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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
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:
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Securities registered pursuant to Section 12(b) of the Act:
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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.
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).
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 | ☐ | ☒ | |
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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
As of October 27, 2020, the registrant had
SOLARIS OILFIELD INFRASTRUCTURE, INC.
TABLE OF CONTENTS
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Management’s Discussion and Analysis of Financial Condition and Results of Operations | 17 | |
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i
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, which has been significantly impacted by the decline in global crude oil demand and crude oil prices for an uncertain period of time that correspondingly have led to a significant reduction in domestic capital spending; |
| ● | developments in the global economy as well as the public health crisis related to the COVID-19 virus and resulting demand and supply for oil and natural gas; |
| ● | 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; |
| ● | 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; |
| ● | natural or man-made disasters and other external events that may disrupt our operations; |
| ● | continued volatility of oil and natural gas prices; |
| ● | large or multiple customer defaults, including defaults resulting from actual or potential insolvencies; |
| ● | technological advancements in well completion technologies; |
| ● | competitive conditions in our industry; |
| ● | inability to fully protect our intellectual property rights; |
| ● | changes in the long-term supply of and demand for oil and natural gas; |
| ● | actions taken by our customers, competitors and third-party operators; |
| ● | fluctuations in transportation costs or the availability or reliability of transportation to supply our systems; |
1
| ● | changes in the availability and cost of capital; |
| ● | our ability to successfully implement our business plan; |
| ● | our ability to complete growth projects on time and on budget; |
| ● | the price and availability of debt and equity financing (including changes in interest rates); |
| ● | changes in our tax status; |
| ● | our ability to successfully develop our research and technology capabilities and implement technological developments and enhancements and expand our product and service offerings; |
| ● | changes in market price and availability of materials; |
| ● | the effects of existing and future laws and governmental regulations (or the interpretation thereof); |
| ● | cyber-attacks targeting systems and infrastructure used by the oil and natural gas industry; |
| ● | failure to secure or maintain contracts with our largest customers; |
| ● | the effects of future litigation; |
| ● | credit markets; |
| ● | business acquisitions; |
| ● | weather and other natural phenomena; |
| ● | uncertainty regarding our future operating results; |
| ● | significant changes in the transportation industries that service our business, such as increased regulation and embargoes; |
| ● | 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, 2019, this Quarterly Report and in our other filings with the United States Securities and Exchange Commission (the “SEC”), which may cause our actual results, performance or achievements to differ materially from anticipated future results, performance or achievements expressed or implied by such forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events, changed circumstances or otherwise, unless required by law.
2
PART 1: FINANCIAL INFORMATION
Item 1: Financial Statements
SOLARIS OILFIELD INFRASTRUCTURE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
(Unaudited)
| September 30, | December 31, | ||||
2020 | 2019 | |||||
Assets |
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Current assets: |
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Cash and cash equivalents | $ | | $ | | ||
Accounts receivable, net of allowances for credit losses |
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Prepaid expenses and other current assets |
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Inventories |
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Total current assets |
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Property, plant and equipment, net |
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Non-current inventories | | — | ||||
Operating lease right-of-use assets | | | ||||
Goodwill |
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Intangible assets, net |
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Deferred tax assets | | | ||||
Other assets |
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Total assets | $ | | $ | | ||
Liabilities and Stockholders' Equity |
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Current liabilities: |
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Accounts payable | $ | | $ | | ||
Accrued liabilities |
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Current portion of payables related to Tax Receivable Agreement | — | | ||||
Current portion of operating lease liabilities | | | ||||
Current portion of finance lease liabilities |
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Other current liabilities | | | ||||
Total current liabilities |
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Operating lease liabilities, net of current | | | ||||
Finance lease liabilities, net of current |
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Payables related to Tax Receivable Agreement | | | ||||
Other long-term liabilities | | | ||||
Total liabilities |
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Commitments and contingencies (Note 9) |
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Stockholders' equity: |
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Preferred stock, $ | ||||||
Class A common stock, $ | | | ||||
Class B common stock, $ | ||||||
Additional paid-in capital | | | ||||
Retained earnings |
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Treasury stock (at cost), | — | ( | ||||
Total stockholders' equity attributable to Solaris |
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Non-controlling interest | | | ||||
Total stockholders' equity | | | ||||
Total liabilities and stockholders' equity | $ | | $ | | ||
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 per share amounts)
(Unaudited)
Three Months Ended | Nine Months Ended | |||||||||||
September 30, | September 30, | |||||||||||
| 2020 |
| 2019 |
| 2020 |
| 2019 | |||||
Revenue: |
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System rental | $ | | $ | | $ | | $ | | ||||
System services | | | | | ||||||||
Transloading services | | | | | ||||||||
Inventory software services | | | | | ||||||||
Total revenue |
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Operating costs and expenses: |
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Cost of system rental (excluding $ |
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Cost of system services (excluding $ |
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Cost of transloading services (excluding $ | | | | | ||||||||
Cost of inventory software services (excluding $ | | | | | ||||||||
Depreciation and amortization |
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Selling, general and administrative (excluding $ |
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Impairment losses | — | — | | — | ||||||||
Other operating expenses | | | | | ||||||||
Total operating costs and expenses |
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Operating income (loss) |
| ( |
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| ( |
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Interest income (expense), net |
| ( |
| ( |
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| ( | ||||
Total other expense (income) |
| ( |
| ( |
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| ( | ||||
Income (loss) before income tax expense |
| ( |
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| ( |
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Benefit (provision) for income taxes |
| |
| ( |
| |
| ( | ||||
Net income (loss) | ( | | ( | | ||||||||
Less: net (income) loss related to non-controlling interests | | ( | | ( | ||||||||
Net income (loss) attributable to Solaris | $ | ( | $ | | $ | ( | $ | | ||||
Earnings per share of Class A common stock – basic | $ | ( | $ | | $ | ( | $ | | ||||
Earnings per share of Class A common stock – diluted | $ | ( | $ | | $ | ( | $ | | ||||
Basic weighted-average shares of Class A common stock outstanding | | | | | ||||||||
Diluted weighted-average shares of Class A common stock outstanding | | | | | ||||||||
Cost of system rental | $ | ( | $ | | $ | | $ | | ||||
Cost of system services | | | | | ||||||||
Cost of transloading services | | | | | ||||||||
Selling, general and administrative | | | | | ||||||||
Stock-based compensation expense | $ | | $ | | $ | | $ | |
]
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)
Nine Months Ended September 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 | | $ | | | $ | — | $ | | $ | | | $ | ( | $ | | $ | | ||||||||||
Exchange of Solaris LLC Units and shares of Class B common stock for shares of Class A common stock | | | ( | — | | — | — | — | ( | — | |||||||||||||||||
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 | — | — | — | — | ( | — | — | — | — | ( | |||||||||||||||||
Stock option exercises | | — | — | — | | — | | ( | ( | ( | |||||||||||||||||
Share and unit repurchases and retirements | ( | ( | — | — | ( | ( | — | — | ( | ( | |||||||||||||||||
Stock-based compensation | — | — | — | — | | — | — | — | | | |||||||||||||||||
Vesting of restricted stock | | | — | — | | — | | ( | ( | ( | |||||||||||||||||
Solaris LLC distribution paid to Solaris LLC unitholders (other than Solaris Inc.) at $ | — | — | — | — | — | — | — | — | ( | ( | |||||||||||||||||
Dividends paid ($ | — | — | — | — | — | ( | — | — | — | ( | |||||||||||||||||
Treasury stock retirements | — | — | — | — | ( | ( | ( | | — | — | |||||||||||||||||
Net loss | — | — | — | — | — | ( | — | — | ( | ( | |||||||||||||||||
Balance at March 31, 2020 | | | | — | | | — | — | | | |||||||||||||||||
Exchange of Solaris LLC Units and shares of Class B common stock for shares of Class A common stock | | | ( | — | | — | — | — | ( | | |||||||||||||||||
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 | — | — | — | — | ( | — | — | — | — | ( | |||||||||||||||||
Stock option exercises | | — | — | — | | — | — | — | ( | | |||||||||||||||||
Stock-based compensation | — | — | — | — | | — | — | — | | | |||||||||||||||||
Vesting of restricted stock | | — | — | — | | — | — | — | ( | — | |||||||||||||||||
Cancelled shares withheld for taxes from RSU vesting | ( | — | — | — | ( | — | — | — | ( | ( | |||||||||||||||||
Solaris LLC distribution paid to Solaris LLC unitholders (other than Solaris Inc.) at $ | — | — | — | — | — | — | — | — | ( | ( | |||||||||||||||||
Dividends paid ($ | — | — | — | — | — | ( | — | — | — | ( | |||||||||||||||||
Net loss | — | — | — | — | — | ( | — | — | ( | ( | |||||||||||||||||
Balance at June 30, 2020 | | $ | | | $ | — | $ | | $ | | — | $ | — | $ | | $ | | ||||||||||
Exchange of Solaris LLC Units and shares of Class B common stock for shares of Class A common stock | | | ( | — | | — | — | — | ( | — | |||||||||||||||||
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 | — | — | — | — | ( | — | — | — | — | ( | |||||||||||||||||
Stock-based compensation | — | — | — | — | | — | — | — | | | |||||||||||||||||
Vesting of restricted stock | | | — | — | | — | — | — | ( | — | |||||||||||||||||
Cancelled shares withheld for taxes from RSU vesting | ( | — | — | — | ( | ( | — | — | ( | ( | |||||||||||||||||
Solaris LLC distribution paid to Solaris LLC unitholders for income tax withholding | — | — | — | — | ( | — | — | — | ( | ( | |||||||||||||||||
Solaris LLC distribution paid to Solaris LLC unitholders (other than Solaris Inc.) at $ | — | — | — | — | — | — | — | — | ( | ( | |||||||||||||||||
Dividends paid ($ | — | — | — | — | ( | — | — | — | ( | ||||||||||||||||||
Net loss | — | — | — | — | — | ( | — | — | ( | ( | |||||||||||||||||
Balance at September 30, 2020 | | $ | | | $ | — | $ | | $ | | — | $ | — | $ | | $ | | ||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
SOLARIS OILFIELD INFRASTRUCTURE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(In thousands)
(Unaudited)
Nine Months Ended September 30, 2019 | |||||||||||||||||||||||||||
Class A | Class B | Additional | Non- | Total | |||||||||||||||||||||||
Common Stock | Common Stock | Paid-in | Retained | Treasury Stock | controlling | Stockholders' | |||||||||||||||||||||
| Shares |
| Amount |
| Shares |
| Amount |
| Capital |
| Earnings |
| Shares |
| Amount |
| Interest |
| Equity | ||||||||
Balance at January 1, 2019 | | $ | | | $ | — | $ | | $ | | | $ | ( | $ | | $ | | ||||||||||
Effect of ASU No. 2016-02 implementation | — | — | — | — | | ( | — | — | ( | ( | |||||||||||||||||
Exchange of Solaris LLC Units and shares of Class B common stock for shares of Class A common stock | | | ( | — | | — | — | — | ( | — | |||||||||||||||||
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 | — | — | — | — | ( | — | — | — | — | ( | |||||||||||||||||
Stock option exercises | | | — | — | | — | | ( | ( | ( | |||||||||||||||||
Stock-based compensation | — | — | — | — | | — | — | — | | | |||||||||||||||||
Vesting of restricted stock | — | — | — | — | | — | — | ( | ( | ( | |||||||||||||||||
Solaris LLC distribution paid to Solaris LLC unitholders at $ | — | — | — | — | — | — | — | — | ( | ( | |||||||||||||||||
Dividends paid ($ | — | — | — | — | — | ( | — | — | — | ( | |||||||||||||||||
Net income | — | — | — | — | — | | — | — | | | |||||||||||||||||
Balance at March 31, 2019 | | | | — | | | | ( | | | |||||||||||||||||
Exchange of Solaris LLC Units and shares of Class B common stock for shares of Class A common stock | | | ( | — | | — | — | — | ( | — | |||||||||||||||||
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 | — | — | — | — | ( | — | — | — | — | ( | |||||||||||||||||
Stock option exercises | | — | — | — | | — | — | — | ( | | |||||||||||||||||
Stock-based compensation | — | — | — | — | | — | — | — | | | |||||||||||||||||
Vesting of restricted stock | | | — | — | | — | | ( | ( | ( | |||||||||||||||||
Solaris LLC distribution paid to Solaris LLC unitholders at $ | — | — | — | — | — | — | — | — | ( | ( | |||||||||||||||||
Dividends paid ($ | — | — | — | — | — | ( | — | — | — | ( | |||||||||||||||||
Net income | — | — | — | — | — | | — | — | | | |||||||||||||||||
Balance at June 30, 2019 | | $ | | | $ | — | $ | | $ | | | $ | ( | $ | | $ | | ||||||||||
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 | — | — | — | — | | — | — | — | — | | |||||||||||||||||
Stock-based compensation | — | — | — | — | | — | — | — | | | |||||||||||||||||
Vesting of restricted stock | | | — | — | | — | | ( | ( | ( | |||||||||||||||||
Solaris LLC distribution paid to Solaris LLC unitholders at $ | — | — | — | — | — | — | — | — | ( | ( | |||||||||||||||||
Dividends paid ($ | — | — | — | — | — | ( | — | — | — | ( | |||||||||||||||||
Net income | — | — | — | — | — | | — | — | | | |||||||||||||||||
Balance at September 30, 2019 | | $ | | | $ | — | $ | | $ | | | $ | ( | $ | | $ | | ||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
SOLARIS OILFIELD INFRASTRUCTURE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
For the Nine Months Ended | ||||||
September 30, | ||||||
| 2020 |
| 2019 | |||
Cash flows from operating activities: |
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Net (loss) income |
| $ | ( |
| $ | |
Adjustment to reconcile net (loss) income to net cash provided by operating activities: |
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Depreciation and amortization |
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Loss on disposal of asset |
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Allowance for credit losses | | — | ||||
Stock-based compensation |
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Amortization of debt issuance costs |
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Deferred income tax expense | ( | | ||||
Impairment losses | | — | ||||
Other | ( | | ||||
Changes in operating assets and liabilities: |
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Accounts receivable |
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| ( |
Prepaid expenses and other assets |
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Inventories |
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| ( |
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| ( |
Accounts payable |
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| ( |
Accrued liabilities |
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| ( |
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Deferred revenue | — | ( | ||||
Net cash provided by operating activities |
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Cash flows from investing activities: |
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Investment in property, plant and equipment |
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| ( |
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| ( |
Proceeds from disposal of assets | | | ||||
Cash received from insurance proceeds | | | ||||
Net cash used in investing activities |
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| ( |
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| ( |
Cash flows from financing activities: |
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Share repurchases | ( | — | ||||
Distribution and dividend paid to Solaris LLC unitholders (other than Solaris Inc.) and Class A common shareholders | ( | ( | ||||
Distribution to Solaris LLC unitholders for income tax withholding | ( | — | ||||
Payments under finance leases |
| ( |
| ( | ||
Payments under insurance premium financing |
| — |
| ( | ||
Proceeds from stock option exercises | | | ||||
Payments for shares withheld for taxes from RSU vesting and cancelled | ( | — | ||||
Payments related to purchase of treasury stock | ( | ( | ||||
Payments related to debt issuance cost | — | ( | ||||
Repayment of senior secured credit facility | — | ( | ||||
Net cash used in financing activities |
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| ( |
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| ( |
Net increase (decrease) in cash |
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| ( |
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Cash at beginning of period |
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Cash at end of period |
| $ | |
| $ | |
Non-cash activities |
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Investing: |
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Capitalized depreciation in property, plant and equipment |
| $ | |
| $ | |
Capitalized stock based compensation | | | ||||
Property and equipment additions incurred but not paid at period-end | | | ||||
Property, plant and equipment additions transferred from inventory | | | ||||
Financing: | ||||||
Insurance premium financing | — | | ||||
Cash paid for: |
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Interest |
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Income Taxes | | | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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
Solaris Oilfield Infrastructure, Inc. (either individually or together with its subsidiaries, as the context requires, the “Company” or “Solaris”), a Delaware corporation, is an oilfield services company that provides supply chain management and logistics solutions designed to drive efficiencies and reduce costs for the oil and natural gas industry. The Company is headquartered in Houston, Texas.
Recent Developments
The global response to COVID-19 as well as the actions taken by a number of global oil producers have contributed to steep declines in the demand and pricing for oil, natural gas and NGLs, negatively impacting U.S. producers and reducing demand for our services. Our revenues have decreased materially as a result of these lower activity levels. In response, we have reduced direct operating costs and selling, general and administrative (“SG&A”) expenses, including reducing workforce levels across the Company, and we have lowered our capital expenditures. We have also recognized impairments on certain assets which is discussed further in Note. 2. Although pricing has stabilized, the commodity price environment is expected to remain depressed based on over-supply, decreased demand and a potential global economic recession. In response, in addition to other measures, the Company has reduced costs and lowered its capital budget for the year.
2. Summary of Significant Accounting Policies
Basis of Presentation and Consolidation
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 nine months ended September 30, 2020 and 2019 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, 2019 and notes thereto.
Solaris Inc. is the managing member of Solaris Oilfield Infrastructure, LLC (“Solaris LLC”) and is responsible for all operational, management and administrative decisions relating to Solaris LLC's business. Solaris Inc. consolidates the financial results of Solaris LLC and its subsidiaries and reports non-controlling interest related to the portion of the units in Solaris LLC (the “Solaris LLC Units”) not owned by Solaris Inc., which will reduce net income attributable to the holders of Solaris Inc.’s Class A common stock.
All material intercompany transactions and balances have been eliminated upon consolidation.
Use of Estimates
The preparation of condensed consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Significant estimates used in the preparation of these condensed consolidated financial statements include, but are not limited to, collectability of accounts receivable, stock-based compensation, depreciation associated with property,
8
plant and equipment and related impairment considerations of those assets, impairment considerations of goodwill, determination of fair value of intangible assets acquired in business combinations, income taxes, determination of the present value of lease payments and right-of-use assets, inventory valuation and certain other assets and liabilities. Actual results could differ from management’s best estimates as additional information or actual results become available in the future, and those differences could be material.
Inventories
Inventories consist of materials used in the manufacturing of the Company’s systems, which include raw materials and purchased parts and is stated at the lower of cost or net realizable value. Net realizable value is determined, giving consideration to quality, excessive levels, obsolescence and other factors. Adjustments that reduce stated amounts will be recognized as impairments in the condensed consolidated statements of operations. The Company recognized a write down of the carrying value of inventory of $
Goodwill
Due to COVID-19 and reduced demand for our services, we performed an interim goodwill impairment assessment as of March 31, 2020.
We estimated the fair value for each reporting unit using an income approach including a discounted cash flow analysis and the use of significant unobservable inputs representative of a Level 3 fair value measurement. Some of the more significant assumptions inherent in the income approach include the estimated future net annual cash flows for each reporting unit and the discount rate. The Company selected assumptions used in the discounted cash flow projections using historical data supplemented by current and anticipated market conditions, near term declines and estimated growth rates. These estimates are based upon assumptions believed to be reasonable. However, given the inherent uncertainty in determining the assumptions underlying a discounted cash flow analysis, particularly in the current volatile market, actual results may differ from those used in the Company’s valuations which could result in additional impairment charges in the future. The discount rates used to value the Company’s reporting units were between
Impairment of Long-Lived Assets, Definite-lived Intangible Assets and ROU Assets
Due to COVID-19 and reduced demand for our services, the Company concluded that such circumstances warranted an evaluation of whether indicators of impairment are present for its asset groups as of March 31, 2020. Based on this evaluation, the Company performed tests for recoverability of the carrying value of these assets using forecasted undiscounted cash flows.
The Company noted that the undiscounted cash flows as well as the fair value of the assets associated with our Kingfisher Facility exceeded their carrying values and the Company recognized impairment losses of $
9
Given the inherent uncertainty in determining the assumptions underlying both undiscounted and discounted cash flow analyses, particularly in the current volatile market, actual results may differ which could result in additional impairment charges. We estimated the fair value of the Kingfisher Facility using an income approach including a discounted cash flow analysis and the use of significant unobservable inputs representative of a Level 3 fair value measurement. Some of the more significant assumptions inherent in the income approach include the estimated future net annual cash flows for each reporting unit and the discount rate. The Company selected assumptions used in the discounted cash flow projections using historical data supplemented by current and anticipated market conditions and estimated growth rates. These estimates are based upon assumptions believed to be reasonable. The discount rates used to value this reporting unit were between
There were no impairment indicators for the three or nine months ended September 30, 2019 and for the three months ended September 30, 2020.
Accounting Standards Recently Adopted
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”) which replaces the incurred loss impairment methodology under current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ASU 2016-13 requires the use of a forward-looking expected credit loss model for accounts receivables, loans and other financial instruments. For public business entities, the amendments are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted. We adopted ASU 2016-13 effective January 1, 2020, which did not have an impact on our condensed consolidated financial statements.
Recently Issued Accounting Standards
In March 2020, the FASB issued 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. Accounts Receivable and Allowance for Credit Losses
Accounts receivable consists of trade receivables recorded at the invoice amount, plus accrued revenue that is not yet billed, less an estimated allowance for credit losses (if any). Accounts receivable are generally due within
In our determination of the allowance for credit losses, we pool receivables with similar risk characteristics and consider a number of current conditions, past events and other factors, including the length of time trade accounts receivable are past due, previous loss history, and the condition of the general economy and the industry as a whole, and apply an expected loss percentage. The expected credit loss percentage is determined using historical loss data adjusted for current conditions and forecasts of future economic conditions. Accounts deemed uncollectible are applied against the allowance for credit losses. The related expense was included in Other operating expense on the condensed consolidated statements of operations.
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The following activity related to our allowance for credit losses on customer receivables for the nine months ended September 30, 2020 reflects the estimated impact of the current economic environment on our receivable balance:
Balance, December 31, 2019 | $ | | |
Credit losses | | ||
Less write-offs | ( | ||
Balance, September 30, 2020 | $ | | |
4. Property, Plant and Equipment
Property, plant and equipment was comprised of the following at September 30, 2020 and December 31, 2019:
| September 30, |
| December 31, | |||
| 2020 |
| 2019 | |||
Systems and related equipment | $ | | $ | | ||
Systems in process | |
| | |||
Transloading facility and equipment | — | | ||||
Computer hardware and software |
| |
| | ||
Machinery and equipment |
| |
| | ||
Vehicles |
| |
| | ||
Buildings |
| |
| | ||
Land |
| |
| | ||
Furniture and fixtures | |
| | |||
Property, plant and equipment, gross | $ | | $ | | ||
Less: accumulated depreciation |
| ( |
| ( | ||
Property, plant and equipment, net | $ | | $ | | ||
As described in Note 2, $
5. 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 $
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
Although there were
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6. Equity
Dividends
Solaris LLC paid distributions totaling $
Share Repurchase Program
During the nine months ended September 30, 2020, Solaris Inc. purchased and retired
Treasury Stock Retirement
During the nine months ended September 30, 2020, the Company cancelled and retired,
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,
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The following table summarizes activity related to restricted stock for the three and nine months ended September 30, 2020 and 2019:
Restricted Stock Awards | ||||
| 2020 |
| 2019 | |
Unvested at January 1, |
| | | |
Awarded |
| | | |
Vested |
| ( | ( | |
Forfeited |
| ( | ( | |
Unvested at March 31, | | | ||
Awarded | | |||
Vested | ( | ( | ||
Forfeited | ( | ( | ||
Unvested at June 30, | | | ||
Awarded | | |||
Vested | ( | ( | ||
Forfeited | ( | ( | ||
Unvested at September 30, | | | ||
Of the unvested
Earnings Per Share
Basic earnings per share of Class A common stock is computed by dividing net income attributable to Solaris Inc. by the weighted-average number of shares of Class A common stock outstanding during the same period. Diluted earnings per share is computed giving effect to all potentially dilutive shares.
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The following table sets forth the calculation of earnings per share, or EPS, for the three and nine months ended September 30, 2020 and 2019:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||
Basic net income per share: | 2020 | 2019 | 2020 |
| 2019 | |||||||
Numerator | ||||||||||||
Net income (loss) attributable to Solaris | $ | ( | $ | | $ | ( | $ | | ||||
Loss (income) attributable to participating securities (1) | ( | ( | ( | ( | ||||||||
Net income (loss) attributable to common stockholders | $ | ( | $ | | $ | ( | $ | | ||||
Denominator | ||||||||||||
Weighted average number of unrestricted outstanding common shares used to calculate basic net income per share | | | | | ||||||||
Effect of dilutive securities: | ||||||||||||
Stock options | — | | — | | ||||||||
Diluted weighted-average shares of Class A common stock outstanding used to calculate diluted net income per share | | | | | ||||||||
Earnings per share of Class A common stock - basic | $ | ( | $ | | $ | ( | $ | | ||||
Earnings per share of Class A common stock - diluted | $ | ( | $ | | $ | ( | $ | | ||||
| (1) | The Company’s restricted shares of common stock are participating securities. |
The following number of weighted-average potentially dilutive shares were excluded from the calculation of diluted earnings per share because the effect of including such potentially dilutive shares would have been antidilutive upon conversion:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||
| 2020 | 2019 | 2020 |
| 2019 | |||||||
Class B common stock | | | | | ||||||||
Restricted stock awards | | | | | ||||||||
Stock Options | | — | | — | ||||||||
Total | | | | | ||||||||
7. 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 September 30, 2020 and 2019, we recognized a combined United States federal and state benefit and expense for income taxes of ($
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three and nine months ended September 30, 2020 and 2019, our effective tax rate differed from the statutory rate primarily due to Solaris LLC’s treatment as a partnership for United States federal income tax purposes.
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.
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 nine months ended September 30, 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, 2020. Future regulatory guidance under the CARES Act or additional legislation enacted by Congress in connection with the COVID-19 pandemic could impact our tax provision in future periods.
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
8. Concentrations
For the three months ended September 30, 2020,
For the three months ended September 30, 2020,
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Company’s total purchases. For the nine months ended September 30, 2020,
9. 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.
10. Related Party Transactions
The Company recognizes certain costs incurred in relation to transactions primarily incurred in connection with the amended and restated administrative services agreement, dated May 17, 2017, between Solaris LLC and Solaris Energy Management, LLC, a company partially owned by William A. Zartler, 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 September 30, 2020 and 2019, Solaris LLC paid $
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 $
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Solaris Oilfield Infrastructure, Inc. (either individually or together with its subsidiaries, as the context requires, “we,” “us,” “our,” “Solaris Inc.” or the “Company”). The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the accompanying financial statements and related notes. The following discussion contains “forward-looking statements” that reflect our plans, estimates, beliefs and expected performance. Our actual results may differ materially from those anticipated as discussed in these forward-looking statements as a result of a variety of risks and uncertainties, including those described above in “Cautionary Statement Regarding Forward-Looking Statements” included elsewhere in this Quarterly Report and “Risk Factors” included in this Quarterly Report and the Annual Report on Form 10-K for the year ended December 31, 2019 as updated by our subsequent filings with the United States Securities and Exchange Commission (the “SEC”), all of which are difficult to predict. In light of these risks, uncertainties and assumptions, the forward-looking events discussed may not occur. We assume no obligation to update any of these forward-looking statements except as otherwise required by law.
Overview
Solaris Inc. 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 and consolidates the financial results of Solaris LLC and its subsidiaries. Solaris Inc. is a holding company whose sole material asset consists of units in Solaris LLC (“Solaris LLC Units”).
Executive Summary
We design, manufacture and rent specialized equipment which combined with field technician support, logistics services and our software solutions, enables us to provide a service offering that helps oil and natural gas operators and their suppliers drive efficiencies and reduce costs during the completion phase of well development. The majority of our revenue is currently derived from rental and services related to our patented mobile proppant management systems that unload, store and deliver proppant used in hydraulic fracturing of oil and natural gas wells, as well as coordinating the delivery of proppant to the well site. Our systems are deployed in most of the active oil and natural gas basins in the United States. We continuously innovate and enhance our offerings.
Recent Trends and Outlook
Demand for our products and services is predominantly driven by the level of onshore oil and natural gas well drilling and completion activity, in the United States, which, in turn, is determined by the current and anticipated profitability of developing oil and natural gas reserves.
Due to a combination of geopolitical and COVID-19 related pressures on the global supply-demand balance for crude oil and related products, as well as the actions taken by a number of global oil producers, commodity prices have significantly declined in recent months, and oil and gas operators have reduced development budgets and activity. During the third quarter 2020, continued containment measures and responsive actions to the COVID-19 pandemic continue to result in severe declines in general economic activity and energy demand. As a result, the global economy has experienced a slowing of economic growth, disruption of global manufacturing supply chains, stagnation of crude oil and natural gas consumption and interference with workforce continuity. As cities, states and countries continue easing the confinement restrictions, the risk for the resurgence and recurrence of COVID-19 remains. The reinstatement of containment measures could potentially lead to an extended period of reduced demand for crude oil and natural gas commodities, as well as assert further pressure on the global economy. Our revenues have increased in comparison to the second quarter but continue to reflect a decrease comparative to prior year activities as a result of these lower activity levels. In response, we have reduced direct operating costs and SG&A expenses, including reducing workforce levels across the Company and lowered our capital expenditures.
The risks associated with COVID-19 have impacted our workforce and the way we meet our business objectives. In response to COVID-19 we have implemented certain health and safety guidelines which are consistent with guidelines proscribed by the Centers for Disease Control and other authorities, as well as those requested by certain of our customers. Due to concerns over health and safety, we are permitting our non-essential employees to work remotely until further notice. Working remotely and under our revised policies has not significantly impacted our ability to
17
maintain operations or caused us to incur significant additional expenses; however, we are unable to predict the duration or ultimate impact of these measures.
Solaris Inc.’s fully utilized system count averaged 34 systems in the third quarter of 2020, an increase of approximately 70% from the second quarter of 2020 and a decrease of approximately 70% from the third quarter of 2019. The increase in fully utilized systems in the third quarter of 2020 is related to completion activities for wells that were previously drilled and waiting on completion. This compares to the Baker Hughes US Land rig count which was flat at the end of the third quarter 2020 from the end of the second quarter of 2020 and down 70% from the end of the third quarter of 2019.
We believe that due to the continued COVID-19 pandemic driven depressed pricing environment for oil and gas commodities and reduction in oil and gas development budgets, drilling and completions activity will continue to remain at depressed levels during the fourth quarter. Absent significant changes in markets share, we expect our activity should follow the general trends of the US land drilling and completion activity.
In response to the decline in commodity prices and activity levels, we have reduced direct operating costs and SG&A expenses, including reducing workforce levels across the Company and maintained our 2020 capital expenditures budget of approximately $5 million. We continue to evaluate ways to increase flexibility and efficiency in our cost structure considering these unprecedented and uncertain times.
We have also seen an increase in the number of distressed companies in the sector which has resulted in several companies filing for bankruptcy or delaying payment to vendors. We continue to monitor the credit risk of our customers and take preventative and precautionary measures to protect the balance of any outstanding receivables.
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Results of Operations
Three and Nine Months Ended September 30, 2020 Compared to Three and Nine Months Ended September 30, 2019
Three Months Ended | Nine Months Ended | |||||||||||||||||
September 30, | September 30, | |||||||||||||||||
| 2020 |
| 2019 |
| Change |
| 2020 |
| 2019 |
| Change | |||||||
(in thousands) | (in thousands) | |||||||||||||||||
Revenue |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
System rental | $ | 9,197 | $ | 36,638 | $ | (27,441) | $ | 40,720 | $ | 113,726 | $ | (73,006) | ||||||
System services |
| 10,855 |
| 18,153 |
| (7,298) |
| 35,231 |
| 48,621 |
| (13,390) | ||||||
Transloading services | 310 |
| 4,417 |
| (4,107) | 1,039 |
| 15,131 |
| (14,092) | ||||||||
Inventory software services | 169 |
| 396 |
| (227) | 710 |
| 1,351 |
| (641) | ||||||||
Total revenue |
| 20,531 |
| 59,604 |
| (39,073) |
| 77,700 |
| 178,829 |
| (101,129) | ||||||
Operating costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Cost of system rental (excluding depreciation and amortization) |
| 1,181 |
| 2,838 |
| (1,657) |
| 4,018 |
| 7,737 |
| (3,719) | ||||||
Cost of system services (excluding depreciation and amortization) |
| 13,126 |
| 21,072 |
| (7,946) |
| 43,269 |
| 56,366 |
| (13,097) | ||||||
Cost of transloading services (excluding depreciation and amortization) | 243 |
| 652 |
| (409) | 783 |
| 2,051 |
| (1,268) | ||||||||
Cost of inventory software services (excluding depreciation and amortization) | 97 |
| 160 |
| (63) | 364 |
| 460 |
| (96) | ||||||||
Depreciation and amortization |
| 6,594 |
| 6,908 |
| (314) |
| 20,378 |
| 19,875 |
| 503 | ||||||
Selling, general and administrative (excluding depreciation and amortization) |
| 3,840 |
| 4,933 |
| (1,093) |
| 12,212 |
| 13,967 |
| (1,755) | ||||||
Impairment losses | — |
| — |
| — | 47,828 | — | 47,828 | ||||||||||
Other operating expenses | 1,856 |
| 248 |
| 1,608 | 5,329 | 529 | 4,800 | ||||||||||
Total operating costs and expenses |
| 26,937 |
| 36,811 |
| (9,874) |
| 134,181 |
| 100,985 |
| 33,196 | ||||||
Operating income (loss) |
| (6,406) |
| 22,793 |
| (29,199) |
| (56,481) |
| 77,844 |
| (134,325) | ||||||
Interest income, net |
| (40) |
| (8) |
| (32) |
| 36 |
| (775) |
| 811 | ||||||
Total other income |
| (40) |
| (8) |
| (32) |
| 36 |
| (775) |
| 811 | ||||||
Income (loss) before income tax expense |
| (6,446) |
| 22,785 |
| (29,231) |
| (56,445) |
| 77,069 |
| (133,514) | ||||||
Benefit (provision) for income taxes |
| 843 |
| (3,703) |
| 4,546 |
| 8,193 |
| (12,042) |
| 20,235 | ||||||
Net income (loss) | (5,603) | 19,082 | (24,685) | (48,252) | 65,027 | (113,279) | ||||||||||||
Less: net (income) loss related to non-controlling interests | 2,320 | (7,684) | 10,004 | 20,347 | (28,036) | 48,383 | ||||||||||||
Net income (loss) attributable to Solaris | $ | (3,283) | $ | 11,398 | $ | (14,681) | $ | (27,905) | $ | 36,991 | $ | (64,896) | ||||||
System Rental
System rental revenue decreased $27.4 million, or 75%, to $9.2 million for the three months ended September 30, 2020 compared to $36.6 million for the three months ended September 30, 2019. System rental revenue decreased $73.0 million, or 64%, to $40.7 million for the nine months ended September 30, 2020 compared to $113.7 million for the nine months ended September 30, 2019. This decrease was primarily due to a decrease in mobile proppant systems on a fully utilized basis, due to severe contraction in oil company budgets and completion activities, in response to global oil market volatility.
Cost of system rental decreased $1.7 million, or 61%, to $1.2 million for the three months ended September 30, 2020 compared to $2.8 million for the three months ended September 30, 2019, excluding depreciation and amortization expense. Cost of system rental decreased $3.7 million, or 48%, to $4.0 million for the nine months ended September 30, 2020 compared to $7.7 million for the nine months ended September 30, 2019, excluding depreciation and amortization expense. Cost of system rental decreased primarily due to a decrease in maintenance expense in relation to a decrease in mobile proppant systems on a fully utilized basis. Cost of system rental as a percentage of system rental revenue was
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13% and 8% for the three months ended September 30, 2020 and 2019, respectively and was 10% and 7% for the nine months ended September 30, 2020 and 2019, respectively.
System Services
System services revenue decreased $7.3 million, or 40%, to $10.9 million for the three months ended September 30, 2020 compared to $18.2 million for the three months ended September 30, 2019. System services revenue decreased $13.4 million, or 28%, to $35.2 million for the nine months ended September 30, 2020 compared to $48.6 million for the nine months ended September 30, 2019. System services revenue decreased due to a decrease in services provided to coordinate proppant delivered into our systems, as well as a decrease in mobile proppant systems on a fully utilized basis.
Cost of system services decreased $7.9 million, or 38%, to $13.1 million for the three months ended September 30, 2020 compared to $21.1 million for the three months ended September 30, 2019, excluding depreciation and amortization expense. Cost of system services decreased $13.1 million, or 23%, to $43.3 million for the nine months ended September 30, 2020 compared to $56.4 million for the nine months ended September 30, 2019, excluding depreciation and amortization expense. Cost of system services decrease in services provided to coordinate proppant delivered to systems as well as a decrease in field support activity and third-party trucking services required to support fewer fully utilized systems. Cost of system services as a percentage of system services revenue was 121% and 116% for the three months ended September 30, 2020 and 2019, respectively and was 123% and 116% for the nine months ended September 30, 2020 and 2019, respectively.
Transloading Services
Transloading services revenue decreased $4.1 million, or 93%, to $0.3 million for the three months ended September 30, 2020 compared to $4.4 million for the three months ended September 30, 2019. Transloading services revenue decreased $14.1 million, or 93%, to $1.0 million for the nine months ended September 30, 2020 compared to $15.1 million for the nine months ended September 30, 2019. This decrease was primarily due to recognition of $3.2 million and $9.5 million of deferred revenue in the three and nine months ended September 30, 2019, respectively, as well as a decrease in the number of tons transloaded.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased $1.1 million, or 22%, to $3.8 million for the three months ended September 30, 2020 compared to $4.9 million for the three months ended September 30, 2019, excluding depreciation and amortization. Selling, general and administrative expenses decreased $1.8 million, or 13%, to $12.2 million for the nine months ended September 30, 2020 compared to $14.0 million for the nine months ended September 30, 2019, excluding depreciation and amortization. The decrease is due primarily to cost cutting measures, including headcount, salary and support cost reductions, in response to the reduction in industry activity.
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 nine months ended September 30, 2020.
Provision for Income Taxes
During the three months ended September 30, 2020, we recognized a combined United States federal and state benefit for income taxes of $0.8 million, an increase of $4.5 million as compared to the $3.7 million income tax expense we recognized during the three months ended September 30, 2019. During the nine months ended September 30, 2020, we recognized a combined United States federal and state benefit for income taxes of $8.2 million, an increase of $20.2 million as compared to the $12.0 million income tax expense we recognized during the nine months ended September 30, 2019. This change was attributable to lower operating income. The effective combined United States federal and
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state income tax rates were 13.1% and 14.8% for the three months ended September 30, 2020 and 2019, respectively. The effective combined United States federal and state income tax rates were 14.5% and 14.9% for the nine months ended September 30, 2020 and 2019, 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
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 as reported under 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 | Nine months ended | |||||||||||||||||
September 30, | September 30, | |||||||||||||||||
| 2020 |
| 2019 |
| Change |
| 2020 |
| 2019 |
| Change | |||||||
(in thousands) | (in thousands) | |||||||||||||||||
Net income (loss) |
| $ | (5,603) |
| $ | 19,082 |
| $ | (24,685) |
| $ | (48,252) |
| $ | 65,027 |
| $ | (113,279) |
Depreciation and amortization |
| 6,594 |
| 6,908 |
| (314) |
| 20,378 |
| 19,875 |
| 503 | ||||||
Interest (income) expense, net |
| 40 |
| 8 |
| 32 |
| (36) |
| 775 |
| (811) | ||||||
Income taxes (1) |
| (843) |
| 3,703 |
| (4,546) |
| (8,193) |
| 12,042 |
| (20,235) | ||||||
EBITDA | $ | 188 | $ | 29,701 | $ | (29,513) | $ | (36,103) | $ | 97,719 | $ | (133,822) | ||||||
Stock-based compensation expense (2) |
| 1,077 |
| 1,225 |
| (148) |
| 3,732 |
| 3,265 |
| 467 | ||||||
Loss on disposal of assets | 38 | 99 | (61) | 1,451 | 383 | 1,068 | ||||||||||||
Impairment loss | — | — | — | 47,828 | — | 47,828 | ||||||||||||
Severance expense | 3 | 154 | (151) | 542 | 154 | 388 | ||||||||||||
Credit losses | 1,246 | — | 1,246 | 2,698 | — | 2,698 | ||||||||||||
Other write-offs (3) | 586 | — | 586 | 589 | 528 | 61 | ||||||||||||
Transload contract termination (4) | — | (3,204) | 3,204 | — | (9,507) | 9,507 | ||||||||||||
Adjusted EBITDA | $ | 3,138 | $ | 27,975 | $ | (24,837) | $ | 20,737 | $ | 92,542 | $ | (71,805) | ||||||
| (1) | United States federal and state income taxes. |
| (2) | Represents stock-based compensation expense related to restricted stock awards. |
| (3) | Write-off of prepaid and cancelled purchase orders in the three and nine months ended September 30, 2020 and unamortized debt issuance costs in the nine months ended September 30, 2019 when the Amended and Restated Credit Agreement, dated as of January 19, 2018, was replaced in its entirety by the 2019 Credit Agreement. |
| (4) | Deferred revenue related to full termination of a sand storage agreement; no deferred revenue balance remained as of December 31, 2019. |
Three and Nine Months Ended September 30, 2020 Compared to Three and Nine Months Ended September 30, 2019: EBITDA and Adjusted EBITDA
EBITDA decreased $29.5 million to $0.2 million for the three months ended September 30, 2020 compared to $29.7 million for the three months ended September 30, 2019. Adjusted EBITDA decreased $24.8 million to $3.1 million for the three months ended September 30, 2020 compared to $28.0 million for the three months ended September 30, 2019. EBITDA decreased $133.8 million to ($36.1) million for the nine months ended September 30, 2020 compared to $97.7
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million for the nine months ended September 30, 2019. Adjusted EBITDA decreased $71.8 million to $20.7 million for the nine months ended September 30, 2020 compared to $92.5 million for the nine months ended September 30, 2019. The decreases in EBITDA and Adjusted EBITDA were primarily due to the changes in revenues and expenses, discussed above.
Liquidity and Capital Resources
Overview
Our capital structure and financing strategy are designed to provide sufficient liquidity to meet our short-term working capital and capital expenditure requirements. Our primary uses of capital have been capital expenditures to expand our proppant and chemical management system fleets, acquire our manufacturing facility and certain intellectual property, pay dividends and repurchase stock. We strive to maintain financial flexibility and proactively monitor potential capital sources, including equity and debt financing, to meet our investment and target liquidity requirements and to permit us to manage the cyclicality associated with our industry and the current risks and uncertainties associated with volatility in global oil markets and the expected impact on our businesses, operations, earnings and results.
We intend to finance most of our capital expenditures, contractual obligations and working capital needs with our current cash balance, cash generated from future operations and borrowings under our 2019 Credit Agreement (as defined in “—Debt Agreements”). We continuously evaluate our capital expenditures and the amount we ultimately spend will depend on a number of factors, including expected industry activity levels and company initiatives. In response to the decline in commodity prices and the COVID-19 pandemic, we lowered 2020 capital expenditures budget from $20.0 to $40.0 million to $5 million or less. We believe that our operating cash flow, cash balance, and available borrowings under our 2019 Credit Agreement will be sufficient to fund our operations for at least the next 12 months.
As of September 30, 2020, cash and cash equivalents totaled $60.9 million, and we had zero drawn and $50 million of available borrowings under the 2019 Credit Agreement.
Cash Flows
The following table summarizes our cash flows for the periods indicated:
Nine Months Ended | |||||||||
September 30, | |||||||||
2020 | 2019 | Change | |||||||
(in thousands) | |||||||||
Net cash provided by operating activities |
| $ | 38,010 |
| $ | 88,549 | $ | (50,539) | |
Net cash used in investing activities | (2,124) | (32,166) | 30,042 | ||||||
Net cash used in financing activities | (41,824) | (29,754) | (12,070) | ||||||
Net change in cash | $ | (5,938) | $ | 26,629 | $ | (32,567) | |||
Significant Sources and Uses of Cash Flows
Operating Activities. Net cash provided by operating activities was $38.0 million for the nine months ended September 30, 2020, compared to net cash provided by operating activities of $88.5 million for the nine months ended September 30, 2019. The decrease of $50.5 million in operating cash flow was primarily attributable to changes in working capital items, lower revenues and changes in working capital.
Investing Activities. Net cash used in investing activities was $2.1 million for the nine months ended September 30, 2020, compared to net cash used in investing activities of $32.2 million for the nine months ended September 30, 2019. Investing activities during the nine months ended September 30, 2020 include system enhancements offset by the sale of assets. Investing activities during the nine months ended September 30, 2019 include manufacturing of new proppant and chemical systems, including work in process.
Financing Activities. Net cash used in financing activities of $41.8 million for the nine months ended September 30, 2020 was primarily related to $26.7 million of share repurchases and quarterly dividends of $14.3 million. Net cash used in financing activities of $29.8 million for the nine months ended September 30, 2019 was primarily related to
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$13.0 million to repay borrowings under the Company’s Amended and Restated Credit Agreement, dated as of January 19, 2018, by and among the Company, as borrower, each of the lender parties thereto and Woodforest National Bank, as administrative agent, which such agreement was replaced, in its entirety, by the 2019 Credit Agreement, and $14.3 million for quarterly dividends.
Capital Sources
Senior Secured Credit Facility
See Note 5. “Debt” to our condensed consolidated financial statements as of September 30, 2020, for a discussion of senior secured credit facility.
Contractual Obligations
We had no material changes in our contractual commitments and obligations during the three or nine months ended September 30, 2020 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. See Note 5, “Debt” and Note 9, “Commitments and Contingencies” to our condensed consolidated financial statements for additional information.
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 additional information.
Recent Accounting Pronouncements
See Note 2. “Summary of Significant Accounting Policies – Accounting Standards Recently Adopted” to our condensed consolidated financial statements as of September 30, 2020, for a discussion of recent accounting pronouncements.
Under the Jumpstart Our Business Startups Act (the “JOBS Act”), we meet the definition of an “emerging growth company,” which allows us to have an extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act, however, we elected to opt out of such exemption (this election is irrevocable).
Off Balance Sheet Arrangements
We have no material off balance sheet arrangements. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such financing arrangements.
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 2019 Annual Report on Form 10-K for the year ended December 31, 2019. Our exposure to market risk has not changed materially since December 31, 2019.
Credit Risk
The majority of our accounts receivable have payment terms of 60 days or less. As of September 30, 2020, two customers collectively accounted for 40% of our total accounts receivable. As of December 31, 2019, two customers collectively accounted for 24% 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 II, Item 1A. “Risk Factors” for more information regarding credit risk of our customers.
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Item 4.Controls and Procedures
Disclosure Controls and Procedures
In accordance with Exchange Act Rules 13a-15 and 15d-15, we have evaluated, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30, 2020. Our disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed by us in reports that we file under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure and is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. Based on the evaluation of our disclosure controls and procedures as of September 30, 2020, 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 15d15(f) under the Exchange Act) during the quarter ended September 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Due to the nature of our business, we may become, from time to time, involved in routine litigation or subject to disputes or claims related to our business activities. In the opinion of our management, there are no pending litigation, disputes or claims against us which, if decided adversely, will have a material adverse effect on our financial condition, cash flows or results of operations.
Item 1A. Risk Factors
As of the date of this filing, the Company and its operations continue to be subject 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, 2019. The risk factor below updates our risk factors previously discussed in our Annual Report on Form 10-K.
The recent COVID-19 pandemic and related economic repercussions have had, and are expected to continue to have, a significate impact on our business, and depending on the duration of the pandemic and its effect on the oil and gas industry, could have a material adverse effect on our business, liquidity, results of operations and financial condition.
Our business is directly affected by capital spending to explore for, develop and produce oil and natural gas in the United States. The oil and natural gas industry is cyclical and historically has experienced periodic downturns in activity, and continues to be volatile. Beginning in February 2020, there has been a severe drop in the price of oil. As of March 31, 2020, the price of WTI oil was $20.48 per barrel and the Henry Hub price for natural gas was $1.64 per MMBtu. As of September 30, 2020, the price of WTI oil was $40.22 per barrel and the Henry Hub price for natural gas was $1.92 per MMBtu. The recent significant decline in crude oil prices has largely been attributable to the actions of global oil producers, which have resulted in a substantial decrease in oil and natural gas prices, and the global outbreak of COVID-19, which has reduced demand for oil and natural gas because of significantly reduced global and national economic activity. The prolonged volatility and low levels of oil and natural gas prices have depressed levels of exploration, development, and production activity, and if the drop in oil and natural gas prices we have experienced in 2020 continues or further declines, certain of our customers may be unable to pay their vendors and service providers, including us, as a result of the decline in commodity prices. Reduced activity in our areas of operation as a result of decreased capital spending could also have a negative long-term impact on our business, even in an environment of stronger oil and natural gas prices.
The COVID-19 pandemic that began in early 2020 provides an illustrative example of how a pandemic or epidemic can also impact our operations and business by reducing global and national economic activity resulting in a decline in the demand for oil and for our products and services, and affecting the health of our workforce and rendering employees unable to work or travel. The price of oil has fallen significantly since the beginning of 2020, due in part to the factors discussed above and to concerns about COVID-19 and its impact on the worldwide economy and demand for oil. In addition, if a pandemic or epidemic such as the COVID-19 pandemic were to impact a location where we have a high concentration of business and resources, our local workforce could be affected by such an occurrence or outbreak which could also significantly disrupt our operations and decrease our ability to provide services and products to our customers. The duration of the business disruption and related financial impact from COVID-19 cannot be reasonably estimated at this time. If the impact of COVID-19 continues for an extended period of time, it could materially adversely affect the demand for our products and services and our ability to operate our business in the manner and on the timelines previously planned. The extent to which COVID-19 or other health pandemics or epidemics may impact our results will depend on future developments, which are highly uncertain and cannot be predicted.
We face risks related to pandemics, epidemics, outbreaks or other public health events that are outside of our control, and could significantly disrupt our operations and adversely affect our financial condition. For example, the recent global outbreak of COVID-19 has reduced demand for oil and natural gas because of significantly reduced global and national economic activity. In addition, the impact of COVID-19 or other public health events may adversely affect our operations or the health of our workforce and the workforces of our customers and service providers by rendering employees or contractors unable to work or unable to access our and their facilities for an indefinite period of time. On
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March 13, 2020, the United States declared the COVID-19 pandemic a national emergency, and several states, including Texas, and municipalities have declared public health emergencies. Along with these declarations, there have been extraordinary and wide-ranging actions taken by international, federal, state and local public health and governmental authorities to contain and combat the outbreak and spread of COVID-19 in regions across the United States and the world, including mandates for many individuals to substantially restrict daily activities and for many businesses to curtail or cease normal operations. To the extent COVID-19 continues or worsens, governments may impose additional similar restrictions.
The public health concerns posed by COVID-19 could also pose a risk to our employees and may render our employees unable to work or travel. The extent to which COVID-19 may impact our employees, and subsequently our business, cannot be predicted at this time.
In addition, the technology required for the corresponding transition to remote work increases our vulnerability to cybersecurity threats, including threats to gain unauthorized access to sensitive information or to render data or systems unusable, the impact of which may have material adverse effects on our business and operations. See “Item 1A. Risk Factors—Risks Related to Our Business—We are subject to cyber security risks. A cyber incident could occur and result in information theft, data corruption, operational disruption and/or financial loss” in our Annual Report on Form 10-K for the year ended December 31, 2019.
As the potential impact from COVID-19 is difficult to predict, the extent to which it may negatively affect our operating results or the duration of any potential business disruption is uncertain. Any potential impact will depend on future developments and new information that may emerge regarding the severity and duration of COVID-19 and the actions taken by authorities to contain it or treat its impact, all of which are beyond our control. These potential impacts, while uncertain, could adversely affect our operating results.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Unregistered Sales of Equity Securities
None.
Issuer Purchases of Equity Securities
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 | |||||
July 1 - July 31 | 2,258 | $ | 7.12 | ||||
August 1 - August 31 | 23,550 | 7.53 | |||||
Total | 25,808 | $ | 7.49 | ||||
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 | ||
3.2 | ||
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** | ||
32.2** | ||
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. | ||
October 29, 2020 | By: | /s/ William A. Zartler |
William A. Zartler | ||
Chairman and Chief Executive Officer | ||
(Principal Executive Officer) | ||
October 29, 2020 | By: | /s/ Kyle S. Ramachandran |
Kyle S. Ramachandran | ||
President and Chief Financial Officer | ||
(Principal Financial Officer) | ||
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