●

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;

●

weather and other natural phenomena;

●

uncertainty regarding our future operating results;

●

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

●

the impact of current and future laws, rulings, governmental regulations, accounting standards and statements, and related interpretations; and

●

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

All forward-looking statements speak only as of the date of this Quarterly Report. You should not place undue reliance on our forward-looking statements. Although forward-looking statements reflect our good faith beliefs at the time they are made, forward-looking statements involve known and unknown risks, uncertainties and other factors, including the factors described under Item 1A, “Risk Factors” in our Annual Report on Form ~~10-K/A~~10-K for the year ended December 31, ~~2018,~~2019, this Quarterly Report and in our other filings with the United States 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.

Table of Contents

PART 1: FINANCIAL INFORMATION

Item 1: Financial Statements

SOLARIS OILFIELD INFRASTRUCTURE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts)

(Unaudited)

September 30,

December 31,

2019

2018
Assets




Current assets:




Cash

$
51,686

$
25,057
Accounts receivable, net

44,115

39,746
Prepaid expenses and other current assets

5,246

5,492
Inventories

7,481

10,470
Total current assets

108,528

80,765
Property, plant and equipment, net

311,253

296,538
Operating lease right-of-use assets

8,032

—
Goodwill

17,236

17,236
Intangible assets, net

3,956

4,540
Deferred tax assets

56,475

58,074
Other assets

660

1,454
Total assets

$
506,140

$
458,607
Liabilities and Stockholders' Equity




Current liabilities:




Accounts payable

$
3,502

$
9,127
Accrued liabilities

16,834

12,658
Current portion of deferred revenue

12,990

12,990
Current portion of operating lease liabilities

598

—
Current portion of finance lease liabilities

30

35
Other current liabilities

1,115

515
Total current liabilities

35,069

35,325
Senior secured credit facility

—

13,000
Deferred revenue, net of current

2,960

12,468
Operating lease liabilities, net of current

7,961

—
Finance lease liabilities, net of current

137

154
Payables related to Tax Receivable Agreement

67,987

56,149
Other long-term liabilities

494

633
Total liabilities

114,608

117,729
Commitments and contingencies (Note 11)




Stockholders' equity:




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

—

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

310

271
Class B common stock, $0.00 par value, 180,000 shares authorized, 15,940 shares issued and outstanding as of September 30, 2019 and 19,627 issued and outstanding as of December 31, 2018

—

—
Additional paid-in capital

194,153

164,086
Retained earnings

62,517

35,507
Treasury stock (at cost), 163 shares and 91 shares as of September 30, 2019 and December 31, 2018, respectively

(2,522)

(1,414)
Total stockholders' equity attributable to Solaris

254,458

198,450
Non-controlling interest

137,074

142,428
Total stockholders' equity

391,532

340,878
Total liabilities and stockholders' equity

$
506,140

$
458,607


	June 30,		December 31,
	2020		2019
Assets
Current assets:
Cash and cash equivalents	$	63,632	$	66,882
Accounts receivable, net of allowances for credit losses of $1,076 and $339 as of June 30, 2020 and December 31, 2019, respectively		11,160		38,554
Prepaid expenses and other current assets		4,809		5,002
Inventories		1,016		7,144
Total current assets		80,617		117,582
Property, plant and equipment, net		255,539		306,583
Non-current inventories		3,555		—
Operating lease right-of-use assets		4,738		7,871
Goodwill		13,004		17,236
Intangible assets, net		3,372		3,761
Deferred tax assets		58,478		51,414
Other assets		545		625
Total assets	$	419,848	$	505,072
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	3,998	$	3,824
Accrued liabilities		6,333		14,447
Current portion of payables related to Tax Receivable Agreement		—		1,416
Current portion of operating lease liabilities		579		596
Current portion of finance lease liabilities		30		30
Other current liabilities		75		74
Total current liabilities		11,015		20,387
Operating lease liabilities, net of current		7,499		7,855
Finance lease liabilities, net of current		115		130
Payables related to Tax Receivable Agreement		68,132		66,582
Other long-term liabilities		607		460
Total liabilities		87,368		95,414
Commitments and contingencies (Note 12)
Stockholders' equity:
Preferred stock, $0.01 par value, 50,000 shares authorized, NaN issued and outstanding		—		—
Class A common stock, $0.01 par value, 600,000 shares authorized, 28,673 shares issued and outstanding as of June 30, 2020 and 30,928 shares issued and 30,765 shares outstanding as of December 31, 2019		287		308
Class B common stock, $0.00 par value, 180,000 shares authorized, 15,839 shares issued and outstanding as of June 30, 2020 and 180,000 shares authorized, 15,939 issued and outstanding as of December 31, 2019		—		—
Additional paid-in capital		178,511		191,843
Retained earnings		31,516		74,222
Treasury stock (at cost), 0 shares and 163 shares as of June 30, 2020 and December 31, 2019, respectively		—		(2,526)
Total stockholders' equity attributable to Solaris		210,314		263,847
Non-controlling interest		122,166		145,811
Total stockholders' equity		332,480		409,658
Total liabilities and stockholders' equity	$	419,848	$	505,072

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

Table of Contents

SOLARIS OILFIELD INFRASTRUCTURE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

Three Months Ended

Nine Months Ended

September 30,

September 30,


2019

2018

2019

2018
Revenue:








System rental

$
36,638

$
42,031

$
113,726

$
104,563
System services

18,153

12,053

48,621

29,499
Transloading services

4,417

2,000

15,131

3,847
Inventory software services

396

602

1,351

1,950
Total revenue

59,604

56,686

178,829

139,859

Operating costs and expenses:







��

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

2,838

1,949

7,737

5,050
Cost of system services (excluding $384 and $347 and $1,173 and $889 of depreciation and amortization for the three and nine months ended September 30, 2019 and 2018, respectively, shown separately) (1)

21,072

13,906

56,366

34,691
Cost of transloading services (excluding $411 and $529 and $1,231 and $544 of depreciation and amortization for the three and nine months ended September 30, 2019 and 2018, respectively, shown separately) (1)

652

597

2,051

1,464
Cost of inventory software services (excluding $193 and $193 and $579 and $598 of depreciation and amortization for the three and nine months ended September 30, 2019 and 2018, respectively, shown separately)

160

191

460

614
Depreciation and amortization

6,908

5,328

19,875

12,514
Selling, general and administrative (excluding $147 and $126 and $411 and $355 of depreciation and amortization for the three and nine months ended September 30, 2019 and 2018, respectively, shown separately) (1)

4,933

3,869

13,967

12,662
Other operating expenses

248

56

529

1,752
Total operating costs and expenses

36,811

25,896

100,985

68,747
Operating income

22,793

30,790

77,844

71,112
Interest expense, net (2)

(8)

(116)

(775)

(271)
Total other expense

(8)

(116)

(775)

(271)
Income before income tax expense

22,785

30,674

77,069

70,841
Provision for income taxes

(3,703)

(4,237)

(12,042)

(9,541)
Net income

19,082

26,437

65,027

61,300
Less: net income related to non-controlling interests

(7,684)

(13,418)

(28,036)

(31,754)
Net income attributable to Solaris

$
11,398

$
13,019

$
36,991

$
29,546

Earnings per share of Class A common stock – basic

$
0.36

$
0.49

$
1.33

$
1.13
Earnings per share of Class A common stock – diluted

$
0.36

$
0.49

$
1.33

$
1.12

Basic weighted-average shares of Class A common stock outstanding

30,951

26,197

27,270

25,216
Diluted weighted-average shares of Class A common stock outstanding

30,980

26,329

27,317

25,380


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2020		2019		2020		2019
Revenue:
System rental	$	5,463	$	39,740	$	31,522	$	77,088
System services		3,419		19,031		24,376		30,468
Transloading services		264		4,881		729		10,714
Inventory software services		192		449		542		955
Total revenue		9,339		64,101		57,169		119,225

Operating costs and expenses:
Cost of system rental (excluding $6,034 and $5,481 and $12,035 and $10,707 of depreciation and amortization for the three and six months ended June 30, 2020 and 2019, respectively, shown separately) (1)		823		2,552		2,836		4,899
Cost of system services (excluding $274 and $391 and $631 and $789 of depreciation and amortization for the three and six months ended June 30, 2020 and 2019, respectively, shown separately) (1)		6,013		21,675		30,143		35,294
Cost of transloading services (excluding $0 and $411 and $411 and $820 of depreciation and amortization for the three and six months ended June 30, 2020 and 2019, respectively, shown separately) (1)		202		689		540		1,399
Cost of inventory software services (excluding $191 and $193 and $384 and $386 of depreciation and amortization for the three and six months ended June 30, 2020 and 2019, respectively, shown separately)		122		165		267		300
Depreciation and amortization		6,671		6,622		13,785		12,967
Selling, general and administrative (excluding $172 and $146 and $324 and $265 of depreciation and amortization for the three and six months ended June 30, 2020 and 2019, respectively, shown separately) (1)		3,967		5,006		8,373		9,034
Impairment losses		—		—		47,828		—
Other operating expenses		2,274		69		3,472		282
Total operating costs and expenses		20,072		36,778		107,244		64,175
Operating income (loss)		(10,733)		27,323		(50,075)		55,050
Interest income (expense), net		(35)		(656)		76		(767)
Total other expense (income)		(35)		(656)		76		(767)
Income (loss) before income tax expense		(10,768)		26,667		(49,999)		54,283
Benefit (provision) for income taxes		1,272		(4,158)		7,350		(8,339)
Net income (loss)		(9,496)		22,509		(42,649)		45,944
Less: net (income) loss related to non-controlling interests		3,956		(9,234)		18,026		(20,352)
Net income (loss) attributable to Solaris	$	(5,540)	$	13,275	$	(24,623)	$	25,592

Earnings per share of Class A common stock – basic	$	(0.20)	$	0.42	$	(0.85)	$	0.85
Earnings per share of Class A common stock – diluted	$	(0.20)	$	0.42	$	(0.85)	$	0.85

Basic weighted-average shares of Class A common stock outstanding		28,638		30,609		28,975		29,326
Diluted weighted-average shares of Class A common stock outstanding		28,638		30,644		28,975		29,387

~~(1)~~

(1)The condensed consolidated statements of operations include stock-based compensation ~~expense as follows:~~

Cost of system rental

$
10

$
—

$
24

$
5
Cost of system services

71

51

187

132
Cost of transloading services

5

1

12

1
Selling, general and administrative

1,139

286

3,042

3,002
Stock-based compensation expense

$
1,225

$
338

$
3,265

$
3,140

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

as follows:


Cost of system rental	$	18	$	10	$	31	$	14
Cost of system services		73		52		273		116
Cost of transloading services		4		4		7		7
Selling, general and administrative		1,231		1,112		2,345		1,903
Stock-based compensation expense	$	1,326	$	1,178	$	2,656	$	2,040

]

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

Table of Contents

Identified intangible assets by major classification consist of the ~~following:~~

Accumulated

Net Book

Gross

Amortization

Value
As of September 30, 2019:

Customer relationships

$
4,703

$
(1,232)

$
3,471
Software acquired in the acquisition of Railtronix

346

(91)

255
Non-competition agreement

225

(82)

143
Patents and other

114

(27)

87
Total identifiable intangibles

$
5,388

$
(1,432)

$
3,956

As of December 31, 2018:

Customer relationships

$
4,703

$
(727)

$
3,976
Software acquired in the acquisition of Railtronix

346

(54)

292
Non-competition agreement

225

(49)

176
Patents and other

114

(18)

96
Total identifiable intangibles

$
5,388

$
(848)

$
4,540

following at June 30, 2020 and December 31, 2019:


			Accumulated		Net Book
	Gross		Amortization		Value
As of June 30, 2020:
Customer relationships	$	4,703	$	(1,735)	$	2,968
Software acquired in the acquisition of Railtronix		346		(128)		218
Non-competition agreement		225		(116)		109
Patents and other		114		(37)		77
Total identifiable intangibles	$	5,388	$	(2,016)	$	3,372

As of December 31, 2019:
Customer relationships	$	4,703	$	(1,400)	$	3,303
Software acquired in the acquisition of Railtronix		346		(103)		243
Non-competition agreement		225		(94)		131
Patents and other		114		(30)		84
Total identifiable intangibles	$	5,388	$	(1,627)	$	3,761

6. Accrued Liabilities

Accrued liabilities were comprised of the following at June 30, 2020 and December 31, 2019:


	June 30,		December 31,
	2020		2019
Property, plant and equipment	$	26	$	47
Employee related expenses		2,135		4,129
Selling, general and administrative		742		1,016
Cost of revenue		786		5,062
Excise, franchise and sales taxes		2,271		2,526
Ad valorem taxes		304		1,598
Other		69		69
Accrued liabilities	$	6,333	$	14,447

7. Leases

The Company ~~accounts~~has operating and finance leases for equipment, office space, land and facilities. The terms and conditions for these leases vary by type of underlying asset.

As described 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 842Note 2, $2,845 of impairment losses were recognized in relation 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~~during the ~~Company’s condensed consolidated balance sheets. Finance~~three months ended March 31, 2020.

Operating leases ~~are included in property and equipment, current portion of finance lease liabilities, and finance lease liabilities, net of current in~~include the ~~Company’s condensed consolidated balance sheets.~~

ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and liabilities are recognized at the commencement date based on the present valueguarantee of lease ~~payments over the lease term. As most~~agreement with Solaris Energy Management, LLC, a related party 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

~~Table of Contents~~

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

~~Goodwill~~

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

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

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

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

~~Revenue Recognition~~

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

~~Table of Contents~~

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

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

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

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

~~Deferred Revenue~~

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

~~Stock-based Compensation~~

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

Table of Contents

The components of lease expense were as follows:


	Three Months Ended		Three Months Ended		Six Months Ended		Six Months Ended
	June 30, 2020		June 30, 2019		June 30, 2020		June 30, 2019
Operating lease cost (1) (2)	$	256	$	297	$	511	$	593

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

(1)

Includes short term leases.

(2)

Operating lease costs of $185, $20 and $51 were reported in Selling, general and administrative, Cost of system services and Cost of transloading services for the three months ended June 30, 2020, respectively. 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 $102 were reported in Selling, general and administrative, Cost of system services and Cost of transloading services for the six months ended June 30, 2020, 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. NaN variable lease costs were recognized during the three and six months ended June 30, 2020 and 2019.

Future minimum lease payments under non-cancellable leases as of June 30, 2020 were as follows:


Year Ending December 31,	Operating Leases		Finance Leases
2020 (remainder of)	$	478		18
2021		1,060		33
2022		1,091		33
2023		1,100		33
2024		1,109		33
Thereafter		8,353		7
Total future minimum lease payments		13,191		157
Less: effects of discounting		(5,114)		(12)
Total lease liabilities	$	8,077	$	145

Supplemental cash flow information related to leases was as follows:


	Three Months Ended		Three Months Ended		Six Months Ended		Six Months Ended
	June 30, 2020		June 30, 2019		June 30, 2020		June 30, 2019
Supplemental Cash Flows Information
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	395	$	394	$	638	$	633
Financing cash flows from finance leases		9		9		18		18

~~recognizes expense~~Table of Contents


Other information related to leases was as follows:	June 30,
	2020
Weighted Average Remaining Lease Term
Operating leases		13.8 years
Finance leases		5.1 years
Weighted Average Discount Rate
Operating leases		6.3%
Finance leases		3.3%

8. Debt

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 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 ~~a straight-line basis over~~April 26, 2022. The 2019 Credit Agreement requires that we prepay any outstanding borrowings under the ~~awards’ vesting period, which is generally the requisite service period.~~

~~Research and Development~~

~~The Company expenses research and development costs as incurred, which is included in selling, general and administrative expenses~~Loan in the ~~condensed~~event our total leverage ratio is greater than 1.00 to 1.00 and our consolidated ~~statements of operations. There were no research and development costs for the three and nine months ended September~~cash balance exceeds $20,000, taking into account certain adjustments. At June 30, ~~2019 and 2018.~~

~~Financial Instruments~~

The carrying value of the Company’s financial instruments, consisting of cash, accounts receivable, notes receivable, accounts payable and insurance premium financing, approximates their fair value due to the short maturity of such instruments. Financial instruments also consist of a revolving credit facility and term loans, for which fair value approximates carrying value as the debt bears interest at a variable rate which is reflective of current rates otherwise available to the Company. As of September 30, 2019,2020, we had no0 borrowings under the 2019 Credit Agreement ~~(as defined below) outstanding. Unless otherwise noted, it is management’s opinion~~outstanding and ability to draw $50,000.

Although there were 0 borrowings outstanding under the 2019 Credit Agreement, 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. We were in compliance with all covenants in accordance with the 2019 Credit Agreement as of June 30, 2020.

9. Equity

Dividends

Solaris LLC paid distributions totaling $4,755 and $4,758 to all Solaris LLC unitholders in the three months ended June 30, 2020 and 2019, respectively, of which $3,087 and $3,164 was paid to Solaris Inc. Solaris LLC paid distributions totaling $9,507 and $9,515 to all Solaris LLC unitholders in the six months ended June 30, 2020 and 2019, respectively, of which $6,176 and $6,280 was paid to Solaris Inc. Solaris Inc. used the proceeds from the distributions to pay quarterly cash dividends to all holders of shares of Class A common stock.

Share Repurchase Program

During the three months ended March 31, 2020, Solaris Inc. purchased and retired 2,374,092 shares of the Company’s Class A common stock for $26,746, or $11.27 average price per share, and, in connection therewith, Solaris LLC purchased and retired 2,374,092 Solaris LLC Units from the Company ~~is not exposed to significant interest, currency~~for the same amount. During the full share repurchase plan, Solaris Inc. purchased and retired 2,626,022 shares of the Company’s Class A common stock for $30,000, or ~~credit risks arising~~$11.41 average price per share, and, in connection therewith, Solaris LLC purchased and retired 2,626,022 Solaris LLC Units from ~~these financial instruments.~~the Company for the same amount. As of March 31, 2020, the share repurchase plan was completed.

~~Fair Value Measurements~~Treasury Stock Retirement

During the six months ended June 30, 2020, the Company cancelled and retired, 207,382 shares of treasury stock. NaN shares were retired during the three and six months ended June 30, 2019.

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Stock-based compensation

The Company’s ~~financial assets~~long-term incentive plan for employees, directors and ~~liabilities are~~consultants (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.

The following table summarizes activity related to restricted stock for the three and six months ended June 30, 2020 and 2019:


	Restricted Stock Awards
	2020	2019
Unvested at January 1,	627,251	411,497
Awarded	386,146	375,068
Vested	(141,700)	(706)
Forfeited	(32,845)	(405)
Unvested at March 31,	838,852	785,454
Awarded	10,194	29,847
Vested	(80,203)	(67,674)
Forfeited	(37,164)	(7,896)
Unvested at June 30,	731,679	739,731

Of the unvested 731,679 shares restricted stock, it is expected that 102,164 shares, 264,046 shares, 249,839 shares, and 115,630 shares will vest in 2020, 2021, 2022 and 2023, respectively, in each case, subject to the applicable vesting terms governing such shares of restricted stock. There was approximately $6,918 of unrecognized compensation expense related to unvested restricted stock as of June 30, 2020. The unrecognized compensation expense will be ~~measured using inputs~~recognized over the weighted average remaining vesting period of 2.6 years.

Earnings Per Share

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

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The following table sets forth the calculation of earnings per share, or EPS, for the three months ended June 30, 2020 and 2019:


	Three Months Ended June 30,				Six Months Ended June 30,
Basic net income per share:	2020		2019		2020		2019

Numerator
Net income (loss) attributable to Solaris	$	(5,540)	$	13,275	$	(24,623)	$	25,592
Loss (income) attributable to participating securities (1)		—		(322)		—		(575)
Net income (loss) attributable to common stockholders	$	(5,540)	$	12,953	$	(24,623)	$	25,017

Denominator
Weighted average number of unrestricted outstanding common shares used to calculate basic net income per share		28,638		30,609		28,975		29,326
Effect of dilutive securities:
Stock options		—		35		—		61
Diluted weighted-average shares of Class A common stock outstanding used to calculate diluted net income per share		28,638		30,644		28,975		29,387

Earnings per share of Class A common stock - basic	$	(0.20)	$	0.42	$	(0.85)	$	0.85
Earnings per share of Class A common stock - diluted	$	(0.20)	$	0.42	$	(0.85)	$	0.85

(1)

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

The following number of weighted-average potentially dilutive shares were excluded from the ~~three levels~~calculation of diluted earnings per share because the ~~fair value hierarchy,~~effect of ~~which the first two are considered observable and the last unobservable, which are as follows:~~including such potentially dilutive shares would have been antidilutive upon conversion:

~~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.~~


	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019
Class B common stock		15,856		16,202		15,889		17,450
Restricted stock awards		761		231		726		71
Stock Options		13		—		17		—
Total		16,630		16,433		16,632		17,521

10. Income Taxes

Income Taxes

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

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

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

~~We account~~liable for income taxes ~~under~~in those states not recognizing its status as a partnership for United States federal income tax purposes.

For the ~~asset~~three months ended June 30, 2020 and ~~liability method,~~2019, we recognized a combined United States federal and state benefit and expense for income taxes of ($1,272) and $4,158, respectively. For the six months ended June 30, 2020 and 2019, we recognized a combined United States federal and state benefit and expense of ($7,350) and $8,339, respectively. The effective combined United States federal and state income tax rates were 11.7% and 15.4% for the three months ended June 30, 2020 and 2019, respectively. The effective combined United States federal and state income tax rates were 14.7% and 15.3% for the six months ended June 30, 2020 and 2019, respectively. For the three and six months ended June 30, 2020 and 2019, our effective tax rate differed from the statutory rate primarily due to Solaris LLC’s treatment as a partnership for United States federal income tax purposes.

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We are subject to a franchise tax imposed by the State of Texas. The franchise tax rate is 0.8%, calculated on taxable margin. Taxable margin is defined as total revenue less deductions for cost of goods sold or compensation and benefits in which ~~requires~~ the ~~recognition~~total calculated taxable margin cannot exceed 70% of total revenue. Tax expenses related to Texas franchise tax were approximately $322 and $270 for the three months ended June 30, 2020 and 2019, respectively. Tax expenses related to Texas franchise tax were approximately $19 and $459 for the six months ended June 30, 2020 and 2019, respectively.

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 ~~expected future~~amounts used for income tax ~~consequences~~reporting. The largest components of ~~events included in~~ the ~~condensed consolidated financial statements. Under this method, we determine~~Company’s deferred tax ~~assets~~position relate to the Company’s investment in Solaris LLC and ~~liabilities on~~net operating loss carryovers. The Company recorded a deferred tax asset and additional paid-in capital for the ~~basis of the differences~~difference between the book value and the tax ~~bases~~basis of ~~assets~~the Company’s investment in Solaris LLC. This difference originates from the equity offerings of Class A common stock, exchanges of Solaris LLC Units (together with a corresponding number of shares of Class B common stock) for shares of Class A common stock, and ~~liabilities by using enacted tax rates~~issuances of Class A common stock, and corresponding Solaris LLC Units, in ~~effect for the year in which the~~connection with stock-based compensation.

~~Table~~Based on our cumulative earnings history and forecasted future sources of ~~Contents~~

~~differences are expected~~taxable income, we believe that we will be able to ~~reverse. The effect of a change in tax rates on~~realize our deferred tax assets ~~and liabilities is recognized in income~~ in the ~~period~~future. As the Company reassesses this position in ~~which~~ the ~~enactment date occurs.~~

~~We recognize deferred tax assets~~future, changes in cumulative earnings history, excluding non-recurring charges, or changes 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 futureforecasted taxable income may alter this expectation and may result in an increase in the valuation allowance and an increase in the effective tax ~~planning strategies and recent results of operations.~~rate.

~~We record uncertain~~

The Company evaluates its tax positions ~~on the basis of a two-step process in which (1) we determine whether it is more-likely-than-not the~~and recognizes only tax ~~positions~~benefits that, more likely than not, will be sustained upon examination, including resolution of any related appeals or litigation processes, based on ~~the basis of~~ the technical merits of the position. The tax position ~~and (2) for those tax positions meeting the more-likely-than-not recognition threshold, we recognize~~is measured at the largest amount of ~~tax~~ benefit that ~~is more~~has a greater than ~~50% likely to~~50.0% likelihood of being realized upon settlement. As of June 30, 2020 and December 31, 2019, the Company’s uncertain tax benefits totaling $816 are reported as a component of the net deferred tax asset in the condensed consolidated balance sheets. The full balance of unrecognized tax benefits as of June 30, 2020, if recognized, would affect the effective tax rate. However, we do not believe that any of the unrecognized tax benefits will be realized ~~upon ultimate settlement with~~within the ~~related tax authority.~~

~~Interest~~coming year. The Company has elected to recognize interest and penalties related to unrecognized tax benefits in income ~~taxes are included~~tax expense notwithstanding the fact that, as of June 30, 2020, the Company has not accrued any penalties or interest.

The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted on March 27, 2020 in the ~~benefit (provision) for~~United States to provide emergency assistance to individuals and businesses affected by the COVID-19 pandemic. The CARES Act includes temporary changes to both income ~~taxes in our condensed consolidated statement of operations. We have not incurred any significant interest or penalties related to income taxes in any~~and non-income based tax laws. For the three and six months ended June 30, 2020 the impact of the ~~periods presented.~~CARES Act was immaterial to the Company’s tax provision. However, under the CARES Act, the Company is deferring the employer portion of payroll tax payments through December 31, 2020. Future regulatory guidance under the CARES Act or additional legislation enacted by Congress in connection with the COVID-19 pandemic could impact our tax provision in future periods.

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

~~Payable~~Payables Related to the Tax Receivable Agreement

In connection with ~~the~~ Solaris Inc.’s initial public offering (the “IPO” or the “Offering”), Solaris Inc. entered into a Tax Receivable Agreement (the “Tax Receivable Agreement”) with the members of Solaris LLC immediately prior to the IPO (each such person and any permitted transferee, a “TRA Holder,” and together, the “TRA Holders”) on May 17, 2017. This agreement generally provides for the payment by Solaris Inc. to each TRA Holder of 85% of the net cash savings, if any, in United States federal, state and local income tax and franchise tax that Solaris Inc. actually realizes (computed using simplifying assumptions to address the impact of state and local taxes) or is deemed to realize in certain circumstances in periods after the IPO as a result of (i) certain increases in tax basis that occur as a result of Solaris Inc.’s acquisition (or deemed acquisition for United States federal income tax purposes) of all or a portion of such TRA Holder’s Solaris LLC Units in connection with the IPO or pursuant to the exercise of the Redemption Right or the Call Right (each as defined in Solaris LLC’s Second Amended and Restated Limited Liability Company Agreement (the “Solaris LLC Agreement”)) and (ii) imputed interest deemed to be paid by Solaris Inc. as a result of, and additional tax basis arising from, any payments Solaris Inc. 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, ~~2019~~2020 and December 31, ~~2018,~~2019, Solaris Inc. recorded a payable related to the Tax Receivable Agreement of ~~$67,987~~$68,132 and ~~$56,149,~~$67,998, respectively, $0 and $1,416 of which has

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been recorded as a current liability, respectively. The increase in payables related to the Tax Receivable Agreement is a result of Solaris Inc.’s acquisition (or deemed acquisition for United States federal income tax purposes) of Solaris LLC Units from TRA Holders during the ~~nine months ended September 30, 2019.~~

~~Environmental Matters~~

The Company is subject to various federal, state and local laws and regulations relating to the protection of the environment. Management has established procedures for the ongoing evaluation of the Company’s operations, to identify potential environmental exposures and to comply with regulatory policies and procedures. Environmental expenditures that relate to current operations are expensed or capitalized as appropriate. Expenditures that relate to an existing condition caused by past operations and do not contribute to current or future revenue generation are expensed as incurred. Liabilities are recorded when environmental costs are probable, and the costs can be reasonably estimated. The Company maintains insurance which may cover in whole or in part certain environmental expenditures. As of September 30, 2019 and December 31, 2018, there were no environmental matters deemed probable.

~~Segment Information~~

Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker, or decision-making group, in making decisions on how to allocate resources and assess performance. The Company’s chief operating decision maker is the

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

~~Accounting Standards Recently Issued But Not Yet Adopted~~

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

~~3. Prepaid Expenses and Other Current Assets~~

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

September 30,

December 31,

2019

2018
Prepaid purchase orders

$
1,106

$
2,802
Prepaid insurance

1,481

576
Deposits

901

882
Incentive receivables and other assets

1,758

1,232
Prepaid expenses and other current assets

$
5,246

$
5,492

~~4. Property, Plant and Equipment~~

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

September 30,

December 31,


2019

2018
Systems and related equipment

$
287,565

$
258,600
Systems in process

16,437

11,245
Transloading facility and equipment

40,254

40,218
Computer hardware and software

1,238

1,185
Machinery and equipment

5,216

5,126
Vehicles

8,044

8,334
Buildings

4,339

4,280
Land

612

612
Furniture and fixtures

284

282
Property, plant and equipment, gross

363,989

329,882
Less: accumulated depreciation

(52,736)

(33,344)
Property, plant and equipment, net

$
311,253

$
296,538

~~Depreciation expense for the~~ three months ended ~~September~~June 30, 2019 and 2018 was $6,713 and $5,133, respectively, of which $5,773 and $4,133 is attributable to cost of system rental, $384 and $347 is attributable to cost of system services, $411 and $529 is attributable to cost of transloading services and $145 and $124 is attributable to selling, general and administrative expenses, respectively. Depreciation expense for the nine months ended September 30, 2019 and 2018 was $19,291 and $11,908, respectively, of which $16,481 and $10,128 is attributable to cost of system rental, $1,173 and $889 is attributable to cost of system services, $1,231 and $544 is attributable to cost of transloading services and $406 and $347 is attributable to selling, general and administrative expenses, respectively. The Company capitalized $187 and $182 of depreciation expense associated with machinery and equipment used in the manufacturing of its systems for the three months ended September 30, 2019 and 2018, respectively. The Company capitalized $559 and $501 of depreciation expense associated with machinery and equipment used in the manufacturing of its systems for the nine months ended September 30, 2019 and 2018, respectively.2020.

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~~5. Accrued Liabilities~~

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

September 30,

December 31,


2019

2018
Property, plant and equipment

$
194

$
2,153
Employee related expenses

3,996

4,500
Selling, general and administrative

1,491

944
Cost of revenue

5,700

2,702
Excise, franchise and sales taxes

4,045

1,461
Ad valorem taxes

1,306

774
Other

102

124
Accrued liabilities

$
16,834

$
12,658

~~6. Leases~~

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

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

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

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

~~The components of lease expense were as follows:~~

Three Months Ended

Nine Months Ended

September 30, 2019

September 30, 2019
Operating lease cost (1) (2)

$
297

$
890

Finance lease cost

Amortization of ROU assets

8

25
Interest on lease liabilities

1

1
Total finance lease cost

$
9

$
26

~~(1)~~

~~Includes short term leases.~~

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~~(2)~~

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

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

Year Ending December 31,

Amount
2019

$
1,432
2020

1,375
2021

1,299
2022

1,093
2023

1,092
Thereafter

9,725
Total minimum lease payments

$
16,016

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

Year Ending December 31,

Operating Leases

Finance Leases
2019 (remainder of)

$
243

14
2020

1,116

35
2021

1,060

33
2022

1,091

33
2023

1,100

33
Thereafter

9,463

36
Total future minimum lease payments

14,073

184
Less: effects of discounting

(5,514)

(17)
Total lease liabilities

$
8,559

$
167

~~Supplemental cash flow information related to leases was as follows:~~

Three Months Ended

Nine Months Ended

September 30, 2019

September 30, 2019
Supplemental Cash Flows Information

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

Operating cash flows from operating leases

$
243

$
877
Financing cash flows from finance leases

9

26

~~Other information related to leases was as follows:~~


	~~September 30,~~
	~~2019~~
~~Weighted Average Remaining Lease Term~~
~~Operating leases~~		~~13.9 years~~
~~Finance leases~~		~~5.4 years~~
~~Weighted Average Discount Rate~~
~~Operating leases~~		~~6.3%~~
~~Finance leases~~		~~3.3%~~

~~7. Senior Secured Credit Facility~~

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

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

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

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

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

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

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

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

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

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

~~8. Equity~~

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

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

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

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

~~Stock-based compensation~~

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

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

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

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

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

Restricted Stock Awards

2019

2018
Unvested at January 1,

411,497

1,218,265
Awarded

375,068

2,120
Vested

(706)

—
Forfeited

(405)

(848)
Unvested at March 31,

785,454

1,219,537
Awarded

29,847

—
Vested

(67,674)

(345,520)
Forfeited

(7,896)

(21,495)
Unvested at June 30,

739,731

852,522
Awarded

43,830

86,544
Vested

(138,821)

(297,371)
Forfeited

(9,644)

(223,988)
Unvested at September 30,

635,096

417,707

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

~~Earnings Per Share~~

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

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

Three Months Ended September 30,

Nine Months Ended September 30,
Basic net income per share:

2019

2018

2019

2018
Numerator

Net income attributable to Solaris

$
11,398

$
13,019

$
36,991

$
29,546
Less income attributable to participating securities (1)

(245)

(251)

(817)

(1,042)
Net income attributable to common stockholders

$
11,153

$
12,768

$
36,174

$
28,504

Denominator

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

30,951

26,197

27,270

25,216
Effect of dilutive securities:

Stock options

29

132

47

164
Diluted weighted-average shares of Class A common stock outstanding used to calculate diluted net income per share

30,980

26,329

27,317

25,380

Earnings per share of Class A common stock - basic

$
0.36

0.49

1.33

1.13
Earnings per share of Class A common stock - diluted

$
0.36

0.49

1.33

1.12

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

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

Three Months Ended September 30,

Nine Months Ended September 30,

2019

2018

2019

2018
Class B common stock

15,939

20,398

15,598

21,085
Restricted stock awards

129

195

242

524
Total

16,068

20,593

15,840

21,609

~~9. Income Taxes~~

~~Income Taxes~~

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

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

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

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

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

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

~~Payables Related to the Tax Receivable Agreement~~

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

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

~~10.~~11. Concentrations

For the three months ended ~~September~~June 30, ~~2019, two~~2020, 2 customers accounted for 14% and 12% of the Company’s revenue. For the three months ended September 30, 2018, two customers accounted for 13%, and 10% of the Company’s revenue. For the nine months ended September 30, 2019, four customers accounted for 14%, 11%, 11% and 10% of the Company’s ~~revenue.~~revenues. For the ~~nine~~three months ended ~~September~~June 30, ~~2018, three~~2019, 3 customers accounted for ~~16%~~13%, ~~10%~~12%, and 11% of the Company’s revenues. For the six months ended June 30, 2020, 0 customer accounted for more than 10% of the Company’s ~~revenue. As of September~~revenues. For the six months ended June 30, 2019, ~~four~~4 customers accounted for 14%, ~~14%~~12%, ~~12%~~11% and 11% of the Company’s revenues. As of June 30, 2020, 2 customers accounted 17% and 10% of the Company’s accounts receivable. As of December 31, ~~2018, three customers~~2019, 1 customer accounted for ~~20%, 10% and 10%~~15% of the Company’s accounts receivable.

For the three months ended ~~September~~June 30, ~~2019, one~~2020, 1 supplier accounted for ~~38%~~40% of the Company’s total purchases. For the three months ended ~~September~~June 30, ~~2018, two suppliers~~2019, 1 supplier accounted for ~~17% and~~ 12% of the Company’s total purchases. For the ~~nine~~six months ended ~~September~~June 30, ~~2019, one~~2020, 1 supplier accounted for ~~17%~~36% of the Company’s total

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purchases. For the ~~nine~~six months ended ~~September~~June 30, ~~2018, two suppliers~~2019, 0 supplier accounted for ~~14% and 12%~~more than 10% or more of the Company’s total purchases. As of ~~September~~June 30, ~~2019, one supplier~~2020, 3 suppliers accounted for ~~77%~~19%, 18% and 15% of the Company’s accounts payable. As of December 31, ~~2018, one~~2019, 1 supplier accounted for ~~13%~~44% of the Company’s accounts payable.

~~11.~~12. Commitments and Contingencies

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

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

For the Year Ending December 31,


2019

2020

2021

2022

2023

Thereafter

Total

(in thousands)
Operating lease obligations (1)

$
243

$
1,116

$
1,060

$
1,091

$
1,100

$
9,463

$
14,073
Finance lease obligations (2)

14

35

33

33

33

36

184
Commitment fees on Revolving Loan (3)

32

125

125

40

—

—

322
Purchase commitments (4)

—

2,588

2,217

—

—

—

4,805
Other commitments

32

274

255

37

2

—

600
Total

$
321

$
4,138

$
3,690

$
1,201

$
1,135

$
9,499

19,984

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

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

~~(3)~~Commitment fees on our Revolving Loan are $229 which 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,~~8. “Debt,” for interest requirements per the 2019 Credit Agreement.

~~(4)~~Purchase commitments of $460 primarily relate to ~~our agreement~~agreements with our suppliers for material and ~~parts~~part purchases to be used in ~~the~~ manufacturing ~~of our systems.~~or maintenance activities. The purchase commitments represent open purchase orders to our suppliers.

~~Other Commitments~~

In13. Related Party Transactions

The Company recognizes certain costs incurred in relation to transactions primarily incurred in connection with the ~~normal course~~amended and restated administrative services agreement, dated May 17, 2017, between Solaris LLC and Solaris Energy Management, LLC, a company partially owned by William A. Zartler, the Chief Executive Officer and Chairman of ~~business,~~ the ~~Company has certain short-term purchase obligations~~Board. These services include rent paid for office space, travel services, personnel, consulting and ~~commitments~~administrative costs. For the three months ended June 30, 2020 and 2019, Solaris LLC paid $191 and $341, respectively, for ~~products~~these services. For the six months ended June 30, 2020 and ~~services, primarily related to purchases of materials used in the manufacturing of its systems.~~2019, Solaris LLC paid $405 and $619, respectively, for these services. As of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, the Company ~~had commitments of approximately $4,805~~included $231 and ~~$18,998,~~$233, respectively, ~~related to these commitments.~~

In connection with the acquisition of Railtronix, the seller is entitled to certain performance-based cash awards totaling $2,500 upon the achievement of certain financial milestones. As of September 30, 2019, one milestone had been achievedin prepaid expenses and ~~the Company paid and recognized $1,625 in June 2018 in~~ other ~~operating expense in~~current assets on the condensed consolidated ~~statements~~balance sheets. As of ~~operations. However, as~~June 30, 2020 and December 31, 2019, the

Table of ~~September 30, 2019, the~~ Contents

Company ~~had not concluded that the remaining milestone will be achieved~~included $58 and ~~thus has not recognized additional obligations~~$74, respectively, of accruals to related parties in accrued liabilities on the condensed consolidated ~~financial statements.~~balance sheets.

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

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under the guarantee of lease agreement with Solaris Energy Management, LLC is ~~$9,477~~$4,540 as of ~~September~~June 30, ~~2019.~~2020. Refer to Note ~~12. “Related Party Transactions” for additional information regarding related party transactions recognized and Note 6.~~7. “Leases” for operating lease discussion.

~~12. Related Party Transactions~~

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

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

~~Payables Related to the Tax Receivable Agreement~~

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

~~13. Subsequent Events~~

~~Kingfisher Facility~~

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

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

Solaris Oilfield Infrastructure, Inc. (either individually or together with its subsidiaries, as the context requires, “we,” “us,” “our,” “Solaris Inc.” or the “Company”). The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the accompanying financial statements and related notes. The following discussion contains “forward-looking statements” that reflect our plans, estimates, beliefs and expected performance. Our actual results may differ materially from those anticipated as discussed in these forward-looking statements as a result of a variety of risks and uncertainties, including those described above in “Cautionary Statement Regarding Forward-Looking Statements” included elsewhere in this Quarterly Report and “Risk Factors” included in this Quarterly Report and the Annual Report on Form ~~10-K/A~~10-K for the year ended December 31, ~~2018~~2019 as updated by our subsequent filings with the United States Securities and Exchange Commission (the “SEC”), all of which are difficult to predict. In light of these risks, uncertainties and assumptions, the forward-looking events discussed may not occur. We assume no obligation to update any of these forward-looking statements except as otherwise required by law.

Overview

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

Executive Summary

We design, manufacture ~~rent~~ and ~~service~~rent specialized equipment which combined with field technician support, logistics services and our software solutions, enables us to provide a service offering that helps oil and natural gas operators and their suppliers drive efficiencies and reduce costs during the completion phase of well development. The majority of our revenue is currently derived from ~~the~~ rental and ~~service of~~services related to our patented mobile proppant management systems that unload, store and deliver proppant used in hydraulic fracturing of oil and natural gas wells, as well as coordinating the delivery of proppant to the well site. Our systems are deployed in most of the active oil and natural gas basins in the United States.

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

Recent Trends and Outlook

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

Due to a combination of geopolitical and the Coronavirus 2019 (“COVID-19”) pandemic related pressures on the global supply-demand balance for crude oil and related products, as well as the actions taken by a number of global oil producers, commodity prices have significantly declined in recent months, and oil and gas operators have reduced development budgets and activity. During the second quarter 2020, continued containment measures and responsive actions to the COVID-19 pandemic continue to result in severe declines in general economic activity and energy demand. As a result, the global economy has experienced a slowing of economic growth, disruption of global manufacturing supply chains, stagnation of crude oil and natural gas consumption and interference with workforce continuity. As cities, states and countries continue easing the confinement restrictions, the risk for the resurgence and recurrence of COVID-19 remains. The reinstatement of containment measures could potentially lead to an extended period of reduced demand for crude oil and natural gas commodities, as well as assert further pressure on the global economy. Our revenues have decreased as a result of these lower activity levels. In response, we have reduced direct operating costs and SG&A expenses, including reducing workforce levels across the Company and lowered our capital expenditures.

The risks associated with COVID-19 have impacted our workforce and the way we meet our business objectives. In response to COVID-19 we have implemented certain health and safety guidelines which are consistent with guidelines proscribed by the Centers for Disease Control and other authorities, as well as those requested by certain of our customers. Due to concerns over health and safety, we have asked our non-essential employees to work remotely until further notice. Working remotely and under our revised policies has not significantly impacted our ability to maintain

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operations or caused us to incur significant additional expenses; however, we are unable to predict the duration or ultimate impact of these measures.

Solaris Inc.’s fully utilized system count averaged 20 systems in the second quarter of 2020, down approximately 76% from the first quarter of 2020 and 84% from the second quarter of 2019. This compares to the Baker Hughes US Land rig count ~~decreased 7%~~which was down 64% at the end of second quarter 2020 from the end of first quarter of 2020 and down 73% from the end of second quarter of 2019.

We believe that due to the current pricing environment and reduction in oil and gas development budgets, drilling and completions activity will continue to remain at depressed levels during the third quarter ~~2019 sequentially~~although we expect a modest improvement from second quarter ~~2019 and was down 13% from third quarter 2018. The~~levels. Absent significant changes in markets share, we expect our activity should continue to follow the general trends of the US land rig count continued to decrease in the fourth quarter 2019, down 10% as of October 18, 2019, from average third quarter 2019 levels. These recent declines have been partially driven by continued efficiency gains as a result of new technologies deployed in the oilfield that have reduced the time required to drill and complete oil and gas wells.

~~As a result of these decreased~~ drilling and completion ~~times,~~activity.

In response to the decline in commodity prices and activity levels, we ~~believe oil~~have reduced direct operating costs and ~~gas operators spent a disproportionate amount of their annual budgets~~SG&A expenses, including reducing workforce levels across the Company and lowered our 2020 capital expenditures budget to $5-10 million from $10 million or below previously. We continue to evaluate ways to increase flexibility and efficiency in our cost structure considering these unprecedented and uncertain time.

We have also seen an increase in the ~~first half~~number of distressed companies in the ~~year,~~sector which has resulted in ~~lower spending~~several companies filing for bankruptcy or delaying payment to vendors. We continue to monitor the credit risk of our customers and

~~Table~~ take preventative and precautionary measures to protect the balance of ~~Contents~~

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

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

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

How We Generate Revenue

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

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

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

Costs of Conducting Our Business

The principal costs associated with operating our business are:

●

Cost of system rental (excluding depreciation and amortization);

●

Cost of system services (excluding depreciation and amortization);

●

Cost of transloading 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;~~

systems;

●

Selling, general and administrative expenses; and

●

Other operating expenses.

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

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

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

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

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

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

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

How We Evaluate Our Operations

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

Revenue

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

~~Revenue Days~~

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

Fully Utilized System Count

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

~~Tons Transloaded~~

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

~~Table of Contents~~

EBITDA and Adjusted EBITDA

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

Note Regarding Non-GAAP Financial Measures

EBITDA and Adjusted EBITDA are not financial measures presented in accordance with accounting principles generally accepted in the United States (“GAAP”). We believe that the presentation of these non-GAAP financial measures will provide useful information to investors in assessing our financial condition and results of operations. Net income (loss) is the GAAP measure most directly comparable to EBITDA and Adjusted EBITDA. Our non-GAAP financial measures should not be considered as alternatives to the most directly comparable GAAP financial measure. Each of these non-GAAP financial measures has important limitations as analytical tools because they exclude some but not all items that affect the most directly comparable GAAP financial measures. You should not consider EBITDA or Adjusted EBITDA in isolation or as substitutes for an analysis of our results as reported under GAAP. Because EBITDA and Adjusted EBITDA may be defined differently by other companies in our industry, our definitions of these non-GAAP financial measures may not be comparable to similarly titled measures of other companies, thereby diminishing their utility.

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Results of Operations

Three Months Ended ~~September~~June 30, ~~2019~~2020 Compared to Three Months Ended ~~September~~June 30, ~~2018~~2019

Three Months Ended

September 30,


2019

2018

Change

(in thousands)
Revenue






System rental

$
36,638

$
42,031

$
(5,393)
System services

18,153

12,053

6,100
Transloading services

4,417

2,000

2,417
Inventory software services

396

602

(206)
Total revenue

59,604

56,686

2,918
Operating costs and expenses:






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

2,838

1,949

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

21,072

13,906

7,166
Cost of transloading services (excluding $411 and $529 of depreciation and amortization for the three months ended September 30, 2019 and 2018, respectively, shown separately) (1)

652

597

55
Cost of inventory software services (excluding $193 and $193 of depreciation and amortization for the three months ended September 30, 2019 and 2018, respectively, shown separately)

160

191

(31)
Depreciation and amortization

6,908

5,328

1,580
Selling, general and administrative (excluding $147 and $126 of depreciation and amortization for the three months ended September 30, 2019 and 2018, respectively, shown separately)

4,933

3,869

1,064
Other operating expenses

248

56

192
Total operating costs and expenses

36,811

25,896

10,915
Operating income

22,793

30,790

(7,997)
Interest expense, net

(8)

(116)

108
Total other expense

(8)

(116)

108
Income before income tax expense

22,785

30,674

(7,889)
Provision for income taxes

(3,703)

(4,237)

534
Net income

19,082

26,437

(7,355)
Less: net income related to non-controlling interests

(7,684)

(13,418)

5,734
Net income attributable to Solaris

$
11,398

$
13,019

$
(1,621)


	Three Months Ended
	June 30,
	2020		2019			Change

	(in thousands)
Revenue
System rental	$	5,463	$	39,740		$	(34,277)
System services		3,419		19,031			(15,612)
Transloading services		264		4,881			(4,617)
Inventory software services		192		449			(257)
Total revenue		9,339		64,101			(54,762)
Operating costs and expenses:
Cost of system rental (excluding depreciation and amortization)		823		2,552			(1,729)
Cost of system services (excluding depreciation and amortization)		6,013		21,675			(15,662)
Cost of transloading services (excluding depreciation and amortization)		202		689			(487)
Cost of inventory software services (excluding depreciation and amortization)		122		165	��		(43)
Depreciation and amortization		6,671		6,622			49
Selling, general and administrative (excluding depreciation and amortization)		3,967		5,006			(1,039)
Other operating expenses		2,274		69			2,205
Total operating costs and expenses		20,072		36,778			(16,706)
Operating income (loss)		(10,733)		27,323			(38,056)
Interest income, net		(35)		(656)			621
Total other income		(35)		(656)			621
Income (loss) before income tax expense		(10,768)		26,667			(37,435)
Benefit (provision) for income taxes		1,272		(4,158)			5,430
Net income (loss)		(9,496)		22,509			(32,005)
Less: net (income) loss related to non-controlling interests		3,956		(9,234)			13,190
Net income (loss) attributable to Solaris	$	(5,540)	$	13,275		$	(18,815)

Revenue

System Rental Revenue. Our system rental revenue decreased ~~$5.4~~$34.3 million, or ~~13%~~86%, to ~~$36.6~~$5.5 million for the three months ended ~~September~~June 30, ~~2019~~2020 compared to ~~$42.0~~$39.7 million for the three months ended ~~September~~June 30, ~~2018.~~2019. This decrease was primarily due to ~~a 11%~~an 84% decrease in mobile proppant systems on a fully utilized basis, due to ~~lower rig count~~severe contraction in oil company budgets and ~~hydraulic fracturing activities as a result of operating efficiencies in~~ completion activities, ~~and substantial spend by~~in response to global oil ~~and gas companies relative to their full year budgets.~~market volatility.

System Services Revenue. Our system services revenue ~~increased $6.1~~decreased $15.6 million, or ~~50%~~82%, to ~~$18.2~~$3.4 million for the three months ended ~~September~~June 30, ~~2019~~2020 compared to ~~$12.1~~$19.0 million for the three months ended ~~September~~June 30, ~~2018.~~2019. System services revenue ~~increased $7.6 million~~decreased due to ~~an increase~~a decrease in services provided to coordinate proppant delivered into our systems, ~~partially offset by~~as well as a decrease ~~of $1.5 million~~ in billable system transportation and field technician ~~support to maintain systems and transportation~~services as a result of ~~systems between customer sites.~~the decrease in fully utilized systems.

~~Table of Contents~~

Transloading Services Revenue. Our transloading services revenue ~~increased $2.4~~decreased $4.6 million, or ~~120%~~94%, to ~~$4.4~~$0.3 million for the three months ended ~~September~~June 30, ~~2019~~2020 compared to ~~$2.0~~$4.9 million for the three months ended ~~September~~June 30, ~~2018.~~2019. This ~~increase~~decrease was primarily due to recognition of $3.2 million of deferred revenue ~~partially offset by~~in the three months ended June 30, 2019 as well as a decrease in the number of tons transloaded at our Kingfisher Facility. We generally charge our customers a throughput fee for providing rail-to-truck transloading and high-efficiency sand silo storage and transloading services in relation to proppant and chemicals delivered to the Kingfisher Facility.

~~Inventory Software Services Revenue.~~ Our inventory software services revenue decreased $0.2 million, or 33%, to $0.4 million for the three months ended September 30, 2019 compared to $0.6 million for the three months ended September 30, 2018, related to Railtronix inventory management software. We generally charge our customers a throughput fee to monitor proppant that is loaded into a railcar, stored at a transload facility or loaded into a truck.23

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Operating Expenses

Total operating costs and expenses for the three months ended ~~September~~June 30, 2020 and 2019 ~~and 2018~~ were ~~$36.8~~$20.1 million and ~~$25.9~~$36.7 million, respectively, which represented ~~62%~~215% and ~~46%~~57% of total revenue, respectively. ~~Total~~The decrease in total operating costs and expenses ~~increased year-over-year~~are primarily ~~as a result of an~~related to lower costs necessary to support lower fully utilized systems. The increase in ~~the number of our systems where we coordinate proppant delivered into our systems, coupled with an increase in depreciation~~total operating costs and ~~amortization expense. Total operating costs~~expenses as a percentage of total ~~revenue increased~~revenues is related to certain fixed costs that do not fluctuate proportionately with system activities and decline as ~~a result of an increase in system services expense in relation to proppant delivery coordination services provided. Additional details regarding the changes in operating expenses are presented below.~~utilization declines including depreciation, insurance property taxes and other overhead costs.

Cost of System Rental (excluding depreciation and amortization). Cost of system rental ~~increased $0.9~~decreased $1.7 million, or ~~47%~~65%, to ~~$2.8~~$0.8 million for the three months ended ~~September~~June 30, ~~2019~~2020 compared to ~~$1.9~~$2.6 million for the three months ended ~~September~~June 30, ~~2018,~~2019, excluding depreciation and amortization expense. Cost of system rental ~~as a percentage of system rental revenue was 8% and 5% for the three months ended September 30, 2019 and 2018, respectively. Cost of system rental increased~~decreased primarily due to ~~an increase~~a decrease in maintenance expense in ~~addition~~relation to ~~ad valorem and other fixed costs as~~ a ~~result of an increase~~decrease in ~~the number of systems that were added to our fleet. The average number of~~ mobile proppant systems ~~in the fleet increased to 165 systems in the three months ended September 30, 2019 from 134 systems in the three months ended September 30, 2018.~~on a fully utilized basis.

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

Cost of System Services (excluding depreciation and amortization). Cost of system services ~~increased $7.2~~decreased $15.7 million, or ~~52%~~72%, to ~~$21.1~~$6.0 million for the three months ended ~~September~~June 30, ~~2019~~2020 compared to ~~$13.9~~$21.7 million for the three months ended ~~September~~June 30, ~~2018.~~2019. This ~~increase~~decrease was primarily due to ~~an increase of $7.9 million~~a decrease in ~~relation to~~ services provided to coordinate proppant delivered to systems ~~partially offset by decreases~~as well as a decrease in field support activity and third-party trucking services ~~of $0.5 million~~required to transport incremental systems deployed to customers. For the three months ended September 30, 2019, the cost of system services as a percentage of system services revenue increased to 116% compared to 115% for the three months ended September 30, 2018.support fewer fully utilized systems.

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

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

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

~~Table of Contents~~

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

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

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

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

Selling, General and Administrative Expenses (excluding depreciation and amortization). Selling, general and administrative expenses ~~increased $1.1~~decreased $1.0 million, or ~~28%~~20%, to $4.0 million for the three months ended June 30, 2020 compared to $5.0 million for the three months ended ~~September~~June 30, 2019 ~~compared to $3.9 million for the three months ended September 30, 2018~~ due primarily to ~~an increase~~cost cutting measures, including headcount, salary and support cost reductions, in ~~stock-based compensation, labor and professional fees.~~response to the reduction in industry activity.

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

Provision for Income Taxes. During the three months ended ~~September~~June 30, ~~2019,~~2020, we recognized a combined United States federal and state ~~provision~~benefit for income taxes of ~~$3.7~~$1.3 million, ~~a decrease~~an increase of ~~$0.5~~$5.4 million as compared to the $4.2 million income tax expense we recognized during the three months ended ~~September~~June 30, ~~2018.~~2019. This ~~decrease~~change was attributable to lower operating income. The effective combined United States federal and state income tax rates were ~~14.80%~~11.8% and ~~13.98%~~15.4% for the three months ended ~~September~~June 30, ~~2019~~2020 and ~~2018,~~2019, respectively. For the three months ended ~~September~~June 30, ~~2019~~2020 and ~~2018,~~2019, our effective tax rate differed from the statutory rate primarily due to Solaris LLC’s ~~pass-through~~ treatment as a partnership for United States federal income tax purposes.

Net Income (Loss)

Net income (loss) decreased ~~$7.4~~$32.0 million, or ~~28%~~142%, to ~~$19.1~~a net loss of $9.5 million for the three months ended ~~September~~June 30, ~~2019~~2020 compared to ~~$26.4~~net income of $22.5 million for the three months ended ~~September~~June 30, ~~2018,~~2019, due to the changes in revenues and expenses discussed above.

Comparison of Non-GAAP Financial Measures

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
	June 30,
	2020		2019		Change

	(in thousands)
Net income (loss)	$	(9,496)	$	22,509	$	(32,005)
Depreciation and amortization		6,671		6,622		49
Interest (income) expense, net		35		656		(621)
Income taxes (1)		(1,272)		4,158		(5,430)
EBITDA	$	(4,062)	$	33,945	$	(38,007)
Stock-based compensation expense (2)		1,326		1,178		148
Loss on disposal of assets		1,345		71		1,274
Severance expense and other		211		—		211
Credit losses		740		—		740
Write-off of debt issuance costs (3)		—		528		(528)
Transload contract termination (4)		—		(3,169)		3,169
Adjusted EBITDA	$	(440)	$	32,553	$	(32,993)

Three months ended

September 30,


2019

2018

Change

(in thousands)
Net income

$
19,082

$
26,437

$
(7,355)
Depreciation and amortization

6,908

5,328

1,580
Interest expense, net

8

116

(108)
Income taxes (1)

3,703

4,237

(534)
EBITDA

$
29,701

$
36,118

$
(6,417)
Stock-based compensation expense (2)

1,225

338

887
Loss on disposal of assets

99

51

48
Severance

154

—

154
Adjusted EBITDA

$
31,179

$
36,507

$
(5,328)

(1)

~~(1)~~

~~Federal~~United States federal and state income taxes.

(2)

~~(2)~~

Represents stock-based compensation expense related to restricted stock ~~awards~~awards.

(3)	Write-off of ~~$1.2 million~~certain unamortized debt issuance when the Amended and ~~$0.3 million~~Restated Credit Agreement, dated as of January 19, 2018, was replaced in its entirety by the ~~three months ended September 30,~~Agreement 2019 ~~and 2018, respectively.~~ Credit Agreement.

(4)

~~(3)~~

~~Other is primarily~~Deferred revenue related to ~~severance costs.~~

full termination of a sand storage agreement; no deferred revenue balance remained as of December 31, 2019.

Three Months Ended ~~September~~June 30, ~~2019~~2020 Compared to Three Months Ended ~~September~~June 30, ~~2018:~~2019: EBITDA and Adjusted EBITDA

EBITDA decreased ~~$6.4~~$38. million to ~~$29.7~~($4.0) million for the three months ended ~~September~~June 30, ~~2019~~2020 compared to ~~$36.1~~$33.9 million for the three months ended ~~September~~June 30, ~~2018.~~2019. Adjusted EBITDA decreased ~~$5.3~~$33.0 million to ~~$31.2~~($0.4) million for the three months ended ~~September~~June 30, ~~2019~~2020 compared to ~~$36.5~~$32.6 million for the three months ended ~~September~~June 30, ~~2018.~~2019. The decreases in EBITDA and Adjusted EBITDA were primarily due to the changes in revenues and expenses, discussed above.

Table of Contents

Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019


	Six Months Ended
	June 30,
	2020		2019		Change

	(in thousands)
Revenue
System rental	$	31,522	$	77,088	$	(45,566)
System services		24,376		30,468		(6,092)
Transloading services		729		10,714		(9,985)
Inventory software services		542		955		(413)
Total revenue		57,169		119,225		(62,056)
Operating costs and expenses:
Cost of system rental (excluding depreciation and amortization)		2,836		4,899		(2,063)
Cost of system services (excluding depreciation and amortization)		30,143		35,294		(5,151)
Cost of transloading services (excluding depreciation and amortization)		540		1,399		(859)
Cost of inventory software services (excluding depreciation and amortization)		267		300		(33)
Depreciation and amortization		13,785		12,967		818
Selling, general and administrative (excluding depreciation and amortization)		8,373		9,034		(661)
Impairment Loss		47,828		—		47,828
Other operating expenses		3,472		282		3,190
Total operating costs and expenses		107,244		64,175		43,069
Operating income (loss)		(50,075)		55,050		(105,125)
Interest income (expense), net		76		(767)		843
Total other expense (income)		76		(767)		843
Income (loss) before income tax expense		(49,999)		54,283		(104,282)
Benefit (provision) for income taxes		7,350		(8,339)		15,689
Net income (loss)		(42,649)		45,944		(88,593)
Less: net (income) loss related to non-controlling interests		18,026		(20,352)		38,378
Net income (loss) attributable to Solaris	$	(24,623)	$	25,592	$	(50,215)

Revenue

System Rental Revenue. Our system rental revenue decreased ~~18% and 15%~~$45.6 million, or 59%, to $31.5 million for the ~~three~~six months ended ~~September~~June 30, ~~2019~~2020 compared to $77.1 million for the ~~three~~six months ended ~~September~~June 30, ~~2018, respectively. The decreases were~~2019. This decrease was primarily due to a 62% decrease in the number of mobile proppant systems deployed on a fully utilized basis, due primarily to lower rig count and hydraulic fracturing activities ~~as a result~~resulting from the impact of ~~operating efficiencies~~volatility in ~~completion activities~~global oil markets driven by significant reductions in demand for oil due to COVID-19 and ~~substantial spend~~certain actions by oil ~~and gas companies relative to their full year budgets.~~producers globally.

~~Table of Contents~~

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

Nine Months Ended

September 30,


2019

2018

Change

(in thousands)
Revenue






System rental

$
113,726

$
104,563

$
9,163
System services

48,621

29,499

19,122
Transloading services

15,131

3,847

11,284
Inventory software services

1,351

1,950

(599)
Total revenue

178,829

139,859

38,970
Operating costs and expenses:






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

7,737

5,050

2,687
Cost of system services (excluding $1,173 and $889 of depreciation and amortization for the nine months ended September 30, 2019 and 2018, respectively, shown separately)

56,366

34,691

21,675
Cost of transloading services and other (excluding $1,231 and $544 of depreciation and amortization for the nine months ended September 30, 2019 and 2018, respectively, shown separately)

2,051

1,464

587
Cost of inventory software services (excluding $579 and $598 of depreciation and amortization for the nine months ended September 30, 2019 and 2018, respectively, shown separately)

460

614

(154)
Depreciation and amortization

19,875

12,514

7,361
Selling, general and administrative (excluding $411 and $355 of depreciation and amortization for the nine months ended September 30, 2019 and 2018, respectively, shown separately)

13,967

12,662

1,305
Other operating expenses

529

1,752

(1,223)
Total operating costs and expenses

100,985

68,747

32,238
Operating income

77,844

71,112

6,732
Interest expense, net

(775)

(271)

(504)
Total other expense

(775)

(271)

(504)
Income before income tax expense

77,069

70,841

6,228
Provision for income taxes

(12,042)

(9,541)

(2,501)
Net income

65,027

61,300

3,727
Less: net income related to non-controlling interests

(28,036)

(31,754)

3,718
Net income attributable to Solaris

$
36,991

$
29,546

$
7,445

~~Revenue~~

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

System Services Revenue. Our system services revenue ~~increased $19.1~~decreased $6.1 million, or ~~65%~~20%, to ~~$48.6~~$24.4 million for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 compared to ~~$29.5~~$30.5 million for the ~~nine~~six months ended ~~September~~June 30, ~~2018.~~2019. System services revenue increased ~~$17.0~~$7.0 million due to an increase in services provided to coordinate proppant delivered into our systems, and was offset by a decrease of $13.1 million in ~~addition to a $2.1 million increase in~~billable system transportation and field technician ~~support to maintain systems and transportation~~services as a result of ~~systems between customer sites.~~the decrease in fully utilized systems.

~~Table of Contents~~

Transloading Services Revenue. Our transloading services revenue ~~increased $11.3~~decreased $10.0 million, or ~~297%~~93%, to ~~$15.1~~$0.7 million for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 compared to ~~$3.8~~$10.7 million for the ~~nine~~six months ended ~~September~~June 30, ~~2018.~~2019. This ~~increase~~decrease was primarily due to recognition of ~~$9.5~~$6.3 million of deferred revenue ~~and an increase~~in the six months ended June 30, 2019 as well as a decrease in the number of tons transloaded at our Kingfisher Facility. We generally charge our customers a throughput fee for providing rail-to-truck transloading and high-efficiency sand silo storage and transloading services in relation to proppant and chemicals delivered to the Kingfisher Facility.

~~Inventory Software Services Revenue.~~ Our inventory software services revenue, which decreased $0.6 million, or 30% to $1.4 million for the nine months ended September 30, 2019 compared to $2.0 million for the nine months ended September 30, 2018, is related to Railtronix inventory management software. We generally charge our customers a throughput fee to monitor proppant that is loaded into a railcar, stored at a transload facility or loaded into a truck.26

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Operating Expenses

Total operating costs and expenses for the ~~nine~~six months ended ~~September~~June 30, 2020 and 2019 ~~and 2018~~ were ~~$101.0~~$107.2 million and ~~$68.7~~$64.2 million, respectively, which represented ~~56%~~187% and ~~49%~~54% of total revenue, respectively. ~~Total~~The increase in total operating costs and expenses ~~increased year-over-year primarily~~ as ~~a result of~~well as the ~~deployment of additional systems to our customers and services thereof, coupled with the related~~ increase in ~~depreciation and amortization expense. Total~~total operating costs as a percentage of total revenue ~~increased as a result of an increase in system services expense in relation~~are primarily related to ~~proppant delivery coordination services provided.~~impairment losses. Additional details regarding the changes in operating expenses are presented below.

Cost of System Rental (excluding depreciation and amortization). Cost of system rental ~~increased $2.6~~decreased $2.1 million, or ~~51%~~43%, to ~~$7.7~~$2.8 million for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 compared to ~~$5.1~~$4.9 million for the ~~nine~~six months ended ~~September~~June 30, ~~2018,~~2019, excluding depreciation and amortization expense. Cost of system rental as a percentage of system rental revenue was 7%9% and 5%6% for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018,~~2019, respectively. Cost of system rental ~~increased~~decreased primarily due to ~~an increase~~a decrease in ~~ad valorem and other fixed costs~~maintenance expense in relation to a decrease in mobile proppant systems on a fully utilized basis. Cost of system rental as a percentage of system revenue increased as a result of ~~an increase in the number of systems~~certain fixed costs that were added to our fleet. The average number of systems deployed to customers increased to 117 systems in the nine months ended September 30, 2019 from 107 systems in the nine months ended September 30, 2018.do not decrease proportionately based on utilization.

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

Cost of System Services (excluding depreciation and amortization). Cost of system services ~~increased $21.7~~decreased $5.2 million, or ~~63%~~15%, to ~~$56.4~~$30.1 million for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 compared to ~~$34.7~~$35.3 million for the ~~nine~~six months ended ~~September~~June 30, ~~2018.~~2019. This ~~increase was primarily due~~decrease is related to an increase ~~of $17.3 million~~ in ~~relation to~~ services provided to coordinate proppant delivered to ~~systems. Cost of system services also increased due to an increase~~systems offset by a decrease in field ~~labor~~support activity and ~~related costs of $2.1 million, coupled with increased~~ third-party trucking services ~~of $1.4 million to transport incremental systems deployed to customers. The increase in field labor and related costs was driven by an increase in the number of field technicians~~ required to support fewer fully utilized systems. For the ~~increased number of systems deployed during the nine~~six months ended ~~September~~June 30, ~~2019. For the nine months ended September 30, 2019,~~2020, the cost of system services as a percentage of system services revenue ~~decreased~~increased to 124% compared to 116% ~~compared to 118%~~ for the ~~nine~~six months ended ~~September~~June 30, ~~2018.~~2019.

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

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

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

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

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

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

Selling, General and Administrative Expenses (excluding depreciation and amortization).Selling, general and administrative expenses ~~increased $1.3~~decreased $0.7 million, or ~~10%~~8%, to ~~$14.0~~$8.4 million for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 compared to ~~$12.7~~$9.0 million for the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 due primarily to ~~an increase~~increases in ~~stock-based compensation, salaries, benefits~~credit losses offset by decreases due to cost cutting measures taken in response to the reduction in industry activity.

Impairment losses. As a result of risks and ~~payroll taxes~~uncertainties associated with volatility in global oil markets driven by significant reductions in demand for oil due to COVID-19 and ~~professional fees.~~

~~Other Operating Expenses.~~ ~~Other operating expenses decreased $1.3~~certain actions by oil producers globally and the expected impact on our businesses, operations, earnings and results, we recorded impairments losses and other charges of $37.8 million, ~~or 72%,~~$4.2 million, $2.8 million, $2.6 million and $0.4 million in relation to ~~$0.5 million for~~property, plant and equipment, goodwill, ROU assets, inventories and other assets, respectively, in the ~~nine~~six months ended ~~September~~June 30, 2019 compared to $1.8 million for the nine months ended September 30, 2018. Other operating expenses in the nine months ended September 30, 2019 were primarily related to $0.4 million loss on disposal of assets. Other operating expenses in the nine months ended September 30, 2018 were primarily related to certain performance-based cash awards totaling $1.7 million in connection with the purchase of Railtronix upon the achievement of certain financial milestones.2020.

Provision for Income Taxes. During the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, we recognized a combined United States federal and state ~~provision~~benefit for income taxes of ~~$12.0~~$7.4 million, an increase of ~~$2.5~~$15.7 million as compared to ~~$9.5~~the $8.3 million income tax expense we recognized during the ~~nine~~six months ended ~~September 31, 2018.~~June 30, 2019. This ~~increase~~change was attributable to ~~higher~~lower operating income. The effective combined United States federal and state income tax rates were ~~14.88%~~14.7% and ~~13.54%~~15.3% for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018,~~2019, respectively. For the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018,~~2019, our effective tax rate differed from the statutory rate primarily due to Solaris LLC’s ~~pass-through~~ treatment as a partnership for United States federal income tax purposes.

Net Income (Loss)

Net income ~~increased $3.7~~(loss) decreased $88.6 million, or 193%, to ~~$65.0~~a net loss of $42.6 million for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 compared to ~~$61.3~~net income of $45.9 million for the ~~nine~~six months ended ~~September~~June 30, ~~2018,~~2019, due to the changes in revenues and expenses discussed above.

Comparison of Non-GAAP Financial Measures

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to EBITDA and Adjusted EBITDA. EBITDA and Adjusted EBITDA should not be considered alternatives to net

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income presented in accordance with GAAP. Because EBITDA and Adjusted EBITDA may be defined differently by other companies in our industry, our definitions of EBITDA and Adjusted EBITDA may not be comparable to similarly titled measures of other companies, thereby diminishing their utility. The following table presents a reconciliation of Net income to EBITDA and Adjusted EBITDA for each of the periods indicated.

Nine months ended

September 30,


2019

2018

Change

(in thousands)
Net income

$
65,027

$
61,300

$
3,727
Depreciation and amortization

19,875

12,514

7,361
Interest expense, net

775

271

504
Income taxes (1)

12,042

9,541

2,501
EBITDA

$
97,719

$
83,626

$
14,093
Stock-based compensation expense (2)

3,265

2,200

1,065
Loss on disposal of assets

383

77

306
Severance

154

—

154
Non-recurring cash bonuses (3)

—

1,679

(1,679)
IPO bonuses (4)

—

896

(896)
Adjusted EBITDA

$
101,521

$
88,478

$
13,939


	Six months ended
	June 30,
	2020		2019		Change

	(in thousands)
Net income (loss)	$	(42,649)	$	45,944	$	(88,593)
Depreciation and amortization		13,785		12,967		818
Interest expense, net		(76)		767		(843)
Income taxes (1)		(7,350)		8,339		(15,689)
EBITDA	$	(36,290)	$	68,017	$	(104,307)
Stock-based compensation expense (2)		2,656		2,040		616
Loss on disposal of assets		1,413		284		1,129
Impairment loss		47,828		—		47,828
Severance expense and other		542		—		542
Credit losses		1,451		—		1,451
Write-off of debt issuance costs (3)		—		528		(528)
Transload contract termination (4)		—		(6,303)		6,303
Adjusted EBITDA	$	17,600	$	64,566	$	(46,966)

~~(1)~~

~~Federal~~United States federal and state income taxes.

~~(2)~~

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

awards.

~~(3)~~

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

unamortized debt issuance when the Amended and Restated Credit Agreement, dated as of January 19, 2018, was replaced in its entirety by the Agreement 2019 Credit Agreement.

~~(4)~~

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

a sand storage agreement; no deferred revenue balance remained as of December 31, 2019.

~~Nine~~Six Months Ended ~~September~~June 30, ~~2019~~2020 Compared to ~~Nine~~Six Months Ended ~~September~~June 30, ~~2018:~~2019: EBITDA and Adjusted EBITDA

EBITDA ~~increased $14.1~~decreased $104.3 million to ~~$97.7~~($36.3) million for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 compared to ~~$83.6~~$68.0 million for the ~~nine~~six months ended ~~September~~June 30, ~~2018.~~2019. Adjusted EBITDA ~~increased $13.0~~decreased $47.0 million to ~~$101.5~~$17.6 million for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 compared to ~~$88.5~~$64.6 million for the ~~nine~~six months ended ~~September~~June 30, ~~2018.~~2019. EBITDA and Adjusted EBITDA ~~increased 17%~~decreased 153% and ~~15%~~73% for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 compared to the ~~nine~~six months ended ~~September~~June 30, ~~2018,~~2019, respectively. The ~~increases~~decreases in EBITDA and Adjusted EBITDA were primarily due to ~~an increase~~the changes in ~~the number of systems deployed to customers due to increasing demand for our systems~~revenues and ~~enhancements to our product offering.~~expenses, including impairment losses, discussed above.

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Liquidity and Capital Resources

Overview

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

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

We intend to finance most of our capital expenditures, contractual obligations and working capital needs with our current cash balance, cash generated from future operations and borrowings under our 2019 Credit Agreement (as defined in “—Debt Agreements”). We continuously evaluate our capital expenditures and the amount we ultimately spend will depend on a number of factors, including expected industry activity levels and company initiatives. In response to the decline in commodity prices and the COVID-19 pandemic, we lowered 2020 capital expenditures budget from $20.0 to $40.0 million to $10 million or less. We believe that our operating cash flow, cash balance, and available borrowings under our 2019 Credit Agreement will be sufficient to fund our operations for at least the next 12 months.

As of ~~September~~June 30, 2020, cash and cash equivalents totaled $63.6 million, and we had zero drawn and $50 million of available borrowings under the 2019 ~~cash totaled $51.7 million.~~Credit Agreement.

Cash Flows

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


							Six Months Ended
							June 30,				Change
							2020		2019		2020 vs. 2019

	Nine Months Ended
	September 30,				Change
	2019		2018		2019 vs. 2018
	(in thousands)
							(in thousands)
Net cash provided by operating activities	$	88,549	$	57,539	$	31,010	$	34,323	$	57,439	$	(23,116)
Net cash used in investing activities		(32,166)		(124,859)		92,693	$	(845)	$	(28,679)	$	27,834
Net cash used in financing activities		(29,754)		5,976		(35,730)	$	(36,728)	$	(24,098)	$	(12,630)
Net change in cash	$	26,629	$	(61,344)	$	87,973	$	(3,250)	$	4,662	$	(7,912)

Analysis of Cash Flow Changes for ~~Nine~~Six Months Ended ~~September~~June 30, ~~2019~~2020 Compared to ~~Nine~~Six Months Ended ~~September~~June 30, ~~2018~~2019

Operating Activities.Net cash provided by operating activities was ~~$88.5~~$34.3 million for the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, compared to net cash provided by operating activities of ~~$57.5~~$57.4 million for the ~~nine~~six months ended ~~September~~June 30, ~~2018.~~2019. The ~~increase~~decrease of ~~$31.0~~$23.1 million in operating cash flow was primarily attributable to changes in working capital ~~items.~~items, lower revenues and EBITDA.

Investing Activities. Net cash used in investing activities was ~~$32.2~~$0.8 million for the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, compared to ~~$124.9 million for the nine months ended September 30, 2018. The decrease~~net cash used in investing activities of ~~$92.7~~$(28.7) million ~~is primarily due to a decrease in~~for the six months ended June 30, 2019. Investing activities during the six months ended June 30, 2020 include system enhancements offset by the sale of assets. Investing activities during the six months ended June 30, 2019 include manufacturing ~~rate~~ of new proppant ~~systems~~ and ~~completion of construction of the Kingfisher Facility in the third quarter of 2018. For the nine months ended September~~

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

Financing Activities. Net cash used in financing activities ~~was $29.8~~of $(36.7) million for the ~~nine~~six months ended ~~September~~June 30, ~~2019, compared~~2020 was primarily related to ~~$6.0~~$26.7 million ~~for the nine months ended September 30, 2018. The increase~~of share repurchases and quarterly dividends of $9.5 million.

Net cash used in financing activities of ~~$35.7~~$24.1 million for the six months ended June 30, 2019 was primarily related to ~~quarterly dividends of $14.3 million,~~ $13.0 million to repay borrowings under the 2019 Credit Agreement (as defined in “—Debt Agreements”), $1.4 million for payments under insurance premium financing, and $1.1 million of payments related to vesting of stock-based compensation.

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

~~Debt Agreements~~

~~Senior Secured Credit Facility~~

~~On April 26, 2019, Solaris LLC entered into an~~Company’s Amended and Restated Credit Agreement, ~~(the “2019 Credit Agreement”)~~dated as of January 19, 2018, by and among ~~Solaris LLC,~~the Company, as borrower, each of the ~~lenders party~~lender parties thereto and ~~Wells Fargo~~ Woodforest National

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Bank, ~~National Association,~~ as administrative ~~agent. The 2019 Credit Agreement~~agent, which such agreement was replaced, in its entirety, Solaris LLC’s 2018 Credit Agreement (as defined herein). The 2019 Credit Agreement consists of an initial $50.0 million revolving loan commitment (the “Loan”) with a $25.0 million uncommitted accordion option to increase the Loan availability to $75.0 million. The term ofby the 2019 Credit Agreement, ~~expires on April 26, 2022.~~

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

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

The 2019 Credit Agreement also requires that we prepay any outstanding borrowings under the Loan in the event our total leverage ratio is greater than 1.00 to 1.00 and our consolidated cash balance exceeds $20.0 million, taking into account certain adjustments. Capital expenditures are not restricted unless borrowings under the Loan exceed $5.0$9.5 million for ~~any 180 consecutive day period, in which case capital expenditures will be permitted up~~quarterly dividends.

Capital Sources

Senior Secured Credit Facility

See Note 8. “Debt– Senior Secured Credit Facility” to ~~$100.0 million plus any unused availability~~our condensed consolidated financial statements as of June 30, 2020, for ~~capital expenditures from the immediately preceding fiscal year.~~

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

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~~As of September 30, 2019, we were in compliance with all covenants in accordance with the 2019 Credit Agreement.~~senior secured credit facility.

Contractual Obligations

We had no material changes in our contractual commitments and obligations during the ~~nine~~three months ended ~~September~~June 30, ~~2019~~2020 from the amounts listed under Part II, Item 7.7, “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.~~10-K. See Note ~~7. “Senior Secured Credit Facility” to our condensed consolidated financial statements for additional information.~~

~~Income Taxes~~

~~Solaris Inc. is a corporation~~8, “Debt” and ~~as a result, is subject to United States federal, state~~Note 12, “Commitments and local income taxes. For the three months ended September 30, 2019 and 2018, we recognized a combined United States federal and state provision for income taxes of $3.7 million and $4.2 million, respectively. For the nine months ended September 30, 2019 and 2018, we recognized a combined United States federal and state provision for income taxes of $12.0 million and $9.5 million, respectively.

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

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

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

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

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

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

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

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

~~Payables Related to the Tax Receivable Agreement~~

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

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

Critical Accounting Policies and Estimates

~~The preparation~~See Part II, Item 7, “Management’s Discussion and Analysis of ~~financial statements requires the use~~Financial Condition and Results of ~~judgments~~Operations—Critical Accounting Policies 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 system rental consist primarily of fixed monthly fees charged to customers for the use of our patented mobile proppant management systems that unload, store and deliver proppant and chemicals at oil and natural gas well sites, which is considered to be our performance obligation. Contracts with customers are typically on thirty- to sixty-day payment terms. Revenues are recognized over time as the performance obligations are satisfied under the terms of the customer contract. We determined that the performance obligation is satisfied over time as the customer simultaneously receives and consumes the benefits provided by the entity’s performance of services, typically as our systems are used by the customer. We measure progress using an input method based on resources consumed or expended relative to the total resources expected to be consumed or expended. We typically charge our customers for the rental of our systems on a monthly basis under agreements requiring the rental of a minimum number of systems for a period of twelve months. The Company is typically entitled to short fall payments if such minimum contractual obligations are not maintained by our customers. Minimum contractual obligations have been maintained and thus the Company has not recognized revenues related to shortfalls on such take or pay contractual obligations to date.

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

~~Deferred Revenue~~

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

~~Property, Plant and Equipment~~

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

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

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

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

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

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

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

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

~~Impairment of Long-Lived and Other Intangible Assets~~

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

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

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

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~~Leases~~

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

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

~~ROU assets represent the Company’s right to use an underlying asset~~Annual Report on Form 10-K for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. As most of the Company’s leases do not provide an implicit rate, we use our incremental borrowing rate in determining the present value of lease payments based on the information available at the commencement date. Our incremental borrowing rate reflects the estimated rate of interest that we would pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. We use the implicit rate when readily determinable. The ROU asset also includes any lease payments made and excludes lease incentives received. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

~~Goodwill~~

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

~~Stock-Based Awards~~

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

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

~~Income Taxes~~

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

~~Payables Related to the Tax Receivable Agreement~~

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

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

Recent Accounting Pronouncements

See Note 2. “Summary of Significant Accounting Policies – Accounting Standards Recently Adopted” to our condensed consolidated financial statements as of June 30, ~~2019,~~2020, for a discussion of recent accounting pronouncements.

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

Off Balance Sheet Arrangements

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

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Item ~~3.Quantitative~~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 lived assets and 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. Please see Part II, Item 1A. “Risk Factors” for more information regarding market risks.

Commodity Price Risk

The market for our services is indirectly exposed to fluctuations in the supply, demand and 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. Please see Part II, Item 1A. “Risk Factors” for more information regarding commodity price risks.

~~Interest Rate Risk~~30

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

Credit Risk

The majority of our accounts receivable have payment terms of 60 days or less. As of ~~September~~June 30, ~~2019, four~~2020, two customers collectively accounted for ~~50%~~27% of our total accounts receivable. As of December 31, ~~2018, three~~2019, two customers collectively accounted for ~~40%~~24% of our total accounts receivable. We mitigate the associated credit risk by performing credit evaluations and monitoring the payment patterns of our customers. ~~The inability or failure~~Please see Part II, Item 1A. “Risk Factors” for more information regarding credit risk of our ~~significant customers to meet their obligations to us or their insolvency or liquidation may adversely affect our financial results.~~customers.

Item ~~4.Controls~~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, ~~2019.~~2020. Our disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed by us in reports that we file ~~or submit~~ under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure and is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. ~~As a result~~Based on the evaluation of ~~the determination~~our disclosure controls and procedures as of ~~a material weakness in the Company’s internal control over~~June 30, 2020, our principal executive officer and principal financial reporting as described more fully in the Company’s Form 10-K/A for the fiscal year ended December 31, 2018 filed with the SEC on July 26, 2019 and the Company’s Form 10-Q/A for the three months ended March 31, 2019, filed with the SEC on July 26, 2019, management hasofficer have concluded that, ~~the Company’s~~as of such date, our disclosure controls and procedures were ~~not~~ effective ~~as of September 30, 2019.~~

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

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~~Remediation~~

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

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

Changes in Internal Control over Financial Reporting

~~Subject to these remediation efforts, that we implemented after June 30, 2019, there have been~~There were no ~~significant~~ changes in ~~the Company’s~~our system of internal control over financial reporting (as defined in Rule 13a-15(f) and Rule 15d15(f) under the Exchange Act) during the ~~period covered by this Quarterly Report~~quarter ended June 30, 2020 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

The following are certain risk factors that affect our business, financial condition, results of operations and cash flows. Many of these risks are beyond our control. These risk factors should be considered in connection with evaluating the forward-looking statements contained in this Quarterly Report. The risks and uncertainties described below are not the only ones that we face. Factors that could materially adversely affect our business, financial condition, operating results or liquidity and the trading price of our Class A common stock are described under the caption “Risk Factors” in our Annual Report on Form ~~10-K/A~~10-K for the year ended December 31, ~~2018,~~2019, as filed with the SEC on July 26, 2019. There have been no material changes to the risk factors previously disclosed under the caption “Risk Factors” in our Annual Report on Form 10-K/A for the year ended December 31, 2018.February 29, 2020. This information should be considered carefully, together with other information in this report and other reports and materials we file with the SEC. If any of the events described below were to actually occur, our business, financial condition, results of operations and cash flows could be adversely affected and our results could differ materially from expected and historical results, any of which may also adversely affect the holders of our stock.

Risks Related to Our Business

Our business depends on domestic capital spending by the oil and natural gas industry, and reductions in capital spending could have a material adverse effect on our liquidity, results of operations and financial condition.

Our business is directly affected by capital spending to explore for, develop and produce oil and natural gas in the United States. The oil and natural gas industry is cyclical and historically has experienced periodic downturns in activity, and continues to be volatile. Beginning in February 2020, there has been a severe drop in the price of oil. As of March 31, 2020, the price of WTI oil was $20.48 per barrel and the Henry Hub price for natural gas was $1.64 per MMBtu. As of June 30, 2020, the price of WTI oil was $39.27 per barrel and the Henry Hub price for natural gas was $1.61 per MMBtu. The recent significant decline in crude oil prices has largely been attributable to the actions of global oil producers, which have resulted in a substantial decrease in oil and natural gas prices, and the global outbreak of COVID-19, which has reduced demand for oil and natural gas because of significantly reduced global and national economic activity. The prolonged volatility and low levels of oil and natural gas prices have depressed levels of exploration, development, and production activity, and if the drop in oil and natural gas prices we have experienced in 2020 continues or further declines, certain of our customers may be unable to pay their vendors and service providers, including us, as a result of the decline in commodity prices. Reduced activity in our areas of operation as a result of decreased capital spending could also have a negative long-term impact on our business, even in an environment of stronger oil and natural gas prices.

Factors affecting the prices of oil and natural gas include: the level of supply and demand for oil and natural gas, worldwide; governmental regulations, including the policies of governments regarding the exploration for and production and development of their oil and natural gas reserves; weather conditions, natural disasters, and health or similar issues, such as pandemics or epidemics; worldwide political, military, and economic conditions; the ability or willingness of the Organization of Petroleum Exporting Countries (“OPEC”) and non-OPEC countries, such as Russia, to set and maintain oil production levels; the levels of oil production in the U.S. and by other non-OPEC countries; oil refining capacity and shifts in end-customer preferences toward fuel efficiency and the use of natural gas; the cost of producing and delivering oil and natural gas; and acceleration of the development of, and demand for, alternative energy sources. Any announcement by an OPEC or non-OPEC country regarding a significant reduction in export prices or an unwillingness to extend or agree to production cuts could contribute to significant declines or continued depression in the price of oil.

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The COVID-19 pandemic that began in early 2020 provides an illustrative example of how a pandemic or epidemic can also impact our operations and business by reducing global and national economic activity resulting in a decline in the demand for oil and for our products and services, and affecting the health of our workforce and rendering employees unable to work or travel. The price of oil has fallen significantly since the beginning of 2020, due in part to the factors discussed above and to concerns about COVID-19 and its impact on the worldwide economy and demand for oil. In addition, if a pandemic or epidemic such as the COVID-19 pandemic were to impact a location where we have a high concentration of business and resources, our local workforce could be affected by such an occurrence or outbreak which could also significantly disrupt our operations and decrease our ability to provide services and products to our customers. The duration of the business disruption and related financial impact from COVID-19 cannot be reasonably estimated at this time. If the impact of COVID-19 continues for an extended period of time, it could materially adversely affect the demand for our products and services and our ability to operate our business in the manner and on the timelines previously planned. The extent to which COVID-19 or other health pandemics or epidemics may impact our results will depend on future developments, which are highly uncertain and cannot be predicted.

In addition, industry conditions are generally influenced by numerous factors over which we have no control, including:

●

expected economic returns to exploration and production (“E&P”) companies of new well completions;

●

domestic and foreign economic conditions and supply of and demand for oil and natural gas;

●

the level of prices, and expectations about future prices, of oil and natural gas;

●

the level of global oil and natural gas exploration and production;

●

the level of domestic and global oil and natural gas inventories;

●

the supply of and demand for hydraulic fracturing and equipment in the United States;

●

federal, state and local regulation of hydraulic fracturing activities, as well as exploration and production activities, including public pressure on governmental bodies and regulatory agencies to regulate our industry or prohibit exploration and production activities on federal lands or in federal waters;

●

United States federal, tribal, state and local and non-United States governmental laws, regulations and taxes, including the policies of governments regarding the exploration for and production and development of their oil and natural gas reserves;

●

technical difficulties or failures;

●

changes in the price and availability of transportation;

●

shortages or late deliveries of qualified personnel, equipment or supplies;

●

political and economic conditions in oil and natural gas producing countries;

●

actions by the members of OPEC with respect to oil production levels and announcements of potential changes in such levels, including the failure of such countries to comply with production cuts;

●

global weather conditions and natural disasters;

●

worldwide political, military and economic conditions;

●

the cost of producing and delivering oil and natural gas;

●

lead times associated with acquiring equipment and products and availability of qualified personnel;

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●

the discovery rates of new oil and natural gas reserves;

●

stockholder activism or activities by non-governmental organizations to limit certain sources of funding for the energy sector or restrict the exploration, development and production of oil and natural gas;

●

the availability of water resources, suitable proppant and chemical additives in sufficient quantities for use in hydraulic fracturing fluids;

●

advances in exploration, development and production technologies or in technologies affecting energy consumption;

●

the potential acceleration of development of alternative fuels;

●

significant changes in the rail industry or the rail lines that service our business, such as increased regulation, embargoes and disruption in service;

●

uncertainty in capital and commodities markets and the ability of oil and natural gas companies to raise equity capital and debt financing; and

●

global or national health concerns, including health epidemics such as the outbreak of COVID-19 at the beginning of 2020.

Reliance upon a few large customers may adversely affect our revenue and operating results.

During the years ended December 31, 2019 and 2018, our top three customers collectively represented approximately 39% and 35%, respectively, of our consolidated revenue. It is likely that we will continue to derive a significant portion of our revenue from a relatively small number of customers in the future. As a result of the recent COVID-19 outbreak or other adverse public health developments, including voluntary and mandatory quarantines, travel restrictions and other restrictions, as well as the precipitous decline in oil prices and resulting reduction of capital budgets, the operations of our customers have and may continue to experience delays or disruptions and temporary suspensions of operations. If a major customer fails to pay us or ceases operations, revenue would be impacted and our operating results and financial condition could be materially harmed. Additionally, prolonged volatility and low levels of oil and natural gas prices could result in certain potential customers in our addressable market filing for bankruptcy or ceasing operations, either of which could reduce our ability to replace a major customer’s level of activity with us. We typically do not enter into long-term contractual agreements with our customers and if we were to lose any material customer, we may not be able to redeploy our equipment at similar utilization or pricing levels or within a short period of time and such loss could have a material adverse effect on our business until the equipment is redeployed at similar utilization or pricing levels.

Events outside of our control, including a pandemic, epidemic or outbreak of an infectious disease, such as the recent global outbreak of COVID-19, have materially adversely affected, and may further materially adversely affect, our business.

We face risks related to pandemics, epidemics, outbreaks or other public health events that are outside of our control, and could significantly disrupt our operations and adversely affect our financial condition. For example, the recent global outbreak of COVID-19 has reduced demand for oil and natural gas because of significantly reduced global and national economic activity. In addition, the impact of COVID-19 or other public health events may adversely affect our operations or the health of our workforce and the workforces of our customers and service providers by rendering employees or contractors unable to work or unable to access our and their facilities for an indefinite period of time. On March 13, 2020, the United States declared the COVID-19 pandemic a national emergency, and several states, including Texas, and municipalities have declared public health emergencies. Along with these declarations, there have been extraordinary and wide-ranging actions taken by international, federal, state and local public health and governmental authorities to contain and combat the outbreak and spread of COVID-19 in regions across the United States and the world, including mandates for many individuals to substantially restrict daily activities and for many businesses to

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curtail or cease normal operations. To the extent COVID-19 continues or worsens, governments may impose additional similar restrictions.

The public health concerns posed by COVID-19 could also pose a risk to our employees and may render our employees unable to work or travel. The extent to which COVID-19 may impact our employees, and subsequently our business, cannot be predicted at this time.

In addition, the technology required for the corresponding transition to remote work increases our vulnerability to cybersecurity threats, including threats to gain unauthorized access to sensitive information or to render data or systems unusable, the impact of which may have material adverse effects on our business and operations. See “Item 1A. Risk Factors— Risks Related to Our Business— We are subject to cyber security risks. A cyber incident could occur and result in information theft, data corruption, operational disruption and/or financial loss” in our Annual Report on Form 10-K for the year ended December 31, 2019.

As the potential impact from COVID-19 is difficult to predict, the extent to which it may negatively affect our operating results or the duration of any potential business disruption is uncertain. Any potential impact will depend on future developments and new information that may emerge regarding the severity and duration of COVID-19 and the actions taken by authorities to contain it or treat its impact, all of which are beyond our control. These potential impacts, while uncertain, could adversely affect our operating results.

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

Unregistered Sales of Equity Securities

None.

Issuer Purchases of Equity Securities

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

Total Number of

Maximum Dollar

Shares Purchased as

Value of Shares

Total Number of

Average Price

Part of Publicly

that May Yet be

Shares

Paid Per

Announced

Purchased Under
Period

Purchased

Share

Plan

the Plan
July 1 - July 31

—

$
—

—

N/A
August 1 - August 31

27,641

13.69

—

N/A
September 1 - September 30

—

—

—

N/A
Total

27,641

$
13.69

—

N/A

~~(1)Represents~~ shares of Class A ~~common stock withheld for~~Common Stock as shown in the ~~payment of~~table below, to satisfy tax withholding ~~taxes~~obligations upon the vesting of restricted ~~stock.~~stock awarded to certain of our employees:




	Total Number of	Average Price
	Shares	Paid Per
Period	Purchased	Share
April 1 - April 30	1,944	$	5.27
May 1 - May 31	16,483		5.63
June 1 - June 30	782		8.39
Total	19,209	$	5.71

Item ~~3.Defaults~~3.Defaults upon Senior Securities

None.

Item ~~4.Mine~~4.Mine Safety Disclosures

None.

Item ~~5.Other~~5.Other Information

None.

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Item ~~6.Exhibits~~6.Exhibits

	Exhibit No.		Description
	~~Description~~

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

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

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

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

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

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

101.INS*		XBRL Instance Document.

101.SCH*		XBRL Taxonomy Extension Schema Document.

101.CAL*		XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF*		XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB*		XBRL Taxonomy Extension Labels Linkbase Document.

101.PRE*		XBRL Taxonomy Extension Presentation Linkbase Document.

104		Cover Page Interactive Data File – The cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document

* Filed herewith.

** Furnished herewith. Pursuant to SEC Release No. ~~33‑8212,~~33-8212, this certification will be treated as “accompanying” this Quarterly Report on Form ~~10‑Q~~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.

4836

Table of Contents

~~SIGNATURES~~

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~~July 30, ~~2019~~2020	By:	/s/ William A. Zartler
		William A. Zartler
		Chairman and Chief Executive Officer
		(Principal Executive Officer)




~~October~~July 30, ~~2019~~2020	By:	/s/ Kyle S. Ramachandran
		Kyle S. Ramachandran
		President and Chief Financial Officer
		(Principal Financial Officer)

4937


Delaware	81-5223109
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

9811 Katy Freeway, Suite 700 Houston, Texas	77024
(Address of principal executive offices)	(Zip code)


~~(281) 501-3070~~
~~(Registrant’s telephone number, including area code)~~

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


~~Securities registered pursuant to Section 12(b) of the Act:~~
Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Class A Common Stock, $0.01 par value	“SOI”	New York Stock Exchange


Large accelerated filer	☐	Accelerated filer	☒
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☒


	For the Nine Months Ended
	September 30,
	2019		2018
Cash flows from operating activities:
Net income	$	65,027	$	61,300
Adjustment to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		19,875		12,514
Loss on disposal of asset		181		222
Stock-based compensation		3,265		3,140
Amortization of debt issuance costs		709		218
Write-off of deposit		202		—
Deferred income tax expense		11,284		9,000
Other		(165)		651
Changes in operating assets and liabilities:
Accounts receivable		(4,369)		(21,599)
Prepaid expenses and other assets		2,088		(3,667)
Inventories		(2,555)		(8,575)
Accounts payable		(3,909)		441
Accrued liabilities		6,424		3,894
Deferred revenue		(9,508)		—
Net cash provided by operating activities		88,549		57,539
Cash flows from investing activities:
Investment in property, plant and equipment		(32,914)		(125,013)
Proceeds from disposal of assets		130		—
Investment in intangible assets		—		(6)
Cash received from insurance proceeds		618		160
Net cash used in investing activities		(32,166)		(124,859)
Cash flows from financing activities:
Payments under finance leases		(26)		(21)
Payments under insurance premium financing		(1,443)		(841)
Proceeds from stock option exercises		294		932
Payments related to purchase of treasury stock		(1,108)		(1,140)
Repayment of senior secured credit facility		(13,000)		8,000
Payments related to debt issuance costs		(197)		(1,014)
Distribution and dividend paid to Solaris LLC unitholders and Class A common shareholders		(14,274)		—
Other		—		60
Net cash provided by (used in) financing activities		(29,754)		5,976

Net increase (decrease) in cash		26,629		(61,344)
Cash at beginning of period		25,057		63,421
Cash at end of period	$	51,686	$	2,077

Non-cash activities
Investing:
Capitalized depreciation in property, plant and equipment	$	559	$	501
Property and equipment additions incurred but not paid at period-end		235		6,309
Property, plant and equipment additions transferred from inventory		5,355		7,532
Financing:
Insurance premium financing		1,869		1,552
Cash paid for:
Interest		200		118
Income Taxes		663		314


	For the Six Months Ended
	June 30,
	2020		2019
Cash flows from operating activities:
Net (loss) income	$	(42,649)	$	45,944
Adjustment to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization		13,785		12,967
Loss on disposal of asset		1,402		284
Allowance for credit losses		1,633		—
Stock-based compensation		2,656		2,040
Amortization of debt issuance costs		88		665
Deferred income tax expense		(7,369)		7,880
Impairment losses		47,828		—
Other		(145)		(169)
Changes in operating assets and liabilities:
Accounts receivable		25,760		(4,597)
Prepaid expenses and other assets		(217)		1,990
Inventories		(533)		(3,296)
Accounts payable		147		(4,661)
Accrued liabilities		(8,063)		4,696
Deferred revenue		—		(6,304)
Net cash provided by operating activities		34,323		57,439
Cash flows from investing activities:
Investment in property, plant and equipment		(1,558)		(28,717)
Cash received from insurance proceeds		713		38
Net cash used in investing activities		(845)		(28,679)
Cash flows from financing activities:
Share repurchases		(26,717)		—
Distribution and dividend paid to Solaris LLC unitholders (other than Solaris Inc.) and Class A common shareholders		(9,507)		(9,515)
Payments under finance leases		(18)		(18)
Payments under insurance premium financing		—		(932)
Proceeds from stock option exercises		64		294
Payments for shares withheld for taxes from RSU vesting and cancelled		(96)		—
Payments related to purchase of treasury stock		(454)		(730)
Payments related to debt issuance cost		—		(197)
Repayment of senior secured credit facility		—		(13,000)
Net cash used in financing activities		(36,728)		(24,098)

Net increase (decrease) in cash		(3,250)		4,662
Cash at beginning of period		66,882		25,057
Cash at end of period	$	63,632	$	29,719

Non-cash activities
Investing:
Capitalized depreciation in property, plant and equipment	$	316	$	372
Capitalized stock based compensation		135		96
Property and equipment additions incurred but not paid at period-end		6		829
Property, plant and equipment additions transferred from inventory		356		4,939
Financing:
Insurance premium financing		—		1,812
Cash paid for:
Interest		66		183
Income Taxes		813		663


		Page
Cautionary Statement Regarding Forward-Looking Statements		1
PART 1: FINANCIAL INFORMATION		3
Item 1.	Financial Statements	3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25 20
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	45 30
Item 4.	Controls and Procedures	45 31
PART II. OTHER INFORMATION		47 32
Item 1.	Legal Proceedings	47 32
Item 1A.	Risk Factors	47 32
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	47 35
Item 3.	Defaults upon Senior Securities	47 35
Item 4.	Mine Safety Disclosures	47 35
Item 5.	Other Information	47 35
Item 6.	Exhibits	48 36
SIGNATURES		49 37


	September 30,		December 31,
	2019		2018
Assets
Current assets:
Cash	$	51,686	$	25,057
Accounts receivable, net		44,115		39,746
Prepaid expenses and other current assets		5,246		5,492
Inventories		7,481		10,470
Total current assets		108,528		80,765
Property, plant and equipment, net		311,253		296,538
Operating lease right-of-use assets		8,032		—
Goodwill		17,236		17,236
Intangible assets, net		3,956		4,540
Deferred tax assets		56,475		58,074
Other assets		660		1,454
Total assets	$	506,140	$	458,607
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	3,502	$	9,127
Accrued liabilities		16,834		12,658
Current portion of deferred revenue		12,990		12,990
Current portion of operating lease liabilities		598		—
Current portion of finance lease liabilities		30		35
Other current liabilities		1,115		515
Total current liabilities		35,069		35,325
Senior secured credit facility		—		13,000
Deferred revenue, net of current		2,960		12,468
Operating lease liabilities, net of current		7,961		—
Finance lease liabilities, net of current		137		154
Payables related to Tax Receivable Agreement		67,987		56,149
Other long-term liabilities		494		633
Total liabilities		114,608		117,729
Commitments and contingencies (Note 11)
Stockholders' equity:
Preferred stock, $0.01 par value, 50,000 shares authorized, none issued and outstanding		—		—
Class A common stock, $0.01 par value, 600,000 shares authorized, 31,179 issued and 31,016 outstanding as of September 30, 2019 and 27,182 issued and 27,091 outstanding as of December 31, 2018		310		271
Class B common stock, $0.00 par value, 180,000 shares authorized, 15,940 shares issued and outstanding as of September 30, 2019 and 19,627 issued and outstanding as of December 31, 2018		—		—
Additional paid-in capital		194,153		164,086
Retained earnings		62,517		35,507
Treasury stock (at cost), 163 shares and 91 shares as of September 30, 2019 and December 31, 2018, respectively		(2,522)		(1,414)
Total stockholders' equity attributable to Solaris		254,458		198,450
Non-controlling interest		137,074		142,428
Total stockholders' equity		391,532		340,878
Total liabilities and stockholders' equity	$	506,140	$	458,607


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2019		2018		2019		2018
Revenue:
System rental	$	36,638	$	42,031	$	113,726	$	104,563
System services		18,153		12,053		48,621		29,499
Transloading services		4,417		2,000		15,131		3,847
Inventory software services		396		602		1,351		1,950
Total revenue		59,604		56,686		178,829		139,859

Operating costs and expenses:							��
Cost of system rental (excluding $5,773 and $4,133 and $16,481 and $10,128 of depreciation and amortization for the three and nine months ended September 30, 2019 and 2018, respectively, shown separately) (1)		2,838		1,949		7,737		5,050
Cost of system services (excluding $384 and $347 and $1,173 and $889 of depreciation and amortization for the three and nine months ended September 30, 2019 and 2018, respectively, shown separately) (1)		21,072		13,906		56,366		34,691
Cost of transloading services (excluding $411 and $529 and $1,231 and $544 of depreciation and amortization for the three and nine months ended September 30, 2019 and 2018, respectively, shown separately) (1)		652		597		2,051		1,464
Cost of inventory software services (excluding $193 and $193 and $579 and $598 of depreciation and amortization for the three and nine months ended September 30, 2019 and 2018, respectively, shown separately)		160		191		460		614
Depreciation and amortization		6,908		5,328		19,875		12,514
Selling, general and administrative (excluding $147 and $126 and $411 and $355 of depreciation and amortization for the three and nine months ended September 30, 2019 and 2018, respectively, shown separately) (1)		4,933		3,869		13,967		12,662
Other operating expenses		248		56		529		1,752
Total operating costs and expenses		36,811		25,896		100,985		68,747
Operating income		22,793		30,790		77,844		71,112
Interest expense, net (2)		(8)		(116)		(775)		(271)
Total other expense		(8)		(116)		(775)		(271)
Income before income tax expense		22,785		30,674		77,069		70,841
Provision for income taxes		(3,703)		(4,237)		(12,042)		(9,541)
Net income		19,082		26,437		65,027		61,300
Less: net income related to non-controlling interests		(7,684)		(13,418)		(28,036)		(31,754)
Net income attributable to Solaris	$	11,398	$	13,019	$	36,991	$	29,546

Earnings per share of Class A common stock – basic	$	0.36	$	0.49	$	1.33	$	1.13
Earnings per share of Class A common stock – diluted	$	0.36	$	0.49	$	1.33	$	1.12

Basic weighted-average shares of Class A common stock outstanding		30,951		26,197		27,270		25,216
Diluted weighted-average shares of Class A common stock outstanding		30,980		26,329		27,317		25,380


	Nine Months Ended September 30, 2019
	Class A			Class B			Additional							Non-		Total
	Common Stock			Common Stock			Paid-in		Retained		Treasury Stock			controlling		Stockholders'
	Shares	Amount		Shares	Amount		Capital		Earnings		Shares	Amount		Interest		Equity
Balance at January 1, 2019	27,091	$	271	19,627	$	—	$	164,086	$	35,507	91	$	(1,414)	$	142,428	$	340,878
Effect of ASU No. 2016-02 implementation (Refer to Note 2)	—		—	—		—		186		(532)	—		—		(186)		(532)
Exchange of Solaris LLC Units and shares of Class B common stock for shares of Class A common stock	3,245		32	(3,245)		—		24,925		—	—		—		(24,957)		—
Net effect of deferred tax asset and payables related to Tax Receivable Agreement from the exchange of Solaris LLC Units and shares of Class B common stock for shares of Class A common stock	—		—	—		—		(1,895)		—	—		—		—		(1,895)
Stock option exercises	65		1	—		—		601		—	28		(427)		(336)		(161)
Stock-based compensation	—		—	—		—		553		—	—		—		346		899
Vesting of restricted stock	—		—	—		—		2		��	—		(4)		(2)		(4)
Solaris LLC distribution paid to Solaris LLC unitholders at $0.10 per Solaris LLC Unit	—		—	—		—		—		—	—		—		(1,638)		(1,638)
Dividends paid ($0.10 per share of Class A common stock)	—		—	—		—		—		(3,119)	—		—		—		(3,119)
Net income	—		—	—		—		—		12,317	—		—		11,118		23,435
Balance at March 31, 2019	30,401		304	16,382		—		188,458		44,173	119		(1,845)		126,773		357,863
Exchange of Solaris LLC Units and shares of Class B common stock for shares of Class A common stock	442		4	(442)		—		3,571		—	—		—		(3,575)		—
Net effect of deferred tax asset and payables related to Tax Receivable Agreement from the exchange of Solaris LLC Units and shares of Class B common stock for shares of Class A common stock	—		—	—		—		(397)		—	—		—		—		(397)
Stock option exercises	11		—	—		—		48		—	—		—		(20)		28
Stock-based compensation	—		—	—		—		809		—	—		—		428		1,237
Vesting of restricted stock	51		1	—		—		245		—	16		(299)		(246)		(299)
Solaris LLC distribution paid to Solaris LLC unitholders at $0.10 per Solaris LLC Unit	—		—	—		—		—		—	—		—		(1,594)		(1,594)
Dividends paid ($0.10 per share of Class A common stock)	—		—	—		—		—		(3,164)	—		—		—		(3,164)
Net income	—		—	—		—		—		13,275	—		—		9,234		22,509
Balance at June 30, 2019	30,905	$	309	15,940	$	—	$	192,734	$	54,284	135	$	(2,144)	$	131,000	$	376,183
Net effect of deferred tax asset and payables related to Tax Receivable Agreement from the exchange of Solaris LLC Units and shares of Class B common stock for shares of Class A common stock	—		—	—		—		143		—	—		—		—		143
Stock-based compensation	—		—	—		—		833		—	—		—		429		1,262
Vesting of restricted stock	111		1	—		—		443		—	28		(378)		(445)		(379)
Solaris LLC distribution paid to Solaris LLC unitholders at $0.10 per Solaris LLC Unit	—		—	—		—		—		—	—		—		(1,594)		(1,594)
Dividends paid ($0.10 per share of Class A common stock)	—		—	—		—		—		(3,165)	—		—		—		(3,165)
Net income	—		—	—		—		—		11,398	—		—		7,684		19,082
Balance at September 30, 2019	31,016	$	310	15,940	$	—	$	194,153	$	62,517	163	$	(2,522)	$	137,074	$	391,532


	Six Months Ended June 30, 2020
	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, 2020	30,765	$	308	15,940	$	—	$	191,843	$	74,222	163	$	(2,526)	$	145,811	$	409,658
Exchange of Solaris LLC Units and shares of Class B common stock for shares of Class A common stock	50		1	(50)		—		460		—	—		—		(461)		—
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	—		—	—		—		(303)		—	—		—		—		(303)
Stock option exercises	9		—	—		—		66		—	7		(80)		(11)		(25)
Share and unit repurchases and retirements	(2,374)		(24)	—		—		(14,804)		(10,177)	—		—		(1,711)		(26,716)
Stock-based compensation	—		—	—		—		907		—	—		—		492		1,399
Vesting of restricted stock	105		1	—		—		471		—	37		(373)		(473)		(374)
Solaris LLC distribution paid to Solaris LLC unitholders (other than Solaris Inc.) at $0.105 per Solaris LLC Unit	—		—	—		—		—		—	—		—		(1,668)		(1,668)
Dividends paid ($0.105 per share of Class A common stock)	—		—	—		—		—		(3,087)	—		—		—		(3,087)
Treasury stock retirements	—		—	—		—		(1,247)		(1,732)	(207)		2,979		—		—
Net income	—		—	—		—		—		(19,081)	—		—		(14,071)		(33,152)
Balance at March 31, 2020	28,555		286	15,890		—		177,393		40,145	—		—		127,908		345,732
Exchange of Solaris LLC Units and shares of Class B common stock for shares of Class A common stock	50		1	(50)		—		395		—	—		—		(395)		1
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	—		—	—		—		(310)		—	—		—		—		(310)
Stock option exercises	7		—	—		—		36		—	—		—		(16)		20
Stock-based compensation	—		—	—		—		895		—	—		—		497		1,392
Vesting of restricted stock	80		—	—		—		171		—	—		—		(171)		—
Cancelled shares withheld for taxes from RSU vesting	(19)		—	—		—		(69)		—	—		—		(38)		(107)
Solaris LLC distribution paid to Solaris LLC unitholders (other than Solaris Inc.) at $0.105 per Solaris LLC Unit	—		—	—		—		—		—	—		—		(1,663)		(1,663)
Dividends paid ($0.105 per share of Class A common stock)	—		—	—		—		—		(3,089)	—		—		—		(3,089)
Net income	—		—	—		—		—		(5,540)	—		—		(3,956)		(9,496)
Balance at June 30, 2020	28,673	$	287	15,840	$	—	$	178,511	$	31,516	—	$	—	$	122,166	$	332,480


	Nine Months Ended September 30, 2018
	Class A			Class B			Additional							Non-		Total
	Common Stock			Common Stock			Paid-in		Retained		Treasury Stock			controlling		Stockholders'
	Shares	Amount		Shares	Amount		Capital		Earnings		Shares	Amount		Interest		Equity
Balance at January 1, 2018	19,010	$	190	26,811	$	—	$	117,638	$	(4,174)	16	$	(261)	$	140,850	$	254,243
Exchange of Solaris LLC Units and shares of Class B common stock for shares of Class A common stock	5,904		59	(5,904)		—		31,317		—	—		—		(31,376)		—
Net effect of deferred tax asset and payables related to Tax Receivable Agreement from the exchange of Solaris LLC Units and shares of Class B common stock for shares of Class A common stock	—		—	—		—		(171)		—	—		—		—		(171)
Stock option exercises	235		3	—		—		1,047		—	—		—		(374)		676
Stock-based compensation	—		—	—		—		989		—	—		—		885		1,874
Net income	—		—	—		—		—		5,930	—		—		7,485		13,415
Balance at March 31, 2018	25,149		252	20,907		—		150,820		1,756	16		(261)		117,470		270,037
Exchange of Solaris LLC Units and shares of Class B common stock for shares of Class A common stock	269		3	(269)		—		1,549		—	—		—		(1,552)		—
Net effect of deferred tax asset and payables related to Tax Receivable Agreement from the exchange of Solaris LLC Units and shares of Class B common stock for shares of Class A common stock	—		—	—		—		753		—	—		—		—		753
Stock option exercises	56		—	—		—		171		—	—		—		(11)		160
Stock-based compensation	—		—	—		—		964		—	—		—		781		1,745
Vesting of restricted stock	346		3	—		—		895		—	—		—		(898)		—
Other	—		—	—		—		60		—	—		—		—		60
Net income	—		—	—		—		—		10,597	—		—		10,851		21,448
Balance at June 30, 2018	25,820	$	258	20,638	$	—	$	155,212	$	12,353	16	$	(261)	$	126,641	$	294,203
Exchange of Solaris LLC Units and shares of Class B common stock for shares of Class A common stock	528		5	(528)		—		3,417		—	—		—		(3,422)		—
Net effect of deferred tax asset and payables related to Tax Receivable Agreement from the exchange of Solaris LLC Units and shares of Class B common stock for shares of Class A common stock	—		—	—		—		842		—	—		—		—		842
Stock option exercises	36		—	—		—		312		—	1		(9)		(207)		96
Stock-based compensation	—		—	—		—		222		—	—		—		310		532
Vesting of restricted stock	223		3	—		—		1,111		—	74		(1,140)		(1,114)		(1,140)
Net income	—		—	—		—		—		13,019	—		—		13,418		26,437
Balance at September 30, 2018	26,607	$	266	20,110	$	—	$	161,116	$	25,372	91	$	(1,410)	$	135,626	$	320,970


	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		(1,845.0)		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


		~~Useful Life~~
~~Systems and related equipment~~		~~Up to 15 years~~
~~Machinery and equipment~~		~~3-10 years~~
~~Furniture and fixtures~~		~~5 years~~
~~Computer hardware and software~~		~~3-10 years~~
~~Vehicles~~		~~5 years~~
~~Transloading facility and equipment~~		~~15-30 years~~
~~Buildings and leasehold improvements~~		~~15 years~~


	(in thousands)
Balance, December 31, 2019	$	339
Credit losses		1,633
Less writeoffs		(896)
Balance, June 30, 2020	$	1,076


			Accumulated		Net Book
	Gross		Amortization		Value
As of September 30, 2019:
Customer relationships	$	4,703	$	(1,232)	$	3,471
Software acquired in the acquisition of Railtronix		346		(91)		255
Non-competition agreement		225		(82)		143
Patents and other		114		(27)		87
Total identifiable intangibles	$	5,388	$	(1,432)	$	3,956

As of December 31, 2018:
Customer relationships	$	4,703	$	(727)	$	3,976
Software acquired in the acquisition of Railtronix		346		(54)		292
Non-competition agreement		225		(49)		176
Patents and other		114		(18)		96
Total identifiable intangibles	$	5,388	$	(848)	$	4,540


	Three Months Ended		Nine Months Ended
	September 30, 2019		September 30, 2019
Operating lease cost (1) (2)	$	297	$	890

Finance lease cost
Amortization of ROU assets		8		25
Interest on lease liabilities		1		1
Total finance lease cost	$	9	$	26


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


	Three Months Ended September 30,				Nine Months Ended September 30,
Basic net income per share:	2019		2018		2019		2018
Numerator
Net income attributable to Solaris	$	11,398	$	13,019	$	36,991	$	29,546
Less income attributable to participating securities (1)		(245)		(251)		(817)		(1,042)
Net income attributable to common stockholders	$	11,153	$	12,768	$	36,174	$	28,504

Denominator
Weighted average number of unrestricted outstanding common shares used to calculate basic net income per share		30,951		26,197		27,270		25,216
Effect of dilutive securities:
Stock options		29		132		47		164
Diluted weighted-average shares of Class A common stock outstanding used to calculate diluted net income per share		30,980		26,329		27,317		25,380

Earnings per share of Class A common stock - basic	$	0.36		0.49		1.33		1.13
Earnings per share of Class A common stock - diluted	$	0.36		0.49		1.33		1.12


	For the Year Ending December 31,
	2019		2020		2021		2022		2023		Thereafter		Total
	(in thousands)
Operating lease obligations (1)	$	243	$	1,116	$	1,060	$	1,091	$	1,100	$	9,463	$	14,073
Finance lease obligations (2)		14		35		33		33		33		36		184
Commitment fees on Revolving Loan (3)		32		125		125		40		—		—		322
Purchase commitments (4)		—		2,588		2,217		—		—		—		4,805
Other commitments		32		274		255		37		2		—		600
Total	$	321	$	4,138	$	3,690	$	1,201	$	1,135	$	9,499		19,984


				Total Number of	Maximum Dollar
				Shares Purchased as	Value of Shares
	Total Number of	Average Price		Part of Publicly	that May Yet be
	Shares	Paid Per		Announced	Purchased Under
Period	Purchased	Share		Plan	the Plan
July 1 - July 31	—	$	—	—		N/A
August 1 - August 31	27,641		13.69	—		N/A
September 1 - September 30	—		—	—		N/A
Total	27,641	$	13.69	—		N/A