six months ended June 30, 2018, primarily includes labor and software subscription costs related to ~~the~~ Railtronix ~~software acquired in December 2017.~~inventory management software.

Cost of ~~proppant~~ inventory software services including depreciation and amortization expense decreased $0.1 million, or 17%, to $0.7 million for the six months ended June 30, 2019 compared to $0.8 million for the six months ended June 30, 2018. This decrease was ~~$1.2 million. This included amortization expense related~~primarily attributable to the ~~acquisition~~labor and software subscription costs. Amortization consists of ~~Railtronix, including~~ customer relationships, a non-competition agreement and ~~software.~~software acquired in the acquisition of Railtronix.

Depreciation and Amortization. Depreciation and amortization increased ~~$8.2~~$5.8 million, or ~~191%~~81%, to ~~$12.5~~$13.0 million for the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 compared to ~~$4.3~~$7.2 million for the ~~nine~~six months ended ~~September~~June 30, ~~2017.~~2018. This increase was primarily attributable to additional depreciation expense related to additional systems that were manufactured and added to our ~~fleet.~~fleet and our transloading facility and equipment placed in service in 2018.

Salaries, Benefits and Payroll Taxes. Salaries, benefits and payroll taxes ~~increased $2.3~~decreased $0.2 million, or ~~40%~~3%, to ~~$8.0~~$5.6 million for the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 compared to ~~$5.7~~$5.8 million for the ~~nine~~six months ended ~~September~~June 30, ~~2017.~~2018. The ~~increase~~decrease was driven by a decrease in stock-based compensation expense of $0.7 million primarily due to the vesting in 2018 of restricted stock awards that were granted to certain employees and consultants in connection with the IPO with one-year vesting terms. This decrease was partially offset by corporate personnel additions of $1.5 million to support public company and growth needs and an increase in stock-based compensation expense of $0.8 million as a result of the issuance of restricted shares in connection with, and subsequent to, the Offering.$0.5 million.

Selling, General and Administrative Expenses (excluding depreciation and amortization). Selling, general and administrative expenses increased ~~$1.0~~$0.5 million, or ~~27%~~17%, to ~~$4.7~~$3.5 million for the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 compared to ~~$3.7~~$3.0 million for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 due primarily to ~~increases of $0.4 million~~an increase in ~~public company expenses and $0.3 million in office rent.~~professional fees.

Other Operating Expenses. Other operating expenses decreased $1.4 million, or 83%, to $0.3 million for the six months ended June 30, 2019 compared to $1.7 million for the six months ended June 30, 2018. Other operating expenses in the ~~nine~~six months ended ~~September~~June 30, 2019 were related to $0.3 million loss on disposal of assets. Other operating expenses in the six months ended June 30, 2018 ~~are~~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. ~~Other operating expenses in~~

Provision for Income Taxes. During the ~~nine~~six months ended ~~September~~June 30, 2017 are primarily one-time bonuses of $3.1 million paid to certain employees in connection with the IPO, loss on disposal of field equipment and vehicles of $0.5 million and certain non-recurring organizational and transaction costs of $0.3 million associated with the IPO and Kingfisher facility.

~~Income Tax Expenses.~~ ~~For the nine months ended September 30, 2018 and 2017,~~2019, we recognized a combined United States federal and state provision for income taxes of ~~$9.5~~$8.3 million, ~~and $1.1 million, respectively.~~

We are subject to a franchise tax imposed by the State of Texas. The franchise tax rate is 1%, calculated on taxable margin. During the nine months ended September 30, 2018, we recognized a provision for income taxes of $508,000, an increase of ~~$433,000~~$3.0 million as compared to ~~$75,000~~$5.3 million we recognized during the ~~nine~~six months ended ~~September 30, 2017.~~June 31, 2018. This increase was ~~primarily~~ attributable to ~~an increase in operations between the applicable periods.~~

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higher operating income.

Net Income

Net income increased ~~$48.0~~$11.0 million to ~~$61.3~~$45.9 million for the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 compared to ~~$13.3~~$34.9 million for the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2018, due to the changes in revenues and expenses discussed above.

Comparison of Non-GAAP Financial Measures

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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						Six months ended
	September 30,						June 30,
	2018		2017		Change		2019		2018		Change
	(in thousands)						(in thousands)
Net income	$	61,300	$	13,250	$	48,050	$	45,944	$	34,863	$	11,081
Depreciation and amortization		12,514		4,276		8,238		12,967		7,186		5,781
Interest expense, net		271		71		200		767		155		612
Income taxes (1)		9,541		1,137		8,404		8,339		5,304		3,035
EBITDA	$	83,626	$	18,734	$	64,892	$	68,017	$	47,508	$	20,509
IPO bonuses (2)		896		4,046		(3,150)		—		896		(896)
Stock-based compensation expense (3)		2,200		1,172		1,028		2,040		1,861		179
Loss on disposal of assets								284		26		258
Non-recurring cash bonuses (4)		1,679		—		1,679		—		1,679		(1,679)
Loss on disposal of assets		77		451		(374)
Non-recurring organizational costs (5)		—		348		(348)
Change in payables related to Tax Receivable Agreement		—		(83)		83
Other (6)		—		36		(36)
Adjusted EBITDA	$	88,478	$	24,704	$	63,774	$	70,341	$	51,970	$	18,371

(1)

Federal and state income taxes.

(2)

~~One-time cash bonuses of $3.1 million in 2017 and~~Represents stock-based compensation expense related to restricted stock awards with one-year vesting of $0.9 million in the ~~nine~~six months ended ~~September~~June 30, 2018 ~~and 2017~~ that were granted to certain employees and consultants in connection with the ~~Offering.~~IPO.

(3)

Represents stock-based compensation expense related to restricted stock awards ~~with three-year vesting~~ of ~~$2.2~~$2.0 million and ~~$0.9~~$1.9 million in the ~~nine~~six months ended ~~September~~June 30, 2019 and 2018, ~~and 2017, respectively, and $0.3 million in 2017 related to the options issued under the Plan.~~respectively.

(4)

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

~~(5)~~

~~Certain non-recurring organization and transaction costs in 2017 associated with our IPO and the Kingfisher Facility.~~

~~(6)~~

~~Non-recurring transaction costs in the nine months ended September 30, 2017.~~

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~~Nine~~Six Months Ended ~~September~~June 30, ~~2018~~2019 Compared to ~~Nine~~Six Months Ended ~~September~~June 30, ~~2017:~~2018: EBITDA and Adjusted EBITDA

EBITDA increased ~~$64.9~~$20.5 million to ~~$83.6~~$68.0 million for the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 compared to ~~$18.7~~$47.5 million for the ~~nine~~six months ended ~~September~~June 30, ~~2017.~~2018. Adjusted EBITDA increased ~~$63.8~~$18.4 million to ~~$88.5~~$70.3 million for the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 compared to ~~$24.7~~$52.0 million ~~and~~ for the ~~nine~~six months ended ~~September~~June 30, ~~2017.~~2018. EBITDA and Adjusted EBITDA increased ~~346%~~43% and ~~258%, respectively,~~35% for the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 compared to the ~~nine~~six months ended ~~September~~June 30, ~~2017.~~2018, respectively. The increases were primarily due to an increase in the number of systems deployed to customers ~~as well as an increase in the rental rates charged 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 ~~Offering (as defined below).~~2017 Offering. Our primary uses of capital have been capital expenditures to expand and enhance our proppant and chemical management ~~fleet, construction of~~system fleets, construct the Kingfisher Facility, ~~the acquisition of~~acquire our manufacturing facility and certain intellectual property and ~~the acquisition of~~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.

During 2017, Solaris Inc. completed two public offerings, the IPO, in which Solaris Inc. sold 10,100,000 shares of its Class A common stock par value $0.01 per share, to the public, and a follow-on offering on November 14, 2017 of 7,000,000 shares of its Class A common stock, including 3,000,000 shares issued and sold by the Company and an aggregate of 4,000,000 shares sold by certain stockholders of the Company (the “November Offering”). On November 13, 2017 the underwriters for the November Offering exercised in full their option to purchase an aggregate of 1,050,000 additional shares of Class A common stock from the selling stockholders. After deducting underwriting discounts and commissions and offering expenses payable by Solaris Inc., Solaris Inc. received net proceeds of approximately $113.9 million and $44.5 million from the IPO and November Offering, respectively. Solaris Inc. contributed all of the net proceeds of the IPO and November Offering to Solaris LLC in exchange for Solaris LLC Units. Solaris LLC used the net proceeds from the IPO (i) to fully repay our existing balance of approximately $5.5 million under its credit facility, (ii) to pay $3.1 million in cash bonuses to certain employees and consultants and (iii) to distribute approximately $25.8 million to the Original Investors as partial consideration for the recapitalization of their membership interests in Solaris LLC in connection with the IPO. Solaris LLC has used a portion of the proceeds from the IPO and all of the proceeds from the November Offering for general corporate purposes, including funding our 2018 capital program.

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. expects to ~~use~~contribute net proceeds, if any, from an offering under the Universal Shelf to Solaris LLC for general corporate purposes, including to fund the Company’s capital program. Solaris Inc. will not receive any proceeds, if any, from the sale of shares of Class A common stock by the Selling Stockholders. The Selling Stockholders have subsequently sold 2,305,955 shares of Class A common stock pursuant to an exemption under Rule 144 of the Securities Act, and as of June 30, 2019, 16,060,657 shares of Class A common stock remain available to offer and sell under the Universal Shelf.

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 ~~2018~~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 ~~2018~~2019 Credit Agreement will be sufficient to fund our operations for at least the next ~~twelve~~12 months.

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As of ~~September~~June 30, ~~2018,~~2019, cash totaled ~~$2.1~~$29.7 million.

Cash Flows

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


	Nine Months Ended						Six Months Ended
	September 30,				Change		June 30,				Change
	2018		2017		2018 vs. 2017		2019		2018		2019 vs. 2018
	(in thousands)						(in thousands)
Net cash provided by operating activities	$	57,539	$	12,999	$	44,540	$	57,439	$	28,598	$	28,841
Net cash used in investing activities		(124,859)		(49,049)		(75,810)		(28,679)		(86,102)		57,423
Net cash provided by financing activities		5,976		86,478		(80,502)
Net cash used in financing activities								(24,098)		(475)		(23,623)
Net change in cash	$	(61,344)	$	50,428	$	(111,772)	$	4,662	$	(57,979)	$	62,641

Analysis of Cash Flow Changes for ~~Nine~~Six Months Ended ~~September~~June 30, ~~2018~~2019 Compared to ~~Nine~~Six Months Ended ~~September~~June 30, ~~2017~~2018

Operating Activities. Net cash provided by operating activities was ~~$57.5~~$57.4 million for the ~~nine~~six months ended ~~September~~June 30, ~~2018,~~2019, compared to net cash provided by operating activities of ~~$13.0~~$28.6 million for the ~~nine~~six months ended ~~September~~June 30, ~~2017.~~2018. The increase of ~~$44.5~~$28.8 million in operating cash flow was primarily attributable to an increase in net income of ~~$48.0~~$11.0 million primarily due to an increase in ~~operating activity, offset by an increase~~the number of ~~$16.6 million in the change in accounts receivable between the two periods~~systems deployed to customers due to increasing demand for our systems and enhancements to our product offering, as ~~a result of~~well as an increase in ~~revenue.~~non-cash and working capital items.

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Investing Activities. Net cash used in investing activities was ~~$124.9~~$28.7 million for the ~~nine~~six months ended ~~September~~June 30, ~~2018,~~2019, compared to ~~$49.0~~$86.1 million for the ~~nine~~six months ended ~~September~~June 30, ~~2017.~~2018. The ~~increase~~decrease in investing activities of ~~$75.8~~$57.4 million is primarily due to ~~an increase~~a decrease in the manufacturing rate of new proppant systems and completion of construction of the Kingfisher ~~Facility.~~Facility in the third quarter of 2018. For the ~~nine~~six months ended ~~September~~June 30, ~~2018, $111.7~~2019, $27.9 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.~~including work in process. For the ~~nine~~six months ended ~~September~~June 30, ~~2017, $40.5~~2018, $75.5 million of investing activities were capital expenditures related to manufacturing new ~~proppant~~ systems, ~~$4.8~~$12.5 million ~~of investing activities were capital expenditures~~ related to the construction of our Kingfisher Facility and ~~$2.1~~$2.3 million ~~of investing activities were capital expenditures~~ related to the purchase of light duty vehicles to support the service of our systems.

Financing Activities. Net cash ~~provided by~~used in financing activities was $24.1 million for the six months ended June 30, 2019, compared to $0.5 million for the six months ended June 30, 2018. The increase in financing activities of ~~$6.0~~$23.6 million ~~for the nine months ended September 30, 2018~~ was primarily related to ~~$8.0~~$13.0 million ~~in proceeds from~~to repay borrowings under the 2018 Credit Agreement (as defined in “—Debt Agreements”), ~~partially offset by $1.1~~$9.5 million for quarterly dividends and $0.9 million for payments under insurance premium financing. Net cash used in financing activities of ~~payments~~$0.5 million for the six months ended June 30, 2018 was primarily related to ~~vesting of stock-based compensation and~~ $1.0 million ofin debt issuance costs in connection with the 2018 Credit ~~Agreement. Net cash provided~~Agreement and $0.4 million repayments under insurance premium financing, partially offset by ~~financing activities of $86.5~~$0.8 million ~~for the nine months ended September 30, 2017 was primarily related to $111.1 million in net proceeds received in the Offering and $4.3 million in~~ proceeds received from the ~~payment~~exercise of promissory notes from employees, less $5.5 million used to fully repay borrowings under the Credit Facility, $3.1 million in cash bonuses to certain employees and consultants and $25.8 million of distributions to the Original Investors as part of the reorganization transaction undertaken in connection with the IPO.stock options.

Debt Agreements

Senior Secured Credit Facility

On ~~January 19, 2018, we~~April 26, 2019, Solaris LLC entered into ~~a credit agreement~~an Amended and Restated Credit Agreement (the ~~“2018~~“2019 Credit Agreement”) by and among ~~the Company,~~Solaris LLC, as borrower, each of the lenders party thereto and ~~Woodforest~~Wells Fargo Bank, National ~~Bank,~~Association, as administrative ~~agent (the “Administrative Agent”).~~agent. The ~~2018~~2019 Credit Agreement replaced, in its entirety, ~~the Company’s prior credit facility.~~Solaris LLC’s 2018 Credit Agreement (as defined herein). The ~~2018~~2019 Credit Agreement consists of aan initial $50.0 ~~million advancing term loan (the “Advance Loan”) and a $20.0~~ million revolving loan commitment (the “Loan”) with a ~~$10.0~~$25.0 million uncommitted accordion option to increase the ~~total revolving loans (the “Revolving Loan”, and together with the Advance~~ Loan ~~the “Loans”). No lender has any obligation~~availability to ~~increase its own revolving credit commitment.~~$75.0 million. The ~~Advance Loan amortizes beginning in April 2019 and each~~term of the ~~Loans matures~~2019 Credit Agreement expires on ~~January 19,~~April 26, 2022.

Our obligations under the ~~Loans~~Loan are generally secured by a pledge of substantially all of the assets of ~~the Company~~

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Solaris LLC and its subsidiaries, and such obligations are guaranteed by ~~our~~Solaris LLC’s domestic subsidiaries other than Immaterial Subsidiaries (as defined in the ~~2018~~2019 Credit Agreement). We have the option to prepay the loans at any time without penalty.

~~The 2018 Credit Agreement permits extensions of credit under the Advance Loan through the end of April 2019 and under the Revolving Loan until January 19, 2022.~~ Borrowings under the Revolving Loan are limited by both commitments and a borrowing base determined monthly by calculating percentages of the eligible accounts and the eligible inventory, provided that the portion of the borrowing base attributable to eligible inventory cannot exceed 35% of the entire borrowing base. Borrowings under the Advance Loan are not to exceed 80% of the then current net orderly liquidation value of the applicable equipment or facility build out or the applicable equipment constructed or acquired which is then subject to the liens securing the Loans.

As of September 30, 2018, we had $8.0 million of outstanding borrowings under the 2018 Credit Agreement. We have subsequently drawn an additional $2.0 million and have availability to borrow approximately $10.0 million under the Revolving Loan and $50.0 million under the Advance Loan.

~~Borrowings under the 2018~~2019 Credit Agreement bear interest at ~~one-month~~either LIBOR or an alternate base rate plus an applicable margin, and interest is payable ~~monthly.~~quarterly. The applicable margin ranges from ~~3.00%~~1.75% to ~~3.50%~~2.50% for Eurodollar loans and 0.75% to 1.50% for alternate base rate loans, in each case depending on our ~~senior~~total leverage ratio. ~~Borrowings under the Revolving Loan had a weighted average interest rate of 5.11% for the three and nine months ended September 30, 2018.~~ The ~~2018~~2019 Credit Agreement requires that we pay a ~~monthly~~quarterly commitment fee on undrawn amounts of the ~~Revolving~~ Loan, ranging from 0.25% to ~~0.50%~~0.375% depending upon the ~~average outstanding balance of the obligations relative to the Revolving Loan commitments.~~total leverage ratio.

The ~~2018~~2019 Credit Agreement requires that we maintain ratios of (a) ~~indebtedness to~~ consolidated EBITDA to interest expense of not ~~more~~less than ~~3.50~~2.75 to 1.00, ~~which steps down to 3.25 to 1.00 beginning April 1, 2018 and 3.00 to 1.00 beginning October 1, 2018, and~~ (b) senior indebtedness to consolidated EBITDA of not more than 2.50 to 1.00 ~~which steps down~~and (c) the sum of 100% of eligible accounts, inventory and fixed assets to ~~2.25~~the total revolving exposure of not less than 1.00 to 1.00 ~~beginning April 1, 2018 and~~when the total leverage ratio is greater than 2.00 to 1.00 ~~beginning October 1, 2018.~~and total revolving exposure under the Loan exceeds $3.0 million. For the purpose of these tests, ~~there is~~certain items are subtracted from indebtedness and senior ~~indebtedness, respectively, an amount equal to the lesser of $10.0 million or 50% of unrestricted cash and cash equivalents of the Company and its subsidiaries.~~indebtedness. EBITDA, as defined in the ~~2018~~2019 Credit Agreement, excludes certain noncash items and any extraordinary, unusual or non-recurring gains, losses or expenses.

The ~~2018~~2019 Credit Agreement also requires that we ~~maintain a~~prepay any outstanding borrowings under the Loan in the event our total leverage ratio ofis greater than 1.00 to 1.00 and our consolidated ~~EBITDA to fixed charges of~~cash balance exceeds $20.0 million, taking into account certain adjustments. Capital expenditures are not ~~less than 1.25 to 1.00. Capital Expenditures are~~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 ~~$225.0~~$100.0 million ~~for the fiscal year ending December 31, 2018, and $75.0 million for fiscal year ending December 31, 2019 and each fiscal year thereafter. In addition, for fiscal years beginning on January 1, 2020,~~plus any unused availability for capital expenditures from the immediately preceding fiscal year may be carried forward to the subsequent year; provided, however that we are permitted to make any capital expenditures in an amount equal to the proceeds of equity contributions made to the Company used to fund such capital expenditures.year.

As of ~~September~~June 30, ~~2018,~~2019, we had no borrowings under the 2019 Credit Agreement outstanding and ability to draw $50.0 million.

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As of June 30, 2019, we were in compliance will all covenants in accordance with ~~our 2018~~the 2019 Credit Agreement.

Contractual Obligations

We had no material changes in our contractual commitments and obligations during the six months ended June 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 ~~and nine~~ months ended ~~September~~June 30, 2019 and 2018, we recognized a combined United States federal and state provision for income taxes of ~~$4.2 million~~$4,158 and ~~$9.5 million,~~$3,277, respectively.

~~On December 22, 2017,~~ For the ~~United States government enacted the Tax Act. The change in tax law required us to remeasure existing net deferred tax assets using the now lower~~six months ended June 30, 2019 and 2018, we recognized a combined United States federal ~~corporate~~and state provision for income ~~tax rate in the period~~taxes of enactment resulting in an income tax expense of approximately $22.6 million to reflect these changes in the year ended December 31, 2017. In conjunction with the Tax Act, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts$8,339 and Jobs Act (SAB 118), which allows us to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. We previously reported provisional amounts of the income tax effects of the Tax Act for which the accounting was incomplete, but a

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~~reasonable estimate could be determined. During the period ended September 30, 2018, our accounting for the income tax effects of the Tax Act was revised and is now complete.~~$5,304, 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.

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. ~~Total expenses~~Expenses related to Texas franchise tax were approximately ~~$174,000~~$270,000 and ~~$31,000~~$175,000 for the three months ended ~~September~~June 30, 2019 and 2018, ~~and 2017,~~ respectively. ~~Total expenses~~Expenses related to Texas franchise tax were approximately ~~$508,000~~$459,000 and ~~$75,000~~$296,000 for the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~2017,~~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 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~~six months ended ~~September~~June 30, ~~2018,~~2019, the Company has recorded an uncertain tax benefit for the treatment of certain costs incurred in connection with ~~its initial~~the IPO and ~~secondary public offerings in 2017.~~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.

See Note 109. “Income Taxes” to our condensed consolidated financial statements for additional ~~information regarding income taxes.~~information.

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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 ~~Reorganization Transactions~~IPO or pursuant to the exercise of the Redemption ~~Notice~~Right or the Call Right (each as defined in the Solaris ~~LLC's~~LLC’s Second Amended and Restated Limited Liability Company ~~Agreement)~~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.

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See Note 109. “Income Taxes” to our condensed consolidated financial statements for additional ~~information regarding income taxes.~~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

Revenues from ~~proppant management~~ 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, ~~as well as the use of our proprietary inventory management system, PropView,~~ which ~~enables our customers to track inventory levels in, and delivery rates from, each silo in a system on a remote and digital basis, both of which are~~is considered to be ~~separate~~our performance ~~obligations.~~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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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. Revenues are recognized over time as the performance obligations are satisfied under the terms of the customer contract. We determined that the performance obligation for system services including field supervision and support is satisfied over time as the customer simultaneously receives and consumes the benefits provided by the entity’s performance of the services, typically based

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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.

Deferred Revenue

Unbilled Receivables

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 ~~and the cost of construction in process at our Kingfisher Facility~~ are considered property, plant and equipment. However, the systems in

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process ~~and construction~~ do not depreciate until they are fully completed. Systems ~~and construction~~ 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 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 Auto Hopper technology is being added to our proppant systems and is compatible with standard pressure pumping company’s equipment. The ~~PropView inventory~~technology uses sensors and machine learning to automatically control the amount of sand delivered from our mobile proppant management system ~~enables~~silos to the blender, eliminating the need for dedicated personnel historically required to run our customers to track inventory levels in, and delivery rates from, each silo in a system. This upgrade improves our customers’ operational efficiencies and reduces operating and supply chain costs by allowing the customer to better manage proppant inventory levels both onsite and remotely. This upgrade is added to and depreciated over the remaining life of the system.

Our ~~patent pending~~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~~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. ~~These upgrades are depreciated over their useful lives (range of 3‑10 years).~~

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

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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.

Allocation of Purchase Price in Business Combinations

As part of our business strategy, we regularly pursue acquisition and business development opportunities. The purchase price in an acquisition is allocated to the assets acquired and liabilities assumed based on their fair values as of the closing date, which may occur many months after the announcement date. The excess of the purchase price over the amount allocated to the assets and liabilities, if any, is recorded as goodwill. We use all available information to estimate fair values including quoted market prices, the carrying value of acquired assets, and widely accepted valuation techniques such as discounted cash flows. Our most significant estimates in our allocation typically relate to the value assigned to property, plant and equipment, intangible assets and goodwill. The judgments made in determining the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives, could materially impact our results 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

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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.

There was no impairment for the three and ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~2017.~~2018.

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.

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

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companies; or a significant sustained increase in worldwide inventories of oil or natural gas. There was no impairment for the three and ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~2017.~~

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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 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~~June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, we had ~~$26.6~~$59.8 million and ~~$25.5~~$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.

On December 22, 2017, the Tax Act was enacted into law. The provisions of the Tax Act that impact us include, but are not limited to, (1) reducing the United States federal corporate income tax rate from 35% to 21%, (2) temporary bonus depreciation that allow for full expensing of certain qualified property acquired after September 27, 2017, (3) limitations on the maximum deduction for net operating loss (NOL) carryforwards generated in tax years beginning after December 31, 2017, to 80 percent of a taxpayer’s taxable income and (4) elimination of certain business deductions and credits, including the deduction for entertainment expenditures. In conjunction with the Tax Act, the SEC staff issued SAB 118, which allows us to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. We previously reported provisional amounts of the income tax effects of the Tax Act for which the accounting was incomplete, but a reasonable estimate could be determined. During the three months ended September 30, 2018, our accounting for the income tax effects of the Tax Act was revised and is now complete.

Payables Related to the Tax Receivable Agreement

As described in Note ~~10 – Income Taxes~~9. “Income Taxes” to our condensed consolidated financial statements, ~~we are~~Solaris Inc. is a party to the Tax Receivable Agreement under which ~~we are~~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’s Amended and Restated Limited Liability Company~~LLC Agreement).

The projection of future taxable income involves significant judgment. Actual taxable income may differ from our estimates, which could significantly impact ~~our~~the liability ~~under~~relating to the Tax Receivable Agreement. We have determined it is ~~more-likely-than-not~~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 weSolaris 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’s Amended and Restated Limited Liability Company~~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

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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~~2. “Summary of Significant Accounting Policies – Accounting Standards Recently Adopted” to our condensed consolidated financial statements as of ~~September~~June 30, ~~2018,~~2019, for a discussion of recent accounting pronouncements.

Under the ~~JOBS~~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

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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, except for operating leases.~~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.

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 ~~2018~~2019 Credit Agreement. As of ~~September~~June 30, ~~2018,~~2019, however, we had ~~$8.0 million of~~no outstanding borrowings under ~~the~~our Revolving ~~Loan. On October 3, 2018, the Company borrowed an additional $2.0 million under the Revolving Loan.~~

~~Borrowings under the 2018~~ Credit Agreement ~~bear~~and therefore a change in interest at one-month LIBOR plus an applicable margin and interest is payable monthly. The applicable margin ranges from 3.00% to 3.50% depending on our senior leverage ratio. Borrowings under the Revolving Loan had a weighted average interest rate of 5.11% for the three and nine months ended September 30, 2018. If the market rates ~~of interest for LIBOR changed by 100 basis points~~ as of ~~September 30, 2018, our annual~~such date would not have resulted in increased or decreased interest ~~expense would change by approximately $25 thousand.~~expense.

Credit Risk

The majority of our accounts receivable have payment terms of 60 days or less. As of ~~September~~June 30, ~~2018, two~~2019, four customers collectively accounted for ~~31%~~53% of our total accounts receivable. As of December 31, ~~2017, two~~2018, three customers collectively accounted for ~~42%~~40% of our total accounts receivable. We mitigate the associated credit risk by performing credit evaluations and monitoring the payment patterns of our customers.

~~Table~~ The inability or failure of ~~Contents~~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~~June 30, ~~2018.~~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. ~~Based upon that evaluation, our principal executive officer~~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 ~~principal financial officer~~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 ~~our~~the Company’s disclosure controls and procedures were not effective as of ~~September~~December 31, 2018.

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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 at June 30, ~~2018 at~~2019, as the ~~reasonable assurance level.~~Company was still in the process of fully implementing or testing the effectiveness of various remediation measures. The material weakness and remedial steps being taken by the Company are discussed below.

Remediation

Management is actively engaged in the planning for, and implementation of, remediation efforts to address the material weakness identified above. The remediation plan includes (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 impairment determination processes and controls. The actions taken by the Company are subject to ongoing senior management review and Audit Committee oversight.

Management believes the measures described above and others that may be implemented will remediate the material weakness that we have identified. 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 or not to complete, certain of the remediation measures identified.

Changes in Internal Control over Financial Reporting

~~There were~~Subject to these remediation efforts, that we implemented after June 30, 2019, there have been no significant changes in ~~our system of~~the Company’s internal control over financial reporting ~~(as defined in Rule 13a-15(f) and Rule 15d-15(f) under the Exchange Act)~~ during the ~~quarter ended September 30, 2018~~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~~10-K/A for the year ended December 31, ~~2017, as filed with the SEC on March 6, 2018 and in our Quarterly Report on Form 10-Q for the quarter ended June 30,~~ 2018, as filed with the SEC on ~~August 1, 2018.~~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~~10-K/A for the year ended December 31, ~~2017, and in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2018, as filed with the SEC on August 1,~~ 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

~~We did not purchase any~~The following table presents the total number of shares of our ~~equity securities~~Class A common stock that we purchased during the ~~quarter~~three months ended ~~September~~June 30, ~~2018.~~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
April 1 - April 30	—		$	—	—		N/A
May 1 - May 31	16,475	(1)		18.13	—		N/A
June 1 - June 30	—			—	—		N/A
Total	16,475	(1)	$	18.13	—		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).

10.1		~~Indemnification~~Credit Agreement, ~~(Ray N. Walker, Jr.)~~dated as of April 26, 2019, by and among Solaris Oilfield Infrastructure, Inc., as borrower, each of the lenders party thereto and Wells Fargo Bank, as administrative agent (incorporated by reference to Exhibit 10.1 to the Registrant’s Form ~~8-K~~10-Q (File No. ~~001-38090)~~001 38090) filed with the Commission on ~~August 14, 2018)~~May 1, 2019).

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 31, 2018~~July 30, 2019	By:	/s/ William A. Zartler
		William A. Zartler
		Chairman and Chief Executive Officer
		(Principal Executive Officer)




~~October 31, 2018~~July 30, 2019	By:	/s/ Kyle S. Ramachandran
		Kyle S. Ramachandran
		President and Chief Financial Officer
		(Principal Financial Officer)

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		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	2524
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	4845
Item 4.	Controls and Procedures	4945
PART II. OTHER INFORMATION		5047
Item 1.	Legal Proceedings	5047
Item 1A.	Risk Factors	5047
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	5047
Item 3.	Defaults upon Senior Securities	5047
Item 4.	Mine Safety Disclosures	5047
Item 5.	Other Information	5047
Item 6.	Exhibits	5148
SIGNATURES		5249


	For the Three Months Ended				For the Nine Months Ended
	September 30, 2017				September 30, 2017
	Actual		Pro Forma		Actual		Pro Forma
Pro forma (unaudited)
Total revenues	$	18,478	$	19,030	$	42,191	$	43,601
Net income		7,406		7,558		13,250		13,343


	Amount
2018 (remainder of)	$	9
2019		35
2020		35
2021		33
2022		33
Thereafter		73
Total payments		218
Less: amount representing imputed interest at 3.25%		(21)
Present value of payments		197
Less: current portion		(35)
Capital lease obligation, net of current portion	$	162