Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2023
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 April 27, 2023, the registrant had 32,123,630 shares of Class A common stock, $0.01 par value per share, and 13,671,971 shares of Class B common stock, $0.00 par value per share, outstanding.
TABLE OF CONTENTS
Page
Cautionary Statement Regarding Forward-Looking Statements
1
PART I: FINANCIAL INFORMATION
3
Item 1.
Financial Statements (Unaudited)
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
17
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
22
Item 4.
Controls and Procedures
PART II: OTHER INFORMATION
24
Legal Proceedings
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults upon Senior Securities
25
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
SIGNATURES
27
i
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (this “Quarterly Report”) includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Statements that are predictive in nature, that depend upon or refer to future events or conditions or that include the words “believe,” “expect,” “anticipate,” “intend,” “estimate” and other expressions that are predictions of or indicate future events and trends and that do not relate to historical matters identify forward-looking statements. Our forward-looking statements include statements about our business strategy, our industry, our future profitability, our expected capital expenditures and the impact of such expenditures on our performance, management changes, current and potential future long-term contracts, the costs of being a publicly traded corporation, our capital programs and our future business and financial performance. In addition, our forward-looking statements address the various risks and uncertainties associated with extraordinary market environments and the expected impact on our businesses, results of operations, and earnings.
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:
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 Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022, 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
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
(Unaudited)
March 31,
December 31,
2023
2022
Assets
Current assets:
Cash and cash equivalents
$
2,175
8,835
Accounts receivable, net of allowances for credit losses of $355 and $385, respectively
68,124
64,543
Accounts receivable - related party
3,840
4,925
Prepaid expenses and other current assets
4,245
5,151
Inventories
7,621
5,289
Total current assets
86,005
88,743
Property, plant and equipment, net
313,299
298,160
Non-current inventories
1,730
1,569
Operating lease right-of-use assets
3,850
4,033
Goodwill
13,004
Intangible assets, net
1,247
1,429
Deferred tax assets
53,624
55,370
Other assets
239
268
Total assets
472,998
462,576
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable
29,817
25,934
Accrued liabilities
22,370
25,252
Current portion of payables related to Tax Receivable Agreement
—
1,092
Current portion of operating lease liabilities
923
917
Current portion of finance lease liabilities
2,191
1,924
Other current liabilities
790
Total current liabilities
55,301
55,909
Operating lease liabilities, net of current
6,034
6,212
Borrowings under the credit agreement
26,000
8,000
Finance lease liabilities, net of current
3,359
3,429
Payables related to Tax Receivable Agreement
71,530
Other long-term liabilities
364
367
Total liabilities
162,588
145,447
Commitments and contingencies (Note 8)
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, 30,399 shares issued and outstanding as of March 31, 2023 and 31,641 shares issued and outstanding as of December 31, 2022
304
317
Class B common stock, $0.00 par value, 180,000 shares authorized, 13,674 shares issued and outstanding as of March 31, 2023 and 13,674 issued and outstanding as of December 31, 2022
Additional paid-in capital
194,463
202,551
Retained earnings
13,081
12,847
Total stockholders' equity attributable to Solaris
207,848
215,715
Non-controlling interest
102,562
101,414
Total stockholders' equity
310,410
317,129
Total liabilities and stockholders' equity
The accompanying notes are an integral part of these condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
Revenue
77,828
51,836
Revenue - related parties
4,894
5,079
Total revenue
82,722
56,915
Operating costs and expenses:
Cost of services (excluding depreciation)
53,223
37,671
Depreciation and amortization
8,417
6,929
Selling, general and administrative
6,538
5,211
Other operating income
(338)
(309)
Total operating costs and expenses
67,840
49,502
Operating income
14,882
7,413
Interest expense, net
(459)
(79)
Total other expense
Income before income tax expense
14,423
7,334
Income tax expense
(2,486)
(1,612)
Net income
11,937
5,722
Less: net income related to non-controlling interests
(4,368)
(2,220)
Net income attributable to Solaris
7,569
3,502
Income per share of Class A common stock – basic
0.23
0.11
Income per share of Class A common stock – diluted
Basic weighted-average shares of Class A common stock outstanding
31,214
31,239
Diluted weighted-average shares of Class A common stock outstanding
]
4
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(In thousands)
Three Months Ended March 31, 2023
Class A
Class B
Additional
Non-
Total
Common Stock
Paid-in
Retained
Treasury Stock
controlling
Stockholders'
Shares
Amount
Capital
Earnings
Interest
Equity
Balance at January 1, 2023
31,641
13,674
Net effect of deferred tax asset and payables related to the stock repurchase and the vesting of restricted stock
594
Share and unit repurchases and retirements
(1,641)
(17)
(10,543)
(3,295)
(572)
(14,427)
Stock-based compensation
1,494
660
2,154
Vesting of restricted stock
547
5
903
(908)
Cancelled shares withheld for taxes from RSU vesting
(148)
(1)
(536)
(384)
(415)
(1,336)
Unitholder Distributions
(1,985)
Dividends paid ($0.11 per share of Class A common stock)
(3,656)
4,368
Balance at March 31, 2023
30,399
Three Months Ended March 31, 2022
Balance at January 1, 2022
31,146
312
13,770
196,912
5,925
94,727
297,876
Net effect of deferred tax asset and payables related to the vesting of restricted stock
610
1,188
520
1,708
366
574
(577)
(96)
(302)
(388)
(299)
(990)
(1,446)
Dividends paid ($0.105 per share of Class A common stock)
(3,441)
2,220
Balance at March 31, 2022
31,416
314
198,982
5,598
95,145
300,039
6
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended
Cash flows from operating activities:
Adjustment to reconcile net income to net cash provided by operating activities:
(Gain) loss on disposal of assets
(22)
107
1,980
1,593
Amortization of debt issuance costs
31
40
Deferred income tax expense
2,329
1,455
Other
10
Changes in operating assets and liabilities:
Accounts receivable
(3,581)
(11,321)
1,086
(1,216)
Prepaid expenses and other assets
905
1,717
(4,071)
(1,152)
2,042
5,040
(3,122)
(2,644)
Payments pursuant to tax receivable agreement
(1,092)
Net cash provided by operating activities
16,849
6,269
Cash flows from investing activities:
Investment in property, plant and equipment
(18,949)
(11,776)
Cash received from insurance proceeds
231
Proceeds from disposal of assets
123
38
Net cash used in investing activities
(18,826)
(11,507)
Cash flows from financing activities:
Share repurchases
Distribution to unitholders (includes distribution of $1.5 million at $0.11/unit and $1.4 million at $0.105/unit, respectively)
Dividend paid to Class A common stock shareholders
18,000
Payments under finance leases
(738)
(8)
Payments under insurance premium financing
(541)
(246)
Payments for shares withheld for taxes from RSU vesting and cancelled
Net cash used in financing activities
(4,683)
(6,131)
Net decrease in cash
(6,660)
(11,369)
Cash at beginning of period
36,497
Cash at end of period
25,128
Non-cash activities
Investing:
Capitalized depreciation in property, plant and equipment
129
146
Capitalized stock based compensation
174
115
Property and equipment additions incurred but not paid at period-end
5,015
2,827
Property, plant and equipment additions transferred from inventory
1,578
575
Additions to fixed assets through finance leases
933
Cash paid for:
335
37
Income Taxes
7
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, last mile 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 that reduce operational footprint and costs during the completion phase of well development. Our equipment and services are deployed across 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 months ended March 31, 2023 and 2022 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, 2022 and notes thereto.
All material intercompany transactions and balances have been eliminated upon consolidation.
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 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 related to stock-based compensation, useful lives and salvage values of long-lived assets, future cash flows associated with goodwill and long-lived asset impairment evaluations, net realizable value of inventory, income taxes, Tax Receivable Agreement liability, 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.
Revenue Recognition
The Company recognizes revenue in accordance with ASC Topic 606, Revenues from Contracts with Customers (“ASC Topic 606”). Under ASC Topic 606, revenue recognition is based on the transfer of control, or the customer’s
8
ability to benefit from our services and products in an amount that reflects the consideration expected to be received in exchange for those services and products.
The majority of our contracts contain multiple performance obligations, such as work orders containing a combination of equipment, last mile logistics services, and labor services. We allocate the transaction price to each performance obligation identified in the contract based on relative stand-alone selling prices, or estimates of such prices, and recognize the related revenue as control of each individual product or service is transferred to the customer, in satisfaction of the corresponding performance obligations. 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 assess our customers’ ability and intention to pay, which is based on a variety of factors including historical payment experience and financial condition and we typically charge our customers on a weekly or monthly basis. Contracts with customers are typically on thirty- to sixty-day payment terms.
Disaggregation of Revenue
The following table summarizes revenues from our contracts disaggregated by revenue generating activity contained therein for the three months ended March 31, 2023 and 2022:
Wellsite services
82.5
56.6
Transloading and Other
0.2
0.3
82.7
56.9
Recently Issued Accounting Standards
In March 2020, the Financial Accounting Standards Board issued ASU No. 2020-04, Reference Rate Reform, which provided temporary optional guidance to companies impacted by the transition away from the London Interbank Offered Rate (“LIBOR”). The guidance provided 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. The original guidance expired on December 31, 2022; however, ASU No. 2022-06 extended the effective date of the guidance to December 31, 2024. The Company is currently assessing the impact of the LIBOR transition and this ASU on the Company’s financial statements and any agreements utilizing LIBOR, including the Tax Receivable Agreement, but does not currently expect to have a material impact on our 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 manufacturing of these assets, they are reflected as systems in process until complete. Modifications to existing systems,
9
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:
Systems and related equipment
380.6
369.3
Systems in process
41.4
30.1
Computer hardware and software
1.7
Machinery and equipment
5.4
Vehicles
13.2
Buildings
4.6
Land
0.6
Furniture and fixtures
0.4
Property, plant and equipment, gross
447.9
425.3
Less: accumulated depreciation
(134.6)
(127.1)
313.3
298.2
4. Senior Secured Credit Facility
On April 28, 2023, Solaris LLC executed Amendment No. 2 to the Amended and Restated Credit Agreement, by and among Solaris LLC, as borrower, each of the guarantors party thereto, each of the lenders party thereto, and Wells Fargo Bank, National Association, as administrative agent (the “2023 Amendment”) to the Amended and Restated Credit Agreement (the “Credit Agreement”), which was entered into on April 26, 2019, by and among Solaris LLC, as borrower, each of the guarantors party thereto, each of the lenders party thereto and Wells Fargo Bank, National Association, as administrative agent, and contained an initial $50.0 borrowing facility. The 2023 Amendment introduced an additional $25.0 facility (the “Additional Facility”) to increase available borrowings under the Credit Agreement from $50.0 to $75.0 (the “Loan”) while preserving the original accordion feature, to provide for a maximum of $100.0 of total available capacity under the Credit Agreement. The 2023 Amendment also modified certain covenant requirements as more fully described in the 2023 Amendment. The 2023 Amendment contains a reducing revolver feature whereby the Additional Facility will reduce 15% beginning in the first quarter of 2024 through the fourth quarter of 2024 and increasing to 20% thereafter with the balance due at maturity. The Credit Agreement continues to have a maturity date of April 26, 2025.
As of March 31, 2023, we had $26.0 borrowings outstanding under the Credit Agreement. As of May 3, 2023, the Company has the ability to draw up to approximately $34.5 under the amended Credit Agreement.
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 Credit Agreement). We have the option to prepay the loans at any time without penalty.
Borrowings under the Credit Agreement bear interest at either Term Secured Overnight Financing Rate (“SOFR”) or an alternate base rate plus an applicable margin, and interest is payable quarterly for alternate base rate loans or the last business day of the interest period applicable to SOFR loans. The applicable margin ranges from 2.75% to 3.50% for SOFR loans and 1.75% to 2.50% for alternate base rate loans, in each case depending on our total leverage ratio. The Credit Agreement requires that we pay a quarterly commitment fee on undrawn amounts of the Loan, ranging from 0.375% to 0.5% depending upon the total leverage ratio. The weighted average interest rate on the borrowings outstanding as of March 31, 2023 was approximately 7.87%.
The Credit Agreement requires that we maintain ratios of (i) consolidated EBITDA to interest expense of not less than 2.75 to 1.00, (ii) senior indebtedness to consolidated EBITDA of not more than 2.50 to 1.00 and (iii) 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. For the purpose of these tests, certain items are subtracted from indebtedness and senior indebtedness. EBITDA, as defined in the Credit Agreement, excludes certain noncash items and any extraordinary, unusual or nonrecurring gains, losses or expenses.
The Credit Agreement also requires that we prepay any outstanding borrowings in the event our total consolidated cash balance exceeds $20.0 on the last business day of every other calendar week, taking into account certain adjustments. Capital expenditures are not restricted unless borrowings under the Loan exceed $5.0 for any 180 consecutive day period, in which case capital expenditures will be permitted up to $100.0 plus any unused availability for capital expenditures from the immediately preceding fiscal year.
As of March 31, 2023, we were in compliance with all covenants under the Credit Agreement.
5. Equity
Dividends
Solaris LLC paid dividend distributions totaling $5.2 and $4.9 to all Solaris LLC unitholders in the three months ended March 31, 2023 and 2022, respectively, of which $3.7 and $3.4 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
On March 2, 2023, the Company’s board of directors authorized a share repurchase plan to repurchase up to $50.0 of the Company’s Class A common stock until the plan terminates pursuant to its provisions. During the three months ended March 31, 2023, Solaris Inc. purchased and retired 1,641,000 shares of the Company’s Class A common stock for $14.4, or $8.80 average price per share, and, in connection therewith, Solaris LLC purchased and retired 1,641,000 Solaris LLC Units from the Company for the same amount. We currently have $35.6 authorized under the share repurchase plan.
The Company’s long-term incentive plan for employees, directors and consultants (the “LTIP”) provides for the grant of all or any of the following types of equity-based awards: (i) incentive stock options qualified as such under United States federal income tax laws; (ii) stock options that do not qualify as incentive stock options; (iii) stock appreciation rights; (iv) restricted stock awards; (v) restricted stock units; (vi) bonus stock; (vii) performance awards; (viii) dividend equivalents; (ix) other stock-based awards; (x) cash awards; and (xi) substitute awards.
Subject to adjustment in accordance with the terms of the LTIP, 5,118,080 shares of Solaris Inc.’s Class A common stock have been reserved for issuance pursuant to awards under the LTIP. As of March 31, 2023, 812,686 stock awards were available for grant.
The following table summarizes activity related to restricted stock for the three months ended March 31, 2023:
Restricted Stock Awards
Number of Shares
Weighted AverageGrant Date FairValue ($)
Unvested at January 1, 2023
1,295,728
10.33
Awarded
790,201
9.19
Vested
(548,992)
9.74
Forfeited
(9,648)
9.82
Unvested at March 31, 2023
1,527,289
9.71
Of the 1,527,289 unvested shares of restricted stock, it is expected that 92,776 shares, 659,693 shares, 527,652 shares, and 247,168 shares will vest in 2023, 2024, 2025 and 2026, respectively, in each case, subject to the applicable vesting terms governing such shares of restricted stock. There was approximately $13.7 of unrecognized compensation expense related to unvested restricted stock as of March 31, 2023. The unrecognized compensation expense will be recognized over the weighted average remaining vesting period of 1.6 years.
11
During the three-month period ending March 31, 2023, we granted 176,898 performance-based restricted stock units (“PSUs”), with a weighted average grant date fair value of $11.92 per share to management under the LTIP. The performance criteria for the PSUs are split as follows:
The vesting and payout of the PSUs occur when the related service condition is completed, which is approximately three years after the grant date regardless of the duration of the stipulated performance period. The PSUs can be paid out in either Class A common stock or cash, at our election. Dividends accrue on PSUs and are paid upon vesting. As of March 31, 2023, $2.0 of compensation cost related to unvested PSUs remained to be recognized. The cost is expected to be recognized over a weighted-average period of 2.5 years.
The grant date fair value was determined using the Monte Carlo simulation method and is expensed ratably over the service period. Expected volatilities used in the fair value simulation were estimated using historical periods consistent with the remaining performance periods. The risk-free rate was based on the U.S. Treasury rate for a term commensurate with the expected life of the grant. We used the following assumptions to estimate the fair value of PSUs granted during the three months ended March 31, 2023:
Assumptions
Risk-free interest rate
4.6%
Volatility
58.93%
The following table summarizes activity related to PSUs for the three months ended March 31, 2023:
Weighted-Average
Grant Date Fair
Number of Units
Value ($)
Outstanding at January 1, 2023
Granted
176,898
11.92
Outstanding at March 31, 2023
Income (Loss) Per Share
Basic income (loss) per share of Class A common stock is computed by dividing net income (loss) attributable to Solaris Inc. by the weighted-average number of shares of Class A common stock outstanding during the same period. Diluted income (loss) per share is computed giving effect to all potentially dilutive shares.
12
The following table sets forth the calculation of income (loss) per share for the three months ended March 31, 2023 and 2022:
Three Months Ended March 31,
Basic net income (loss) per share:
Numerator
7.6
3.5
Less: income attributable to participating securities (1)
(0.4)
(0.1)
Net income attributable to common stockholders
7.2
3.4
Denominator
Weighted average number of unrestricted outstanding common shares used to calculate basic net income per share
31,214,271
31,239,351
Diluted weighted-average shares of Class A common stock outstanding used to calculate diluted net income per share
Income per share of Class A common stock - basic
Income per share of Class A common stock - diluted
The following number of weighted-average potentially dilutive shares were excluded from the calculation of diluted income (loss) per share because the effect of including such potentially dilutive shares would have been antidilutive upon conversion:
Class B common stock
13,671,971
13,768,517
Restricted stock awards
1,374,760
1,025,513
Performance-based restricted stock awards
Stock Options
5,440
7,122
15,229,069
14,801,152
6. 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 March 31, 2023 and 2022, we recognized a combined United States federal and state expense for income taxes of $2.5 and $1.6, respectively. The effective combined United States federal and state income tax rates were 17.2% and 22.3% for the three months ended March 31, 2023 and 2022, respectively. For the three months ended March 31, 2023 and 2022, 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.
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
13
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.
Payables Related to the Tax Receivable Agreement
We made payments of $1.1 in January 2023 under the Tax Receivable Agreement. Solaris LLC made a tax distribution to Solaris Inc. of $1.1 in order to satisfy these obligations and concurrently made a cash distribution on a pro rata basis to each of the other members of Solaris LLC of $0.4. Future amounts payable under the Tax Receivable Agreement are dependent upon future events.
As of March 31, 2023, our liability under the Tax Receivable Agreement was $71.5, representing 85% of the net cash savings in United States federal, state and local income tax or 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 our initial public offering or pursuant to an exercise of the Redemption Right or the Call Right (each as defined in the Solaris LLC Agreement) and additional tax basis arising from any payments Solaris Inc. makes under the Tax Receivable 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. Therefore, in accordance with ASC 450, Contingencies, we have recorded a liability under the Tax Receivable Agreement related to the tax savings we may realize from certain increases in tax basis and certain tax benefits attributable to imputed interest as a result of Solaris Inc.’s acquisition (or deemed acquisition for United States federal income tax purposes) of Solaris LLC Units in connection with the IPO or pursuant to an excise of the Redemption Right or the Call Right (each as defined in the Solaris LLC Agreement) and additional tax basis arising from any payments Solaris Inc. makes under the Tax Receivable Agreement. Solaris LLC may make tax distributions to Solaris Inc. in order for Solaris Inc. to satisfy its obligations under the Tax Receivable Agreement and will be required to distribute cash pro rata to each of the other members of Solaris LLC, in accordance with the number of Solaris LLC Units owned by each member at that time.
7. Concentrations
For the three months ended March 31, 2023, three customers accounted for 13%, 12% and 11% of the Company’s revenues. For the three months ended March 31, 2022, one customer accounted for 29% of the Company’s revenues. As of March 31, 2023, one customer accounted for 13% of the Company’s accounts receivable. As of December 31, 2022, one customer accounted for 22% of the Company’s accounts receivable.
For the three months ended March 31, 2023, no suppliers accounted for more than 10% of the Company’s total purchases. For the three months ended March 31, 2022, one supplier accounted for 11% of the Company’s total
14
purchases. As of March 31, 2023, no supplier accounted for more than 10% of the Company’s accounts payable. As of December 31, 2022, one supplier accounted for 13% of the Company’s accounts payable.
8. Commitments and Contingencies
Tax Matters
We are subject to a number of state and local taxes that are not income-based. As many of these taxes are subject to assessment and audit by the taxing authorities, it is possible that an assessment or audit could result in additional taxes due. We accrue for additional taxes when we determine that it is probable that we will have incurred a liability and we can reasonably estimate the amount of the liability. On June 16, 2022, Cause Number CV20-09-372, styled Solaris Oilfield Site Services v. Brown County Appraisal District, was presented to the 35th District Court of Brown County, Texas. The 35th District Court of Brown County ruled in favor of Brown County Appraisal District regarding the disqualification of our equipment for certain property tax exemptions. While we intend to vigorously appeal this ruling, we have recognized $3.1 in accrued liabilities as of March 31, 2023. No additional contingencies were recognized during the three months period ended March 31, 2023. If this litigation is ultimately resolved against us, in whole or in part, it is possible that the resolution of this matter could be material to our consolidated results of operations or cash flows.
Litigation and Claims
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.
See Note 9 “Related Party Transactions” for contingent payments related to contracts with customers.
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 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 March 31, 2023 and 2022, Solaris LLC paid $0.5 and $0.2, respectively, for these services. As of March 31, 2023, and December 31, 2022, 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 March 31, 2023 and December 31, 2022, 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 $4.1 as of March 31, 2023.
As of March 31, 2023, THRC Holdings, LP, an entity managed by THRC Management, LLC (collectively “THRC”), held shares representing a 9.6% ownership of the Company’s Class A common stock and 6.9% total shares outstanding. THRC is affiliated with certain of the Company’s customers, including ProFrac Services, LLC (“ProFrac”) and certain of the Company’s suppliers including Automatize Logistics, LLC, IOT-EQ, LLC and Cisco Logistics, LLC (“Cisco”) (together the “THRC Affiliates”). For the three months ended March 31, 2023, the Company recognized revenues related to our service offering provided to the THRC Affiliates of $4.9. Accounts receivable related to THRC Affiliates as of March 31, 2023 was $3.8. For the three months ended March 31, 2023, the Company recognized cost of services provided by THRC Affiliates of $1.1. There was $1.0 of accounts payable related to THRC Affiliates as of March 31, 2023.
Solaris is the dedicated wellsite sand storage provider (“Services”) to certain THRC Affiliates. Solaris provides volume-based pricing for the Services and may be required to pay up to $4.0 in payments throughout a term ending in
15
2024, contingent upon the ability of these affiliates to meet minimum Services revenue thresholds. As of March 31, 2023, accounts payable to THRC Affiliates related to these services is $0.9, which was recognized in revenues.
On January 31, 2023, the Company made payments of $1.1 under the Tax Receivable Agreement. Solaris LLC made a tax distribution to Solaris Inc. of $1.1 to satisfy these obligations and concurrently made a cash distribution on a pro rata basis to each of the other members of Solaris LLC of $0.4.
10. Subsequent Events
On April 28, 2023, the Company executed a second amendment to the Credit Agreement. Refer to Note 4. “Senior Secured Credit Facility.”
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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
References to “we,” “us,” “our,” “Solaris Inc.” or the “Company” refer to Solaris Oilfield Infrastructure, Inc. (either individually or together with its subsidiaries, as the context requires). 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 in our Annual Report on Form 10-K for the year ended December 31, 2022, as updated by our subsequent filings with 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, last mile 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 that reduce operational footprint and costs during the completion phase of well development. The majority of our revenue is currently derived from providing equipment and services related to our mobile proppant and fluid management systems and our last mile logistics management services. We also generate revenue from new technology and offerings that work in conjunction with our mobile proppant and fluid management systems, including our proprietary top fill equipment and AutoBlend™ integrated electric blender. Our equipment and services are deployed across active oil and natural gas basins in the United States.
Recent Trends and Outlook
Oil and natural gas prices were volatile during the first quarter of 2023 driven by changing expectations of global economic demand growth, geopolitical factors and an oversupply of natural gas in North America. WTI oil prices averaged over $80 per barrel in fourth quarter 2022 and have remained volatile in a range between the high $60s and low $80s per barrel since the start of 2023. Henry Hub natural gas prices averaged over $6 per MMBtu during fourth quarter 2022 and decreased to $2-3 per MMBtu currently. Per the published Baker Hughes rig count, oil-directed activity represents approximately 80% of US rig count activity. While oil prices remain at healthy levels to support a sustained level of US drilling and completion activity, such activity could be impacted by the recent decline in natural gas prices as well as continued capital discipline among many operators, supply chain tightness and elevated inflation.
Overall, demand for our offerings is predominantly influenced by the level of oil and natural gas well drilling and completion activity. 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 or longer. Recently, our fully utilized system count growth has outpaced the rig count trend due primarily to new technology-led growth with new and existing customers. A recent increase in pricing and incremental earnings from our new products has also allowed us to grow earnings despite a flat fully utilized system count. We expect continued earnings growth from these new product lines could continue to provide an offset for any future changes in underlying oil and gas activity and Solaris sand systems.
The sustainability of favorable supply-demand dynamics and a strong commodity environment will depend on multiple factors, including any supply chain disruptions, potential regulatory changes, uncertainty around a potential economic slowdown and potential impacts from geopolitical disruptions. 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. Additionally, consolidation can drive procurement 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.
Results of Operations
Three Months Ended March 31, 2023 Compared to Three Months Ended March 31, 2022
Change
(in thousands)
25,992
(185)
25,807
15,552
1,488
1,327
(29)
18,338
7,469
(380)
7,089
Expense for income taxes
(874)
6,215
(2,148)
4,067
Revenue increased $25.8 million, or 45%, to $82.7 million for the three months ended March 31, 2023 compared to $56.9 million for the three months ended March 31, 2022. The increase in revenue is primarily related to an activity-driven increase in demand for our products and services and updated pricing. Mobile proppant systems, on a fully utilized basis, increased from 75 systems for the three months ended March 31, 2022, to 92 systems for the three months ended March 31, 2023, in response to the increase in industry activity levels and by the introduction of new products.
Cost of Services
Cost of services, excluding depreciation and amortization expense, increased $15.6 million, or 41%, to $53.2 million for the three months ended March 31, 2023, compared to $37.7 million for the three months ended March 31, 2022. The increase was primarily due to an increase in operating costs to support an activity-driven increase in demand for our products and services. Cost of services, excluding depreciation and amortization as a percentage of revenue was 64% and 66% for the three months ended March 31, 2023 and 2022, respectively.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $1.3 million, or 25%, to $6.5 million for the three months ended March 31, 2023 compared to $5.2 million for the three months ended March 31, 2022. Selling, general and administrative expenses increased primarily due to increases in headcount and professional fees.
Provision for Income Taxes
During the three months ended March 31, 2023, we recognized a combined United States federal and state expense for income taxes of $2.5 million, an increase of $0.9 million as compared to the $1.6 million income tax expense we recognized during the three months ended March 31, 2022. This change was attributable to operating gains. The effective combined United States federal and state income tax rates were 17.2% and 22.3% for the three months ended
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March 31, 2023 and 2022, 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.
Comparison of Non-GAAP Financial Measures
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.
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
459
79
380
Income taxes (1)
2,486
1,612
874
EBITDA
23,299
14,342
8,957
Stock-based compensation expense (2)
387
(361)
(366)
Other (3)
200
(200)
400
Adjusted EBITDA
25,118
15,740
9,378
Three Months Ended March 31, 2023 Compared to Three Months Ended March 31, 2022: EBITDA and Adjusted EBITDA
EBITDA increased $9.0 million to $23.3 million for the three months ended March 31, 2023 compared to $14.3 million for the three months ended March 31, 2022. Adjusted EBITDA increased $9.4 million to $25.1 million for the three months ended March 31, 2023 compared to $15.7 million for the three months ended March 31, 2022. The changes in EBITDA and Adjusted EBITDA were primarily due to the changes in revenues and expenses, discussed above.
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Liquidity and Capital Resources
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, 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 March 31, 2023, cash and cash equivalents totaled $2.2 million. We have $26.0 million in borrowings outstanding under our Credit Agreement. As of May 3, 2023, the Company has the ability to draw up to approximately $34.5 million under the amended Credit Agreement. We believe that our cash on hand, operating cash flow and available borrowings under our Credit Agreement will provide sufficient liquidity to address our future cash needs, including capital expenditures, working capital investments, and dividends for the next 12 months and beyond.
The Company’s Board of Directors authorized a share repurchase program on March 2, 2023, with an approved limit of $50.0 million and no set term limits. As of March 31, 2023, we have purchased 1,641,000 shares of Class A common stock for $14.4 million, or $8.80 per share, resulting in $35.6 million remaining under the authorized share repurchase program.
All purchases made pursuant to the authorized share repurchase plan were made in accordance with applicable securities laws from time to time in the open-market or through private transactions, depending on market conditions, may be made pursuant to a trading plan meeting the requirements of Rule 10b-18 under the Exchange Act, and may be discontinued at any time.
Cash Flows
The following table summarizes our cash flows for the periods indicated:
10,580
(7,319)
1,448
Net change in cash
4,709
Significant Sources and Uses of Cash Flows
Operating Activities. Net cash provided by operating activities was $16.8 million for the three months ended March 31, 2023, compared to net cash provided by operating activities of $6.3 million for the three months ended March 31, 2022. The increase of $10.5 million in operating cash flow was primarily attributable to increased profitability from operations.
Investing Activities. Net cash used in investing activities was $18.8 million for the three months ended March 31, 2023, compared to net cash used in investing activities of $11.5 million for the three months ended March 31, 2022. The increase in investing activities of $7.3 million is primarily due to capital expenditures related to new technologies and enhancements to our fleet.
Financing Activities. Net cash used in financing activities of $4.7 million for the three months ended March 31, 2023 was primarily related to the repurchase of shares for $14.4 million, quarterly dividends of $3.7 million to Class A common stock shareholders, distributions to Solaris LLC unitholders of $2.0 million, payments under finance leases and
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insurance of $1.3 million, and $1.3 million of payments related to vesting of stock-based compensation, partially offset by net borrowings under the Credit Agreement of $18.0 million. Net cash used in financing activities of $6.1 million for the three months ended March 31, 2022 was primarily related to quarterly dividends of $3.4 million to Class A common stock shareholders, $1.4 million in distributions to Solaris LLC unitholders, and $1.0 million of payments related to vesting of stock-based compensation.
Capital Sources
Senior Secured Credit Facility
See Note 4. “Senior Secured Credit Facility” to our condensed consolidated financial statements as of March 31, 2023, for a discussion of our senior secured credit facility.
Future Sources and Uses of Cash
Our material cash commitments consist primarily of obligations under our Credit Agreement, Tax Receivable Agreement, finance and operating leases for property and equipment, and purchase obligations as a part of normal operations. We have no material off balance sheet arrangements as of March 31, 2023, except for purchase commitments under supply agreements disclosed below.
As of March 31, 2023, we expect to pay approximately $0.1 million in commitment fees on our Credit Agreement within the next twelve months, calculated based on the unused portion of lender commitments, at the applicable commitment fee rate of 0.375%. As of March 31, 2023, if our borrowings under the Credit Agreement remain at $26.0 million, we expect to pay approximately $2.1 million in interest within the next twelve months, calculated based on the weighted average interest rate on the borrowings outstanding as of March 31, 2023 of approximately 7.87%.
As of March 31, 2023, we had purchase obligations of approximately $23.9 million payable within the next twelve months.
Critical Accounting Policies and Estimates
We had no material changes in our critical accounting policies and estimates during the three months ended March 31, 2023, 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, 2022 for additional information.
Recent Accounting Pronouncements
Recently Adopted Accounting Standards
None.
See Note 2. “Summary of Significant Accounting Policies – Recently Issued Accounting Standards” to our condensed consolidated financial statements included in this Quarterly Report, for a discussion of recently issued accounting standards.
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, except for purchase commitments under supply agreements.
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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, 2022. Our exposure to market risk has not changed materially since December 31, 2022.
Credit Risk
The majority of our accounts receivable have payment terms of 60 days or less. As of March 31, 2023, one customer accounted for 13% of our total accounts receivable. As of December 31, 2022, one customer collectively accounted for 22% 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, 2022 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 March 31, 2023. Disclosure controls refer to controls and procedures 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 by our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure and is recorded, processed, and summarized 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 March 31, 2023, our principal executive officer and principal financial officer have concluded that, as of such date, our disclosure controls and procedures were not effective due to the material weakness in our internal control over financial reporting described below.
As discussed in our Annual Report on Form 10-K for the year ended December 31, 2022, management identified a material weakness related to ineffective information technology general controls (“ITGCs”) in the areas of user access, application change management, operating system and logical access controls and segregation of duties for a third-party information technology (“IT”) system that supports the Company’s financial reporting process for its last mile logistics services, which includes the costs of providing that service and the associated pass through revenues. The material weakness did not result in any identified misstatements to the financial statements and there were no changes to previously released financial results.
Remediation Plan for Material Weakness
In response to the material weakness, management, with oversight of the Audit Committee of the Company’s Board of Directors, has begun the process of, and is committee to, designing and implementing effective measures to strengthen our internal controls over financial reporting and remediate the material weakness. Our planned internal control remediation efforts include:
While these actions and planned actions are subject to ongoing management evaluation and will require validation and testing of the design and operating effectiveness of internal controls over a sustained period of financial reporting
cycles, we are committed to the continuous improvement of our internal control over financial reporting and will continue to diligently review our internal control over financial reporting.
Changes in Internal Control over Financial Reporting
Except for the changes discussed above, 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 March 31, 2023 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.
On June 16, 2022, Cause Number CV20-09-372, styled Solaris Oilfield Site Services v. Brown County Appraisal District, was presented to the 35th District Court of Brown County, Texas. The 35th District Court of Brown County ruled in favor of Brown County Appraisal District regarding the disqualification of our equipment for certain property tax exemptions. While we intend to vigorously appeal this ruling, we have recognized $3.1 in Accrued Liabilities in the three months ended March 31, 2023. No additional contingencies were recognized during the three months ended March 31, 2023. If this litigation is ultimately resolved against us, in whole or in part, it is possible that the resolution of this matter could be material to our consolidated results of operations or cash flows.
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, 2022, as filed with the SEC on March 9, 2023. 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, 2022.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Unregistered Sales of Equity Securities
Issuer Purchases of Equity Securities
The following table presents the total number of shares of our Class A common stock that we purchased during the three months ended March 31, 2023, and the average price paid per share:
Total Number of
Maximum Dollar
Purchased
Value of Shares
Average Price
as Part of Publicly
that May Yet be
Paid Per
Announced
Purchased Under
Period
Purchased (1)
Share
Plan (2)
the Plan (2)
January 1 - January 31
50,000,000
February 1 - February 28
March 1 - March 31
1,788,838
8.82
1,641,000
35,557,509
Item 3.Defaults upon Senior Securities
Item 4.Mine Safety Disclosures
Item 5.Other Information
The information set forth below is included herein for the purpose of providing the disclosure required under “Item 1.01 – Entry into a Material Definitive Agreement” of Form 8-K.
As previously disclosed, Solaris Oilfield Infrastructure, LLC (“Solaris LLC”) is party to that certain Amended and Restated Credit Agreement, dated as of April 26, 2019 (as further amended, restated or supplemented) by and among Solaris LLC, as borrower, each of the guarantors party thereto, each of the lenders party thereto and Wells Fargo Bank, National Association, as administrative agent, which contained an initial $50.0 million borrowing facility (the “Credit Agreement”).
On April 28, 2023, Solaris LLC entered into Amendment No. 2 to Amended and Restated Credit Agreement, by and among Solaris LLC, as borrower, each of the guarantors party thereto, each of the lenders party thereto and Wells Fargo Bank, National Association, as administrative agent (the “2023 Amendment”) to the Credit Agreement, which amended the Credit Agreement, to, among other things, (i) introduce an additional $25.0 million facility (the “Additional Facility”) to increase available borrowings under the Credit Agreement from $50.0 million to $75.0 million, while preserving the original accordion feature, to provide for a maximum of $100.0 million of total available capacity under the Credit Agreement and (ii) modify certain covenant requirements as more fully described in the 2023 Amendment. The 2023 Amendment additionally contains a reducing revolver feature whereby the Additional Facility will reduce 15% beginning in the first quarter of 2024 through the fourth quarter of 2024 and increasing to 20% thereafter with the balance due at maturity. The Credit Agreement continues to have a maturity date of April 26, 2025.
The foregoing description of the 2023 Amendment is a summary only and is qualified in its entirety to the complete text of the 2023 Amendment, a copy of which is attached as Exhibit 10.3 to this Quarterly Report on Form 10-Q and incorporated by reference herein.
The information set forth below is included herein for the purposes of providing the disclosure required under “Item 2.03 – Creation of a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement of a Registrant” of Form 8-K.
The information relating to the 2023 Amendment set forth above in Item 5 of this Quarterly Report on Form 10-Q is incorporated into this section of Item 5 by reference.
Item 6.Exhibits
Exhibit No.
Description
3.1
Amended and Restated Certificate of Incorporation of Solaris Oilfield Infrastructure, Inc. (incorporated by reference to Exhibit 3.1 to the Registrant’s Form 8-K (File No. 001-38090) filed with the Commission on May 23, 2017).
3.2
Amended and Restated Bylaws of Solaris Oilfield Infrastructure, Inc. (incorporated by reference to Exhibit 3.2 to the Registrant’s Form 8-K (File No. 001-38090) filed with the Commission on May 23, 2017).
10.1†
Form of Solaris Oilfield Infrastructure, Inc. Executive Change in Control Severance Plan, effective as of March 1, 2023 (incorporated by reference to Exhibit 10.1 to Registrant’s Form 8-K (File No. 001-38090) filed with the Commission on March 7, 2023).
10.2†*
Form of Performance-Based Restricted Stock Unit (PSU) Agreement under the Solaris Oilfield Infrastructure, Inc. Long Term Incentive Plan.
10.3#*
Amendment No. 2 to Amended and Restated Credit Agreement, dated as of April 28, 2023, by and among Solaris Oilfield Infrastructure, LLC, as borrower, each of the guarantors party thereto, each of the lenders party thereto and Wells Fargo Bank, National Association, as administrative agent.
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*
Inline XBRL Instance Document.
101.SCH*
Inline XBRL Taxonomy Extension Schema Document.
101.CAL*
Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF*
Inline XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB*
Inline XBRL Taxonomy Extension Labels Linkbase Document.
101.PRE*
Inline XBRL Taxonomy Extension Presentation Linkbase Document.
104*
Cover Page Interactive Data File (Embedded within the Inline XBRL document and included in Exhibit 101)
* 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.
†
Management contract or compensatory plan or arrangement.
# Certain schedules, annexes or exhibits have been omitted pursuant to Item 601(a)(5) of Regulation S-K, but will be furnished supplementally to the SEC upon request.
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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.
May 4, 2023
By:
/s/ William A. Zartler
William A. Zartler
Chairman and Chief Executive Officer
(Principal Executive Officer)
/s/ Kyle S. Ramachandran
Kyle S. Ramachandran
President and Chief Financial Officer
(Principal Financial Officer)