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SOI Solaris Oilfield Infrastructure

Filed: 4 Aug 21, 8:00pm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2021

or

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

For the transition period from           to

Commission File Number: 001-38090

SOLARIS OILFIELD INFRASTRUCTURE, INC.

(Exact name of registrant as specified in its charter)

Delaware

81-5223109

(State or other jurisdiction
of incorporation or organization)

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

9811 Katy Freeway, Suite 700

Houston, Texas

77024

(Address of principal executive offices)

(Zip code)

(281) 501-3070

(Registrant’s telephone number, including area code)

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

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Class A Common Stock, $0.01 par value

“SOI”

New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

 

Non-accelerated filer

Smaller reporting company

 

Emerging growth company

 

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

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

As of August 3, 2021, the registrant had 31,862,999 shares of Class A common stock, $0.01 par value per share, and 13,818,517 shares of Class B common stock, $0.00 par value per share, outstanding.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (the “Quarterly Report”) includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Statements that are predictive in nature, that depend upon or refer to future events or conditions or that include the words “believe,” “expect,” “anticipate,” “intend,” “estimate” and other expressions that are predictions of or indicate future events and trends and that do not relate to historical matters identify forward-looking statements. Our forward-looking statements include statements about our business strategy, our industry, our future profitability, expected capital expenditures and the impact of such expenditures on our performance, management changes, current and potential future long-term contracts and our future business and financial performance. In addition, our forward-looking statements address the various risks and uncertainties associated with the extraordinary market environment and impacts resulting from both the coronavirus 2019 (“COVID-19”) pandemic and the continued volatility in global oil markets, and the expected impact of these events on our businesses, operations, earnings and results.

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

the level of domestic capital spending by the oil and natural gas industry and uncertainty regarding the future actions of oil producers and the risk that they take actions that will prolong or exacerbate the current over-supply of crude oil;
developments in the global economy, as well as the public health crisis related to the COVID-19 pandemic, and the resulting impacts to the demand and supply for oil and natural gas or volatility of oil and natural gas prices;
operational challenges relating to the COVID-19 pandemic, distribution and administration of the COVID-19 vaccines and efforts to mitigate the impact and spread of the virus;
uncertainty regarding the timing, pace and extent of an economic recovery in the United States and elsewhere, which in turn will likely affect demand for crude oil and therefore the demand for the services we provide and the commercial opportunities available to us;
consolidation amongst current or potential customers that could affect demand for our products and services;
large or multiple customer defaults, including defaults resulting from actual or potential insolvencies;
technological advancements in well completion technologies and our ability to expand our product and service offerings;
competitive conditions in our industry;
inability to fully protect our intellectual property rights;
actions taken by our customers, competitors and third-party operators;
significant changes in the transportation industries or fluctuations in transportation costs or the availability or reliability of transportation that service our business;
changes in the availability and cost of capital;
our ability to successfully implement our business strategy;

1

changes in our tax status;
changes in market price and availability of materials;
the effects of existing and future laws and governmental regulations (or the interpretation thereof) on us and our customers;
cyber-attacks targeting systems and infrastructure used by the oil and natural gas industry;
the effects of future litigation;
credit markets;
business acquisitions;
natural or man-made disasters and other external events that may disrupt our manufacturing operations;
uncertainty regarding our future operating results;
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 for the year ended December 31, 2020, 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.

2

PART 1: FINANCIAL INFORMATION

Item 1:     Financial Statements

SOLARIS OILFIELD INFRASTRUCTURE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

(Unaudited)

    

June 30, 

December 31, 

2021

2020

Assets

 

  

 

  

Current assets:

 

  

 

  

Cash and cash equivalents

$

46,276

$

60,366

Accounts receivable, net of allowances for credit losses of $920 and $1,099, respectively

 

31,341

 

18,243

Prepaid expenses and other current assets

 

3,813

 

2,169

Inventories

 

1,939

 

954

Total current assets

 

83,369

 

81,732

Property, plant and equipment, net

 

241,048

 

245,884

Non-current inventories

2,882

3,318

Operating lease right-of-use assets

4,449

4,708

Goodwill

 

13,004

 

13,004

Intangible assets, net

 

2,593

 

2,982

Deferred tax assets

63,842

59,805

Other assets

 

381

 

463

Total assets

$

411,568

$

411,896

Liabilities and Stockholders' Equity

 

  

 

  

Current liabilities:

 

  

 

  

Accounts payable

$

14,145

$

6,863

Accrued liabilities

 

12,006

 

11,986

Current portion of payables related to Tax Receivable Agreement

606

606

Current portion of operating lease liabilities

693

647

Current portion of finance lease liabilities

 

30

 

30

Other current liabilities

813

75

Total current liabilities

 

28,293

 

20,207

Operating lease liabilities, net of current

6,981

7,419

Finance lease liabilities, net of current

 

85

 

100

Payables related to Tax Receivable Agreement

72,908

68,097

Other long-term liabilities

587

594

Total liabilities

 

108,854

 

96,417

Commitments and contingencies (Note 8)

 

  

 

  

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, 30,984 shares issued and outstanding as of June 30, 2021 and 28,943 shares issued and outstanding as of December 31, 2020

310

290

Class B common stock, $0.00 par value, 180,000 shares authorized, 13,820 shares issued and outstanding as of June 30, 2021 and 15,685 issued and outstanding as of December 31, 2020

Additional paid-in capital

194,690

180,415

Retained earnings

 

11,137

 

20,549

Total stockholders' equity attributable to Solaris

 

206,137

 

201,254

Non-controlling interest

96,577

114,225

Total stockholders' equity

302,714

315,479

Total liabilities and stockholders' equity

$

411,568

$

411,896

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

3

SOLARIS OILFIELD INFRASTRUCTURE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except share and per share amounts)

(Unaudited)

Three Months Ended

Six Months Ended

June 30, 

June 30, 

    

2021

    

2020

    

2021

    

2020

Revenue:

 

  

 

  

 

  

 

  

System rental

$

14,323

$

5,463

$

27,971

$

31,522

System services

20,616

3,419

35,326

24,376

Transloading services

38

264

152

729

Inventory software services

202

192

399

542

Total revenue

 

35,179

 

9,339

 

63,848

 

57,169

Operating costs and expenses:

 

  

 

  

 

  

 

  

Cost of system rental (excluding $6,187 and $6,034 and $12,328 and $12,035 of depreciation and amortization for the three and six months ended June 30, 2021 and 2020, respectively, shown separately) (1)

 

1,556

 

823

 

3,164

 

2,836

Cost of system services (excluding $188 and $274 and $362 and $631 of depreciation and amortization for the three and six months ended June 30, 2021 and 2020, respectively, shown separately) (1)

 

23,282

 

6,013

 

40,534

 

30,143

Cost of transloading services (excluding $0 and $0 and $0 and $411 of depreciation and amortization for the three and six months ended June 30, 2021 and 2020, respectively, shown separately) (1)

197

202

441

540

Cost of inventory software services (excluding $195 and $191 and $390 and $384 of depreciation and amortization for the three and six months ended June 30, 2021 and 2020, respectively, shown separately) (1)

100

122

202

267

Depreciation and amortization

 

6,752

 

6,671

 

13,445

 

13,785

Selling, general and administrative (excluding $182 and $172 and $365 and $324 of depreciation and amortization for the three and six months ended June 30, 2021 and 2020, respectively, shown separately) (1)

 

4,964

 

3,967

 

9,570

 

8,373

Impairment losses

47,828

Other operating expenses

360

2,274

613

3,472

Total operating costs and expenses

 

37,211

 

20,072

 

67,969

 

107,244

Operating loss

 

(2,032)

 

(10,733)

 

(4,121)

 

(50,075)

Interest income (expense), net

 

(55)

 

(35)

 

(104)

 

76

Total other expense (income)

 

(55)

 

(35)

 

(104)

 

76

Loss before income tax expense

 

(2,087)

 

(10,768)

 

(4,225)

 

(49,999)

Benefit for income taxes

 

217

 

1,272

 

430

 

7,350

Net loss

(1,870)

(9,496)

(3,795)

(42,649)

Less: net loss related to non-controlling interests

659

3,956

1,415

18,026

Net loss attributable to Solaris

$

(1,211)

$

(5,540)

$

(2,380)

$

(24,623)

Loss per share of Class A common stock – basic

$

(0.04)

$

(0.20)

$

(0.08)

$

(0.85)

Loss per share of Class A common stock – diluted

$

(0.04)

$

(0.20)

$

(0.08)

$

(0.85)

Basic weighted-average shares of Class A common stock outstanding

30,984

28,638

30,473

28,975

Diluted weighted-average shares of Class A common stock outstanding

30,984

28,638

30,473

28,975

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

Cost of system rental

$

7

$

18

$

12

$

31

Cost of system services

88

73

260

273

Cost of transloading services

4

4

13

7

Selling, general and administrative

1,254

1,231

2,267

2,345

Stock-based compensation expense

$

1,353

$

1,326

$

2,552

$

2,656

]

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

4

SOLARIS OILFIELD INFRASTRUCTURE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(In thousands)

(Unaudited)

Six Months Ended June 30, 2021

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, 2021

28,943

$

290

15,685

$

$

180,415

$

20,549

$

$

114,225

$

315,479

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

1,865

19

(1,865)

13,526

(13,545)

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

(1,184)

(1,184)

Stock option exercises

4

18

(6)

12

Stock-based compensation

854

418

1,272

Vesting of restricted stock

223

2

407

(409)

Cancelled shares withheld for taxes from RSU vesting

(57)

(1)

(146)

(319)

(207)

(673)

Solaris LLC distribution paid to Solaris LLC unitholders (other than Solaris Inc.) at $0.105 per Solaris LLC Unit

(1,451)

(1,451)

Dividends paid ($0.105 per share of Class A common stock)

(3,346)

(3,346)

Net loss

(1,169)

(756)

(1,925)

Balance at March 31, 2021

30,978

310

13,820

193,890

15,715

98,269

308,184

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

(198)

(198)

Stock-based compensation

989

442

1,431

Vesting of restricted stock

8

15

(15)

Cancelled shares withheld for taxes from RSU vesting

(2)

(6)

(21)

(9)

(36)

Solaris LLC distribution paid to Solaris LLC unitholders (other than Solaris Inc.) at $0.105 per Solaris LLC Unit

(1,451)

(1,451)

Dividends paid ($0.105 per share of Class A common stock)

(3,346)

(3,346)

Net loss

(1,211)

(659)

(1,870)

Balance at June 30, 2021

30,984

$

310

13,820

$

$

194,690

$

11,137

$

$

96,577

$

302,714

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 loss

(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 loss

(5,540)

(3,956)

(9,496)

Balance at June 30, 2020

28,673

$

287

15,840

$

$

178,511

$

31,516

$

$

122,166

$

332,480

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

5

SOLARIS OILFIELD INFRASTRUCTURE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

For the Six Months Ended

June 30, 

    

2021

    

2020

Cash flows from operating activities:

 

  

 

  

Net loss

 

$

(3,795)

 

$

(42,649)

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

 

 

 

 

  

Depreciation and amortization

 

 

13,445

 

 

13,785

Loss on disposal of assets

 

 

117

 

 

1,402

Allowance for credit losses

599

1,633

Stock-based compensation

 

 

2,552

 

 

2,656

Amortization of debt issuance costs

 

 

88

 

 

88

Deferred income tax benefit

(607)

(7,369)

Impairment losses

47,828

Other

(146)

(145)

Changes in operating assets and liabilities:

 

 

 

 

Accounts receivable

 

 

(13,697)

 

 

25,760

Prepaid expenses and other assets

 

 

(742)

 

 

(217)

Inventories

 

 

(1,085)

 

 

(533)

Accounts payable

 

 

7,239

 

 

147

Accrued liabilities

 

 

72

 

 

(8,063)

Net cash provided by operating activities

 

 

4,040

 

 

34,323

Cash flows from investing activities:

 

 

 

 

Investment in property, plant and equipment

 

 

(7,716)

 

 

(1,558)

Cash received from insurance proceeds

6

Proceeds from disposal of assets

40

713

Net cash used in investing activities

 

 

(7,670)

 

 

(845)

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

(9,594)

(9,507)

Payments under finance leases

 

(12)

 

(18)

Payments under insurance premium financing

 

(164)

 

Proceeds from stock option exercises

12

64

Payments for shares withheld for taxes from RSU vesting and cancelled

(702)

(96)

Payments related to purchase of treasury stock

(454)

Net cash used in financing activities

 

 

(10,460)

 

 

(36,728)

Net decrease in cash

 

 

(14,090)

 

 

(3,250)

Cash at beginning of period

 

60,366

 

66,882

Cash at end of period

 

$

46,276

 

$

63,632

Non-cash activities

 

  

 

  

Investing:

 

  

 

  

Capitalized depreciation in property, plant and equipment

 

$

289

 

$

316

Capitalized stock based compensation

151

135

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

612

6

Property, plant and equipment additions transferred from inventory

536

356

Financing:

Insurance premium financing

738

Cash paid for:

 

 

Interest

 

66

 

66

Income Taxes

325

813

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

6

SOLARIS OILFIELD INFRASTRUCTURE, INC.

Notes to the Condensed Consolidated Financial Statements

(Dollars in millions, except share data)

1.    Organization and Background of Business

Description of Business

We design and manufacture 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. Our equipment and services are deployed in most of the active oil and natural gas basins in the United States.

2.    Summary of Significant Accounting Policies

Basis of Presentation and Consolidation

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

The accompanying interim unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”). These financial statements reflect all normal recurring adjustments that are necessary for fair presentation. Operating results for the three and six months ended June 30, 2021 and 2020 are not necessarily indicative of the results that may be expected for the full year or for any interim period.

The unaudited interim condensed consolidated financial statements do not include all information or notes required by GAAP for annual financial statements and should be read together with Solaris Inc.’s Annual Report on Form 10-K for the year ended December 31, 2020 and notes thereto.

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

COVID-19 and Global Economic and Market Conditions

The novel strain of coronavirus ("COVID-19") has caused, and continues to cause, severe disruptions to the U.S. and global economies, including the oil and gas industry and the demand for our products and services.

The degree to which COVID-19 and related events outside of our control adversely impacts our results will depend on future developments, which are highly uncertain and cannot be predicted, including the timing, extent, trajectory and duration of the COVID-19 pandemic, the development, availability and administration of effective treatments and vaccines and the impact of the COVID-19 pandemic on the global economy and any subsequent recovery of normal economic and operating conditions.

While we expect these matters discussed above will continue to disrupt our operations in some way, the degree of the adverse financial impact cannot be reasonably estimated at this time.

Use of Estimates

The preparation of consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities

7

at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

The most significant estimates relate to stock-based compensation, useful lives and salvage values of long-lived assets, future cash flows associated with goodwill and long-lived asset impairment, net realizable value of inventory, collectability of accounts receivable and estimates of allowance for credit losses and determination of the present value of lease payments and right-of-use assets.

Recently Issued Accounting Standards

In March 2020, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) No. 2020-04, Reference Rate Reform, which provides temporary optional guidance to companies impacted by the transition away from the London Interbank Offered Rate (“LIBOR”). The guidance provides certain expedients and exceptions to applying GAAP in order to lessen the potential accounting burden when contracts, hedging relationships, and other transactions that reference LIBOR as a benchmark rate are modified. This guidance is effective upon issuance and expires on December 31, 2022. The Company is currently assessing the impact of the LIBOR transition and this ASU on the Company’s financial statements.

3.    Property, Plant and Equipment

Property, plant and equipment are stated at cost. We manufacture or construct most of our systems. During the manufacture of these assets, they are reflected as systems in process until complete. Modifications to existing systems, including the expenditures for upgrades and enhancements that result in additional functionality, increased efficiency, or the extension of the estimated useful life, are capitalized. Property, plant and equipment consists of the following:

    

June 30, 

    

December 31, 

    

2021

    

2020

Systems and related equipment

$

302.9

$

299.4

Systems in process

14.8

 

12.6

Computer hardware and software

 

1.1

 

1.0

Machinery and equipment

 

5.3

 

5.3

Vehicles

 

4.3

 

3.6

Buildings

 

4.4

 

4.3

Land

 

0.6

 

0.6

Furniture and fixtures

0.4

 

0.4

Property, plant and equipment, gross

$

333.8

$

327.2

Less: accumulated depreciation

 

(92.8)

 

(81.3)

Property, plant and equipment, net

$

241.0

$

245.9

4.    Debt

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 $50.0 revolving loan commitment (the “Loan”) with a $25.0 uncommitted accordion option to increase the Loan availability to $75.0.

The term of the 2019 Credit Agreement expires on April 26, 2022. The 2019 Credit Agreement 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, taking into account certain adjustments. At June 30, 2021, we had 0 borrowings under the 2019 Credit Agreement outstanding and ability to draw $50.0.

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

8

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, 2021.

5.    Equity

Dividends

Solaris LLC paid distributions totaling $4.8 and $4.8 to all Solaris LLC unitholders in the three months ended June 30, 2021 and 2020, respectively, of which $3.3 and $3.1 was paid to Solaris Inc. Solaris LLC paid distributions totaling $9.6 and $9.5 to all Solaris LLC unitholders in the six months ended June 30, 2021 and 2020, respectively, of which $6.7 and $6.2 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.

Stock-based compensation

The Company’s long-term incentive plan for employees, directors and 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.

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. As of June 30, 2021, 2,543,375 stock awards were available for grant.

The following table summarizes activity related to restricted stock for the three and six months ended June 30, 2021 and 2020:

Restricted Stock Awards

2021

2020

Unvested at January 1,

 

703,115

627,251

Awarded

 

414,185

386,146

Vested

 

(223,275)

(141,700)

Forfeited

 

(5,388)

(32,845)

Unvested at March 31,

888,637

838,852

Awarded

3,376

10,194

Vested

(8,797)

(80,203)

Forfeited

(2,306)

(37,164)

Unvested at June 30,

880,910

731,679

Of the unvested 880,910 shares of restricted stock, it is expected that 121,235 shares, 386,793 shares, 238,180 shares, and 134,702 shares will vest in 2021, 2022, 2023 and 2024, respectively, in each case, subject to the applicable vesting terms governing such shares of restricted stock. There was approximately $7.9 of unrecognized compensation expense related to unvested restricted stock as of June 30, 2021. The unrecognized compensation expense will be recognized over the weighted average remaining vesting period of 1.2 years.

Loss Per Share

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

9

The following table sets forth the calculation of loss per share for the three and six months ended June 30, 2021 and 2020:

Three Months Ended June 30,

Six Months Ended June 30,

Basic net loss per share:

2021

2020

2021

    

2020

Numerator

Net loss attributable to Solaris

$

(1.2)

$

(5.5)

$

(2.4)

$

(24.6)

Loss attributable to participating securities (1)

(0.1)

(0.2)

Net loss attributable to common stockholders

$

(1.3)

$

(5.5)

$

(2.6)

$

(24.6)

Denominator

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

30,984

28,638

30,473

28,975

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

30,984

28,638

30,473

28,975

Loss per share of Class A common stock - basic

$

(0.04)

$

(0.20)

$

(0.08)

$

(0.85)

Loss per share of Class A common stock - diluted

$

(0.04)

$

(0.20)

$

(0.08)

$

(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 calculation of diluted loss per share because the effect of including such potentially dilutive shares would have been antidilutive upon conversion:

Three Months Ended June 30,

Six Months Ended June 30,

2021

2020

2021

    

2020

Class B common stock

13,819

15,856

14,271

15,889

Restricted stock awards

94

761

220

726

Stock Options

8

13

10

17

Total

13,921

16,630

14,501

16,632

6. 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 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 unitholders, including Solaris Inc., are liable for United States federal income tax on their respective shares of Solaris LLC’s taxable income reported on the unitholders’ United States federal income tax returns. Solaris LLC is liable for income taxes in those states not recognizing its status as a partnership for United States federal income tax purposes.

For the three months ended June 30, 2021 and 2020, we recognized a combined United States federal and state benefit for income taxes of ($0.2) and ($1.3), respectively. For the six months ended June 30, 2021 and 2020, we recognized a combined United States federal and state benefit for income taxes of ($0.4) and ($7.4), respectively. The effective combined United States federal and state income tax rates were 10.4% and 11.7% for the three months ended June 30, 2021 and 2020, respectively. The effective combined United States federal and state income tax rates were 10.2% and 14.7% for the six months ended June 30, 2021 and 2020, respectively. For the three and six months ended June 30, 2021 and 2020, 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.

10

The Company’s deferred tax position reflects the net tax effects of the temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax reporting. The largest components of the Company’s deferred tax position relate to the Company’s investment in Solaris LLC and net operating loss carryovers. The Company recorded a deferred tax asset and additional paid-in capital for the difference between the book value and the tax basis of the Company’s investment in Solaris LLC. This difference originates from the equity offerings of Class A common stock, exchanges of Solaris LLC Units (together with a corresponding number of shares of Class B common stock) for shares of Class A common stock, and issuances of Class A common stock, and corresponding Solaris LLC Units, 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 this position in the future, changes in cumulative earnings history, excluding non-recurring charges, or changes to forecasted taxable income may alter this expectation and may result in an increase in the valuation allowance and an increase in the effective tax rate.

Section 382 of the Internal Revenue Code of 1986, contains rules that limit the ability of a company that undergoes an “ownership change” to utilize its net operating loss and tax credit carryovers and certain built-in losses recognized in years after the “ownership change.” An “ownership change” is generally defined as any change in ownership of more than 50% of a corporation’s stock over a rolling three-year period by stockholders that own (directly or indirectly) 5% or more of the stock of a corporation, or arising from a new issuance of stock by a corporation. If an ownership change occurs, Section 382 generally imposes an annual limitation on the use of pre-ownership change net operating loss carryovers to offset taxable income earned after the ownership change. We do not believe the Section 382 annual limitation related to historical ownership changes impacts our ability to utilize our net operating losses; however, if we were to experience a future ownership change our ability to use net operating losses may be impacted.

The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted on March 27, 2020 in the 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 and non-income based tax laws. For the three and six months ended June 30, 2021 and 2020 the impact of the 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, 2022. 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.

Payables Related to the Tax Receivable Agreement

In connection with 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 June 30, 2021 and December 31, 2020, Solaris Inc. recorded a payable related to the Tax Receivable Agreement of $73.5 and $68.7, respectively, $0.6 and $0.6 of which has 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 six months ended June 30, 2021.

11

7.  Concentrations

For the three months ended June 30, 2021, 1 customer accounted for 30% of the Company’s revenues. For the three months ended June 30, 2020, 2 customers accounted for 21% of the Company’s revenues. For the six months ended June 30, 2021, 1 customer accounted for 22% of the Company’s revenues. For the six months ended June 30, 2020, no customer accounted for more than 10% of the Company’s revenues. As of June 30, 2021, 2 customers accounted for 46% of the Company’s accounts receivable. As of December 31, 2020, 4 customers accounted for 42% of the Company’s accounts receivable.

For the three months ended June 30, 2021, no supplier accounted for more than 10% of the Company’s total purchases. For the three months ended June 30, 2020, 1 supplier accounted for 40% of the Company’s total purchases. For the six months ended June 30, 2021, no supplier accounted for more than 10% of the Company’s total purchases. For the six months ended June 30, 2020, 1 supplier accounted for 36% of the Company’s total purchases. As of June 30, 2021, no supplier accounted for 10% of the Company’s accounts payable. As of December 31, 2020, 2 suppliers accounted for 23% of the Company’s accounts payable.

8.  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.

9.  Related Party Transactions

The Company recognizes certain costs incurred in relation to transactions 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, the Chief Executive Officer and Chairman of the Board. These services include rent paid for office space, travel services, personnel, consulting and administrative costs. For the three months ended June 30, 2021 and 2020, Solaris LLC paid $0.2 and $0.2, respectively, for these services. For the six months ended June 30, 2021 and 2020, Solaris LLC paid $0.3 and $0.4, respectively, for these services. As of June 30, 2021, and December 31, 2020, the Company included $0.1 and $0.1, respectively, in prepaid expenses and other current assets on the condensed consolidated balance sheets. Additionally, as of June 30, 2021 and December 31, 2020, the Company included $0.1 and $0.1, respectively, of accruals to related parties in accrued liabilities on the consolidated balance sheet.

The Company has executed a guarantee of lease agreement with Solaris Energy Management, LLC, a related party of the Company, related to the rental of office space for the Company’s corporate headquarters. The total future guaranty under the guarantee of lease agreement with Solaris Energy Management, LLC is $4.6 as of June 30, 2021.

On March 26, 2021, THRC Holdings, LP (“THRC”), purchased shares representing an 8.7% ownership of the Company’s Class A common stock and 6.0% total shares outstanding as of June 30, 2021.  THRC is affiliated with certain of the Company’s customers, including ProFrac Services, LLC (“ProFrac”) and FTS International, and certain of the Company’s suppliers including Automatize Logistics, LLC and Cisco Logistics, LLC (“Cisco”) (together the “THRC Affiliates”).  For the three and six months ended June 30, 2021, the Company recognized revenues related to our service offering provided to the THRC Affiliates of $3.1 and $3.2, respectively.  Accounts receivable related to THRC Affiliates as of June 30, 2021, were $2.4.  For the three and six months ended June 30, 2021, the Company recognized cost of services provided by THRC Affiliates of $0.1 and $0.1, respectively.  Accounts payable as of June 30, 2021, included $0.1 related to THRC Affiliates.

In August 2021, the Company executed a three-year agreement with ProFrac and Cisco (the “ProFrac-Cisco Agreement”), whereby Solaris will be the dedicated wellsite sand storage provider to ProFrac and Solaris will provide volume-based pricing for those services. Per the ProFrac-Cisco Agreement, Solaris will also purchase certain equipment from Cisco Logistics.

12

10.  Subsequent Events

See Note 9. “Related Party Transactions”, for a discussion of an agreement executed in the third quarter of 2021.

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 for the year ended December 31, 2020 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

We design and manufacture 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 to drive efficiencies and reduce costs during the completion phase of well development. The majority of our revenue is currently derived from rental and services related to our patented mobile proppant and patent-pending chemical management systems that unload, store and deliver proppant and chemicals used in the 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.

Our service fleet currently consists of 158 mobile proppant management systems, 14 mobile chemical management systems and 17 mobile water management systems which reflects the conversion of proppant management systems to water management systems.

Recent Trends and Outlook

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

Since the first quarter of 2020, changing market expectations around the COVID-19 global economic impact drove extreme volatility in oil and gas commodity prices and activity. WTI oil prices fell from $60 per barrel to under $20 per barrel during the second quarter of 2020 and recovered to over $70 per barrel in June 2021. The Baker Hughes US Land rig count decreased 55% to 417 average rigs in 2020 from 920 average rigs in 2019. Since the start of 2021, the Baker Hughes US Land rig count has increased another 34% to 470 rigs compared to a 26% increase in our fully utilized systems since the fourth quarter of 2020. While our fully utilized systems are highly correlated with US land rig count activity over longer periods, timing differences between drilling and completion activity can result in lags of one to two quarters. Recent rig count increases against our expectation for relatively flat completions activity for the remainder of 2021 imply a build in drilled but uncompleted wells that support an increase in completions activity in early 2022. Further recovery in oil and gas prices and activity will depend on multiple factors, including the ultimate pace of economic recovery, the success of COVID-19 vaccine rollouts, potential regulatory changes and the resulting supply-demand balance in oil and gas.

Recent consolidation amongst some of our E&P and oil service customers combined with financial discipline from publicly traded energy companies has reduced industry-wide capital spending, resulting in activity levels that remain below pre-pandemic levels despite the recovery in commodity prices. Additionally, consolidation can drive procurement

13

strategy changes, which has historically resulted in both market share gains and losses for the Company. We expect both consolidation and financial discipline will likely continue to be important themes for the energy industry going forward.

Previous capital expenditure guidance for the full year 2021 of $10.0 to $15.0 million included approximately $5.0 million for investments in new technology, which are now expected to be between $5.0 and $10.0 million. As a result, the Company now expects capital expenditures for the full year 2021 to be between $15.0 and $20.0 million.

Results of Operations

Three and Six Months Ended June 30, 2021 Compared to Three and Six Months Ended June 30, 2020

Three Months Ended

Six Months Ended

June 30, 

June 30, 

    

2021

    

2020

    

Change

    

2021

    

2020

    

Change

(in thousands)

(in thousands)

Revenue

 

  

 

  

 

  

 

  

 

  

 

  

System rental

$

14,323

$

5,463

$

8,860

$

27,971

$

31,522

$

(3,551)

System services

 

20,616

 

3,419

 

17,197

 

35,326

 

24,376

 

10,950

Transloading services

38

 

264

 

(226)

152

 

729

 

(577)

Inventory software services

202

 

192

 

10

399

 

542

 

(143)

Total revenue

 

35,179

 

9,339

 

25,840

 

63,848

 

57,169

 

6,679

Operating costs and expenses:

 

  

 

  

 

  

 

  

 

  

 

  

Cost of system rental (excluding depreciation and amortization)

 

1,556

 

823

 

733

 

3,164

 

2,836

 

328

Cost of system services (excluding depreciation and amortization)

 

23,282

 

6,013

 

17,269

 

40,534

 

30,143

 

10,391

Cost of transloading services (excluding depreciation and amortization)

197

 

202

 

(5)

441

 

540

 

(99)

Cost of inventory software services (excluding depreciation and amortization)

100

 

122

 

(22)

202

 

267

 

(65)

Depreciation and amortization

 

6,752

 

6,671

 

81

 

13,445

 

13,785

 

(340)

Selling, general and administrative (excluding depreciation and amortization)

 

4,964

 

3,967

 

997

 

9,570

 

8,373

 

1,197

Impairment losses

 

 

47,828

(47,828)

Other operating expenses

360

 

2,274

 

(1,914)

613

3,472

(2,859)

Total operating costs and expenses

 

37,211

 

20,072

 

17,139

 

67,969

 

107,244

 

(39,275)

Operating loss

 

(2,032)

 

(10,733)

 

8,701

 

(4,121)

 

(50,075)

 

45,954

Interest income (expense), net

 

(55)

 

(35)

 

(20)

 

(104)

 

76

 

(180)

Total other income (expense)

 

(55)

 

(35)

 

(20)

 

(104)

 

76

 

(180)

Loss before income tax expense

 

(2,087)

 

(10,768)

 

8,681

 

(4,225)

 

(49,999)

 

45,774

Benefit for income taxes

 

217

 

1,272

 

(1,055)

 

430

 

7,350

 

(6,920)

Net loss

(1,870)

(9,496)

7,626

(3,795)

(42,649)

38,854

Less: net loss related to non-controlling interests

659

3,956

(3,297)

1,415

18,026

(16,611)

Net loss attributable to Solaris

$

(1,211)

$

(5,540)

$

4,329

$

(2,380)

$

(24,623)

$

22,243

System Rental

System rental revenue increased $8.9 million, or 162%, to $14.3 million for the three months ended June 30, 2021 compared to $5.5 million for the three months ended June 30, 2020. System rental revenue decreased $3.6 million, or 11%, to $28.0 million for the six months ended June 30, 2021 compared to $31.5 million for the six months ended June 30, 2020. The changes in system rental revenue are primarily related to changes in mobile proppant systems on a fully utilized basis, in response to global oil market volatility.

Cost of system rental increased $0.7 million, or 88%, to $1.6 million for the three months ended June 30, 2021 compared to $0.8 million for the three months ended June 30, 2020, excluding depreciation and amortization expense.

14

Cost of system rental increased $0.3 million, or 11%, to $3.2 million for the six months ended June 30, 2021 compared to $2.8 million for the six months ended June 30, 2020, excluding depreciation and amortization expense. Cost of system rental increased primarily due to an increase in mobile proppant systems on a fully utilized basis. Cost of system rental as a percentage of system rental revenue was 11% and 15% for the three months ended June 30, 2021 and 2020, respectively and was 11% and 9% for the six months ended June 30, 2021 and 2020, respectively.

System Services

System services revenue increased $17.2 million, or 506%, to $20.6 million for the three months ended June 30, 2021 compared to $3.4 million for the three months ended June 30, 2020. System services revenue increased $11.0 million, or 45%, to $35.3 million for the six months ended June 30, 2021 compared to $24.4 million for the six months ended June 30, 2020. System services revenue increased due to an increase in last mile services provided to coordinate proppant delivered into our systems, as well as an increase in mobile proppant systems on a fully utilized basis.

Cost of system services increased $17.3 million, or 288%, to $23.3 million for the three months ended June 30, 2021 compared to $6.0 million for the three months ended June 30, 2020, excluding depreciation and amortization expense. Cost of system services increased $10.4 million, or 35%, to $40.5 million for the six months ended June 30, 2021 compared to $30.1 million for the six months ended June 30, 2020, excluding depreciation and amortization expense. Cost of system services increased due to an increase in last mile services provided to coordinate proppant delivered to systems as well as an increase in fully utilized systems. Cost of system services as a percentage of system services revenue was 113% and 176% for the three months ended June 30, 2021 and 2020, respectively and was 115% and 124% for the six months ended June 30, 2021 and 2020, respectively.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $1.0 million, or 25%, to $5.0 million for the three months ended June 30, 2021 compared to $4.0 million for the three months ended June 30, 2020, excluding depreciation and amortization. Selling, general and administrative expenses increased $1.2 million, or 14%, to $9.6 million for the six months ended June 30, 2021 compared to $8.4 million for the six months ended June 30, 2020, excluding depreciation and amortization expense. Selling, general and administrative expenses increased due primarily to increases in compensation costs and professional fees.

Impairment Losses

As a result of risks and uncertainties associated with volatility in global oil markets driven by significant reductions in demand for oil due to COVID-19 and certain actions by oil producers globally and the expected impact on our businesses, operations, earnings and results, we recorded impairment losses and other charges of $37.8 million, $4.2 million, $2.8 million, $2.6 million and $0.4 million in relation to property, plant and equipment, goodwill, ROU assets, inventories and other assets, respectively, in the six months ended June 30, 2020. We did not record impairment losses in the three or six months ended June 30, 2021, respectively, and for the three months ended June 30, 2020.

Provision for Income Taxes

During the three months ended June 30, 2021, we recognized a combined United States federal and state benefit for income taxes of $0.2 million, a decrease of $1.1 million as compared to the $1.3 million income tax benefit we recognized during the three months ended June 30, 2020. During the six months ended June 30, 2021, we recognized a combined United States federal and state benefit for income taxes of $0.4 million, a decrease of $7.0 million as compared to the $7.4 million income tax benefit we recognized during the six months ended June 30, 2020. This change was attributable to lower operating losses. The effective combined United States federal and state income tax rates were 10.4% and 11.7% for the three months ended June 30, 2021 and 2020, respectively. The effective combined United States federal and state income tax rates were 10.2% and 14.7% for the six months ended June 30, 2021 and 2020, respectively. The 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.

15

Comparison of Non-GAAP Financial Measures

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

EBITDA and Adjusted EBITDA should not be considered in isolation or as substitutes for an analysis of our results of operation and financial condition as reported in accordance with accounting standards generally accepted in the United States (“GAAP”). Net income is the GAAP measure most directly comparable to EBITDA and Adjusted EBITDA. EBITDA and Adjusted EBITDA should not be considered alternatives to net income presented in accordance with GAAP. Because EBITDA and Adjusted EBITDA may be defined differently by other companies in our industry, our definitions of EBITDA and Adjusted EBITDA may not be comparable to similarly titled measures of other companies, thereby diminishing their utility.

The following table presents a reconciliation of Net income to EBITDA and Adjusted EBITDA for each of the periods indicated.

Three months ended

Six months ended

June 30, 

June 30, 

    

2021

    

2020

    

Change

    

2021

    

2020

    

Change

(in thousands)

(in thousands)

Net loss

    

$

(1,870)

    

$

(9,496)

    

$

7,626

    

$

(3,795)

    

$

(42,649)

    

$

38,854

Depreciation and amortization

 

6,752

 

6,671

 

81

 

13,445

 

13,785

 

(340)

Interest (income) expense, net

 

55

 

35

 

20

 

104

 

(76)

 

180

Income taxes (1)

 

(217)

 

(1,272)

 

1,055

 

(430)

 

(7,350)

 

6,920

EBITDA

$

4,720

$

(4,062)

$

8,782

$

9,324

$

(36,290)

$

45,614

Stock-based compensation expense (2)

 

1,353

 

1,326

 

27

 

2,552

 

2,656

 

(104)

Loss on disposal of assets

99

1,345

(1,246)

117

1,413

(1,296)

Impairment losses

47,828

(47,828)

Severance expense

211

(211)

542

(542)

Credit losses

316

740

(424)

599

1,451

(852)

Transaction costs (3)

10

10

24

24

Adjusted EBITDA

$

6,498

$

(440)

$

6,938

$

12,616

$

17,600

$

(4,984)

(1)United States federal and state income taxes.
(2)Represents stock-based compensation expense related to restricted stock awards.
(3)Costs related to the evaluation of acquisitions.

Three and Six Months Ended June 30, 2021 Compared to Three and Six Months Ended June 30, 2020: EBITDA and Adjusted EBITDA

EBITDA increased $8.8 million to $4.7 million for the three months ended June 30, 2021 compared to ($4.1) million for the three months ended June 30, 2020. Adjusted EBITDA increased $6.9 million to $6.5 million for the three months ended June 30, 2021 compared to ($0.4) million for the three months ended June 30, 2020. EBITDA increased $45.6 million to $9.3 million for the six months ended June 30, 2021 compared to ($36.3) million for the six months ended June 30, 2020. Adjusted EBITDA decreased $5.0 million to $12.6 million for the six months ended June 30, 2021 compared to $17.6 million for the six months ended June 30, 2020. The changes in EBITDA and Adjusted EBITDA were primarily due to the changes in revenues and expenses, discussed above.

Liquidity and Capital Resources

Overview

Our primary sources of liquidity to date have been cash flows from operations, borrowings under our credit agreements and proceeds from equity offerings. Our primary uses of capital have been to fund ongoing operations,

16

capital expenditures to support organic growth, including our fleet development and related maintenance and fleet upgrades, repurchase shares of Class A common stock in the open market, and pay dividends. Although no assurance can be given, depending upon market conditions and other factors, we may also have the ability to issue additional equity and debt if needed.

As of June 30, 2021, cash and cash equivalents totaled $46.3 million. We have no borrowings outstanding under our 2019 Credit Agreement and have $50.0 million of available borrowing capacity. We believe that our cash on hand, operating cash flow and available borrowings under our 2019 Credit Agreement will be sufficient to fund our operations for at least the next 12 months.

Cash Flows

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

Six Months Ended

June 30, 

2021

2020

Change

(in thousands)

Net cash provided by operating activities

    

$

4,040

    

$

34,323

$

(30,283)

Net cash used in investing activities

(7,670)

(845)

(6,825)

Net cash used in financing activities

(10,460)

(36,728)

26,268

Net change in cash

$

(14,090)

$

(3,250)

$

(10,840)

Significant Sources and Uses of Cash Flows

Operating Activities. Net cash provided by operating activities was $4.0 million for the six months ended June 30, 2021, compared to net cash provided by operating activities of $34.3 million for the six months ended June 30, 2020. The decrease of $30.3 million in operating cash flow was primarily attributable to lower revenues and changes in working capital.

Investing Activities. Net cash used in investing activities was $7.7 million for the six months ended June 30, 2021, compared to net cash used in investing activities of $0.8 million for the six months ended June 30, 2020. The increase in investing activities of $6.8 million is primarily due to capital expenditures related to enhancements to our fleet and for new technologies.

Financing Activities. Net cash used in financing activities of $10.5 million for the six months ended June 30, 2021 was primarily related to quarterly dividends of $9.6 million and $0.7 million of payments related to vesting of stock-based compensation. Net cash used in financing activities of ($36.7) million for the six months ended June 30, 2020 was primarily related to $26.7 million of share repurchases and quarterly dividends of $9.5 million.

Capital Sources

Senior Secured Credit Facility

See Note 4. “Debt” to our condensed consolidated financial statements as of June 30, 2021, for a discussion of our senior secured credit facility.

Contractual Obligations

We had no material changes in our contractual commitments and obligations during the three months ended June 30, 2021 from the amounts listed under Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Contractual Obligations” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, as filed with the SEC on February 23, 2021. See Note 4 “Debt” and Note 8 “Commitments and Contingencies” to our condensed consolidated financial statements for additional information.

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Critical Accounting Policies and Estimates

See Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 for additional information.

Recent Accounting Pronouncements

Recently Adopted Accounting Standards

None.

Recently Issued Accounting Standards

See Note 2. “Summary of Significant Accounting Policies – Recently Issued Accounting Standards” to our condensed consolidated financial statements as of June 30, 2021, for a discussion of recently issued accounting standards.

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.

Item 3.Quantitative and Qualitative Disclosures about Market Risk

For quantitative and qualitative disclosures about market risk, see Part II, Item 7A. “Quantitative and Qualitative Disclosures about Market Risk” in our Annual Report on Form 10-K for the year ended December 31, 2020. Our exposure to market risk has not changed materially since December 31, 2020.

Credit Risk

The majority of our accounts receivable have payment terms of 60 days or less. As of June 30, 2021, two customers collectively accounted for 46% of our total accounts receivable. As of December 31, 2020, four customers collectively accounted for 42% of our total accounts receivable. We mitigate the associated credit risk by performing credit evaluations and monitoring the payment patterns of our customers. Please see Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2020 for more information regarding credit risk of our customers.

Item 4.Controls and Procedures

Disclosure Controls and Procedures

In accordance with Exchange Act Rules 13a-15 and 15d-15, we have evaluated, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of June 30, 2021. 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 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

18

and reported within the time periods specified in the rules and forms of the SEC. Based on the evaluation of our disclosure controls and procedures as of June 30, 2021, our principal executive officer and principal financial officer have concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

There were no changes in our system of internal control over financial reporting (as defined in Rule 13a-15(f) and Rule 15d-15(f) under the Exchange Act) during the quarter ended June 30, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

19

PART II. OTHER INFORMATION

Item 1.        Legal Proceedings

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

Item 1A.      Risk Factors

Factors that could materially adversely affect our business, financial condition, operating results or liquidity and the trading price of our Class A common stock are described under Part I, Item 1A. “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2020, as filed with the SEC on February 23, 2021. As of the date of this filing, there have been no material updates to the risk factors previously disclosed in Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2020.

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

Unregistered Sales of Equity Securities

None.

Issuer Purchases of Equity Securities

During the current quarter, we repurchased the shares of Class A common stock as shown in the table below, to satisfy tax withholding obligations upon the vesting of restricted stock awarded to certain of our employees:

Total Number of

Average Price

Shares

Paid Per

Period

Purchased

Share

January 1 - January 31

$

February 1 - February 28

March 1 - March 31

57,026

11.78

April 1 - April 30

504

12.82

May 1 - May 31

June 1 - June 30

1,820

11.67

Total

59,350

$

11.79

Item 3.Defaults upon Senior Securities

None.

Item 4.Mine Safety Disclosures

None.

Item 5.Other Information

None.

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Item 6.Exhibits

Exhibit No.

Description

3.1

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

3.2

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

31.1*

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

31.2*

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

32.1**

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

32.2**

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

101.INS*

XBRL Instance Document.

101.SCH*

XBRL Taxonomy Extension Schema Document.

101.CAL*

XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF*

XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB*

XBRL Taxonomy Extension Labels Linkbase Document.

101.PRE*

XBRL Taxonomy Extension Presentation Linkbase Document.

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, this certification will be treated as “accompanying” this Quarterly Report on Form 10-Q and not “filed” as part of such report for purposes of Section 18 of the Exchange Act or otherwise subject to the liability of Section 18 of the Exchange Act, and this certification will not be deemed to be incorporated by reference into any filing under the Securities Act, except to the extent that the registrant specifically incorporates it by reference.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

SOLARIS OILFIELD INFRASTRUCTURE, INC.

August 4, 2021

By:

/s/ William A. Zartler

William A. Zartler

Chairman and Chief Executive Officer

(Principal Executive Officer)

August 4, 2021

By:

/s/ Kyle S. Ramachandran

Kyle S. Ramachandran

President and Chief Financial Officer

(Principal Financial Officer)

22