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 |
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or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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SOLARIS OILFIELD INFRASTRUCTURE, INC.
TABLE OF CONTENTS
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Management’s Discussion and Analysis of Financial Condition and Results of Operations | 15 | |
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (the “Quarterly Report”) includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Statements that are predictive in nature, that depend upon or refer to future events or conditions or that include the words “believe,” “expect,” “anticipate,” “intend,” “estimate” and other expressions that are predictions of or indicate future events and trends and that do not relate to historical matters identify forward-looking statements. Our forward-looking statements include statements about our business strategy, our industry, our future profitability, expected capital expenditures and the impact of such expenditures on our performance, management changes, current and potential future long-term contracts and our future business and financial performance. In addition, our forward-looking statements address the various risks and uncertainties associated with the extraordinary market environment and impacts resulting from both the coronavirus 2019 (“COVID-19”) pandemic and the continued volatility in global oil markets, and the expected impact of these events on our businesses, operations, earnings and results.
A forward-looking statement may include a statement of the assumptions or bases underlying the forward-looking statement. We believe that we have chosen these assumptions or bases in good faith and that they are reasonable. You are cautioned not to place undue reliance on any forward-looking statements. You should also understand that it is not possible to predict or identify all such factors and should not consider the following list to be a complete statement of all potential risks and uncertainties. Factors that could cause our actual results to differ materially from the results contemplated by such forward-looking statements include:
| ● | the level of domestic capital spending by the oil and natural gas industry and uncertainty regarding the future actions of oil producers; |
| ● | developments in the global economy and the resulting impacts to the demand and supply for oil and natural gas or volatility of oil and natural gas prices; |
| ● | operational and economic challenges relating to, and resulting from, the COVID-19 pandemic; |
| ● | uncertainty regarding the sustainability and extent of a continued 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; |
| ● | Geopolitical risks, including the war in Ukraine, which could affect the stability and continued recovery of oil and gas markets; |
| ● | consolidation amongst current or potential customers that could affect demand for our products and services; |
| ● | inflationary risks, including changes in market price and availability of materials; |
| ● | significant changes in the transportation industries or fluctuations in transportation costs or the availability or reliability of transportation that service our business; |
| ● | large or multiple customer defaults, including defaults resulting from actual or potential insolvencies; |
| ● | technological advancements in well completion technologies and our ability to expand our product and service offerings; |
| ● | competitive conditions in our industry; |
| ● | inability to fully protect our intellectual property rights; |
| ● | actions taken by our customers, competitors and third-party operators; |
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| ● | changes in the availability and cost of capital; |
| ● | our ability to successfully implement our business strategy; |
| ● | changes in our tax status; |
| ● | the effects of existing and future laws and governmental regulations (or the interpretation thereof) on us and our customers; |
| ● | cyber-attacks targeting systems and infrastructure used by the oil and natural gas industry; |
| ● | the effects of future litigation; |
| ● | credit markets; |
| ● | business acquisitions; |
| ● | natural or man-made disasters and other external events that may disrupt our manufacturing operations; |
| ● | uncertainty regarding our future operating results; |
| ● | the impact of current and future laws, rulings, governmental regulations, accounting standards and statements, and related interpretations; and |
| ● | plans, objectives, expectations and intentions contained in this Quarterly Report that are not historical. |
All forward-looking statements speak only as of the date of this Quarterly Report. You should not place undue reliance on our forward-looking statements. Although forward-looking statements reflect our good faith beliefs at the time they are made, forward-looking statements involve known and unknown risks, uncertainties and other factors, including the factors described under Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021, 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.
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PART 1: FINANCIAL INFORMATION
Item 1: Financial Statements
SOLARIS OILFIELD INFRASTRUCTURE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
(Unaudited)
| March 31, | December 31, | ||||
2022 | 2021 | |||||
Assets |
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Current assets: |
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Cash and cash equivalents | $ | | $ | | ||
Accounts receivable, net of allowances for credit losses of $ |
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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 8) |
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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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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.
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SOLARIS OILFIELD INFRASTRUCTURE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)
(Unaudited)
Three Months Ended | ||||||
March 31, | ||||||
| 2022 |
| 2021 | |||
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Revenue |
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Operating costs and expenses: |
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Cost of services (exclusive of depreciation) | | | ||||
Depreciation and amortization |
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Selling, general and administrative |
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Other operating (income) expense | ( | | ||||
Total operating costs and expenses |
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Operating income (loss) |
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Interest expense, net |
| ( |
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Total other expense (income) |
| ( |
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Income (loss) before income tax expense |
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Income tax (expense) benefit |
| ( |
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Net income (loss) | | ( | ||||
Less: net (income) loss related to non-controlling interests | ( | | ||||
Net income (loss) attributable to Solaris | $ | | $ | ( | ||
Income (loss) per share of Class A common stock – basic | $ | | $ | ( | ||
Income (loss) 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 | | | ||||
]
The accompanying notes are an integral part of these condensed consolidated financial statements.
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SOLARIS OILFIELD INFRASTRUCTURE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(In thousands)
(Unaudited)
Three Months Ended March 31, 2022 | |||||||||||||||||||||||||||
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, 2022 | | $ | | | $ | — | $ | | $ | | — | $ | — | $ | | $ | | ||||||||||
Net effect of deferred tax asset and payables related to the vesting of restricted stock | — | — | — | — | | — | — | — | — | | |||||||||||||||||
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 income | — | — | — | — | — | | — | — | | | |||||||||||||||||
Balance at March 31, 2022 | | | | — | | | — | — | | | |||||||||||||||||
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)
Three Months Ended March 31, 2021 | |||||||||||||||||||||||||||
Class A | Class B | Additional | Non- | Total | |||||||||||||||||||||||
Common Stock | Common Stock | Paid-in | Retained | Treasury Stock | controlling | Stockholders' | |||||||||||||||||||||
| Shares |
| Amount |
| Shares |
| Amount |
| Capital |
| Earnings |
| Shares |
| Amount |
| Interest |
| Equity | ||||||||
Balance at January 1, 2021 | | $ | | | $ | — | $ | | $ | | — | $ | — | $ | | $ | | ||||||||||
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 and the vesting of restricted 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 income (loss) | — | — | — | — | — | ( | — | — | ( | ( | |||||||||||||||||
Balance at March 31, 2021 | | | | — | | | — | — | | | |||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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SOLARIS OILFIELD INFRASTRUCTURE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
For the Three Months Ended | ||||||
March 31, | ||||||
| 2022 |
| 2021 | |||
Cash flows from operating activities: |
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Net income (loss) |
| $ | |
| $ | ( |
Adjustment to reconcile net loss to net cash provided by operating activities: |
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Depreciation and amortization |
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Loss on disposal of assets |
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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 benefit | | ( | ||||
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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Accounts payable |
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Accrued liabilities |
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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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Cash received from insurance proceeds | | — | ||||
Proceeds from disposal of assets | | | ||||
Net cash used in investing activities |
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Cash flows from financing activities: |
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Distribution and dividend paid to Solaris LLC unitholders (other than Solaris Inc.) and Class A common shareholders | ( | ( | ||||
Payments under finance leases |
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Payments under insurance premium financing |
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Proceeds from stock option exercises | — | | ||||
Payments for shares withheld for taxes from RSU vesting and cancelled | ( | ( | ||||
Net cash used in financing activities |
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Net decrease in cash |
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Cash at beginning of period |
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Cash at end of period |
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Non-cash activities |
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Investing: |
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Capitalized depreciation in property, plant and equipment |
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Capitalized stock based compensation | | | ||||
Property and equipment additions incurred but not paid at period-end | | | ||||
Property, plant and equipment additions transferred from inventory | | | ||||
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
We design and manufacture specialized equipment, which combined with field technician support, logistics services and our software solutions, enables us to provide a service offering that helps oil and natural gas operators and their suppliers drive efficiencies that reduce operational footprint and costs during the completion phase of well development. Our equipment and services are deployed in most of the active oil and natural gas basins in the United States.
2. Summary of Significant Accounting Policies
Basis of Presentation and Consolidation
Solaris Oilfield Infrastructure, Inc. (either individually or together with its subsidiaries, as the context requires “Solaris Inc.” or the “Company”) is the managing member of Solaris Oilfield Infrastructure, LLC (“Solaris LLC”) and is responsible for all operational, management and administrative decisions relating to Solaris LLC’s business. Solaris Inc. consolidates the financial results of Solaris LLC and its subsidiaries and reports non-controlling interest related to the portion of the units in Solaris LLC (the “Solaris LLC Units”) not owned by Solaris Inc., which will reduce net income attributable to the holders of Solaris Inc.’s Class A common stock.
The accompanying interim unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”). These financial statements reflect all normal recurring adjustments that are necessary for fair presentation. Operating results for the three months ended March 31, 2022 and 2021 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, 2021 and notes thereto.
All material intercompany transactions and balances have been eliminated upon consolidation.
Global Economic, Geopolitical and Market Conditions
The recent invasion of Ukraine by Russia has the potential to disrupt the supply and demand for oil and natural gas across the globe. The degree to which these and other events outside of our control adversely impacts our results will depend on future developments, which are highly uncertain, cannot be predicted and are outside of our control. The timing, extent, trajectory and duration of their impacts upon our business and the industry in which we, our customers and vendors operate could impact any subsequent recovery of normal economic and operating conditions.
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.
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The most significant estimates relate to stock-based compensation, useful lives and salvage values of long-lived assets, future cash flows associated with goodwill and long-lived asset impairment, net realizable value of inventory, 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 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, transportation, 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 quarters ended March 31, 2022 and 2021:
Three Months Ended March 31, | ||||||
2022 | 2021 | |||||
Wellsite services | $ | | $ | | ||
Transloading and Other | | | ||||
Total revenue | $ | | $ | | ||
Recently Issued Accounting Standards
In March 2020, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) No. 2020-04, Reference Rate Reform, which provides temporary optional guidance to companies impacted by the transition away from the London Interbank Offered Rate (“LIBOR”). The guidance provides certain expedients and exceptions to applying GAAP in order to lessen the potential accounting burden when contracts, hedging relationships, and other transactions that reference LIBOR as a benchmark rate are modified. This guidance is effective upon issuance and expires on December 31, 2022. The Company is currently assessing the impact of the LIBOR transition and this ASU on the Company’s financial statements 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,
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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:
| March 31, |
| December 31, | |||
| 2022 |
| 2021 | |||
Systems and related equipment | $ | | $ | | ||
Systems in process | |
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Computer hardware and software |
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Machinery and equipment |
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Vehicles |
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Buildings |
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Land |
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Furniture and fixtures | |
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Property, plant and equipment, gross | $ | | $ | | ||
Less: accumulated depreciation |
| ( |
| ( | ||
Property, plant and equipment, net | $ | | $ | | ||
4. Debt
On February 24, 2022, Solaris LLC executed the first amendment (the “2022 Amendment”) to the Amended and Restated Credit Agreement (the “Credit Agreement”), which was originally entered into on April 26, 2019, by and among Solaris LLC, as borrower, each of the lenders party thereto and Wells Fargo Bank, National Association, as administrative agent. The 2022 Amendment extended the term of the Credit Agreement to expire on April 26, 2025 and modified applicable interest rates and repayment requirements.
The Credit Agreement consists of an initial $
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, following the 2022 Amendment, 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
The Credit Agreement requires that we maintain ratios of (i) consolidated EBITDA to interest expense of not less than
Following the 2022 Amendment, the Credit Agreement also requires that we prepay any outstanding borrowings in the event our total consolidated cash balance exceeds $
As of March 31, 2022, we were in compliance with all covenants in accordance with the Credit Agreement.
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5. Equity
Dividends
Solaris LLC paid distributions totaling $
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: (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,
The following table summarizes activity related to restricted stock for the three months ended March 31, 2022 and 2021:
Restricted Stock Awards | ||||
| 2022 |
| 2021 | |
Unvested at January 1, |
| | | |
Awarded |
| | | |
Vested |
| ( | ( | |
Forfeited |
| ( | ( | |
Unvested at March 31, | | | ||
Of the unvested
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.
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The following table sets forth the calculation of income (loss) per share for the three months ended March 31, 2022 and 2021:
Three Months Ended March 31, | ||||||
Basic net income (loss) per share: | 2022 | 2021 | ||||
Numerator | ||||||
Net income (loss) attributable to Solaris | $ | | $ | ( | ||
Income (loss) 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 (loss) per share | | | ||||
Diluted weighted-average shares of Class A common stock outstanding used to calculate diluted net income (loss) per share | | | ||||
Income (loss) per share of Class A common stock - basic | $ | | $ | ( | ||
Income (loss) 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 loss per share because the effect of including such potentially dilutive shares would have been antidilutive upon conversion:
Three Months Ended March 31, | ||||||
| 2022 | 2021 | ||||
Class B common stock | | | ||||
Restricted stock awards | | | ||||
Stock Options | | | ||||
Total | | | ||||
6. Income Taxes
Income Taxes
Solaris Inc. is a corporation and, as a result, is subject to United States federal, state and local income taxes. Solaris LLC is treated as a partnership for United States federal income tax purposes and therefore does not pay United States federal income tax on its taxable income. Instead, the Solaris LLC unitholders, including Solaris Inc., are liable for United States federal income tax on their respective shares of Solaris LLC’s taxable income reported on the unitholders’ United States federal income tax returns. Solaris LLC is liable for income taxes in those states not recognizing its status as a partnership for United States federal income tax purposes.
For the three months ended March 31, 2022 and 2021, we recognized a combined United States federal and state (expense)/benefit for income taxes of ($
The Company’s deferred tax position reflects the net tax effects of the temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax reporting. The largest components of the Company’s deferred tax position relate to the Company’s investment in Solaris LLC and net
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operating loss carryovers. The Company recorded a deferred tax asset and additional paid-in capital for the difference between the book value and the tax basis of the Company’s investment in Solaris LLC. This difference originates from the equity offerings of Class A common stock, exchanges of 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
As of March 31, 2022, our liability under the Tax Receivable Agreement was $
7. Concentrations
For the three months ended March 31, 2022, one customer accounted for
For the three months ended March 31, 2022, one supplier accounted for
8. Commitments and Contingencies
In the normal course of business, the Company is subjected to various claims, legal actions, contract negotiations and disputes. The Company provides for losses, if any, in the year in which they can be reasonably estimated. In management’s opinion, there are currently no such matters outstanding that would have a material effect on the accompanying condensed consolidated financial statements.
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
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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, 2022 and 2021, 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 $
On March 26, 2021, THRC Holdings, LP (“THRC”), purchased shares representing an
Solaris is a 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 $
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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, 2021 as updated by our subsequent filings with the United States Securities and Exchange Commission (the “SEC”), all of which are difficult to predict. In light of these risks, uncertainties and assumptions, the forward-looking events discussed may not occur. We assume no obligation to update any of these forward-looking statements except as otherwise required by law.
Overview
We design and manufacture specialized equipment, which combined with field technician support, logistics services and our software solutions, enables us to provide a service offering that helps oil and natural gas operators and their suppliers to drive efficiencies and reduce oil and gas development costs and environmental impact. 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 AutoBlend™ integrated electric blender and proprietary top fill equipment. Our systems and equipment are deployed in most of the active oil and natural gas basins in the United States.
Recent Trends and Outlook
Exiting 2021, the oil and natural gas industry continued its recovery as global economic activity improved. Tightening supply and demand fundamentals, impacted by the geopolitical uncertainty surrounding the Ukrainian conflict, drove WTI oil prices to a high of over $120 per barrel in March 2022 from $75 per barrel in January 2022. While the improvement in commodity prices has driven an increase in drilling and completion activity in North America, overall activity levels in North America continue to be impacted by capital discipline among many operators, supply chain disruptions and rising inflation.
North American land activity improved into 2022 as the Baker Hughes Land rig count increased 15% since the start of the year to 656 rigs at the end of March 2022, as compared to a 19% increase in our fully utilized systems in the first quarter of 2022. 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.
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 and potential impacts from geopolitical disruptions. Consolidation amongst some of our EP 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.
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Results of Operations
Three Months Ended March 31, 2022 Compared to Three Months Ended March 31, 2021
Three Months Ended | |||||||||
March 31, | |||||||||
| 2022 |
| 2021 |
| Change | ||||
(in thousands) | |||||||||
|
|
|
|
|
| ||||
Revenue |
| 56,915 |
| 28,669 |
| 28,246 | |||
Operating costs and expenses: |
|
|
|
|
|
| |||
Cost of services (exclusive of depreciation) | 37,671 | 19,206 | 18,465 | ||||||
Depreciation and amortization |
| 6,929 |
| 6,693 |
| 236 | |||
Selling, general and administrative (excluding depreciation and amortization) |
| 5,211 |
| 4,606 |
| 605 | |||
Other operating (income) expense | (309) |
| 253 |
| (562) | ||||
Total operating costs and expenses |
| 49,502 |
| 30,758 |
| 18,744 | |||
Operating income (loss) |
| 7,413 |
| (2,089) |
| 9,502 | |||
Interest income (expense), net |
| (79) |
| (49) |
| (30) | |||
Total other income (expense) |
| (79) |
| (49) |
| (30) | |||
Income (loss) before income tax expense |
| 7,334 |
| (2,138) |
| 9,472 | |||
(Expense) benefit for income taxes |
| (1,612) |
| 213 |
| (1,825) | |||
Net income (loss) | 5,722 | (1,925) | 7,647 | ||||||
Less: net (income) loss related to non-controlling interests | (2,220) | 756 | (2,976) | ||||||
Net income (loss) attributable to Solaris | $ | 3,502 | $ | (1,169) | $ | 4,671 | |||
Revenue
Revenue increased $28.2 million, or 99%, to $56.9 million for the three months ended March 31, 2022 compared to $28.7 million for the three months ended March 31, 2021. The increase in revenue is primarily related to increases in demand for our products and services. Mobile proppant systems, on a fully utilized basis, increased from 52 systems for the three months ended March 31, 2021 to 75 systems for the three months ended March 31, 2022, in response to the increase in activity levels of our customers, driven primarily by stronger commodity prices.
Cost of Services
Cost of services, excluding depreciation and amortization expense increased $18.5 million, or 96%, to $37.7 million for the three months ended March 31, 2022 compared to $19.2 million for the three months ended March 31, 2021. The increase was primarily due to operating costs related to an increase in demand for our products and services. Cost of services, excluding depreciation and amortization as a percentage of revenue was 66% and 67% for the three months ended March 31, 2022 and 2021, respectively.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $0.6 million, or 13%, to $5.2 million for the three months ended March 31, 2022 compared to $4.6 million for the three months ended March 31, 2021. Selling, general and administrative expenses increased due primarily to increases in headcount and professional fees.
Provision for Income Taxes
During the three months ended March 31, 2022, we recognized a combined United States federal and state expense for income taxes of $1.6 million, an increase of $1.8 million as compared to the $0.2 million income tax benefit we recognized during the three months ended March 31, 2021. This change was attributable to operating gains. The effective combined United States federal and state income tax rates were 22.3% and 10.0% for the three months ended March 31, 2022 and 2021, 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.
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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 | ||||||||||
March 31, | ||||||||||
| 2022 |
| 2021 |
| Change |
| ||||
(in thousands) | ||||||||||
Net income (loss) |
| $ | 5,722 |
| $ | (1,925) |
| $ | 7,647 |
|
Depreciation and amortization |
| 6,929 |
| 6,693 |
| 236 | ||||
Interest expense, net |
| 79 |
| 49 |
| 30 | ||||
Income taxes (1) |
| 1,612 |
| (213) |
| 1,825 | ||||
EBITDA | $ | 14,342 | $ | 4,604 | $ | 9,738 | ||||
Stock-based compensation expense (2) |
| 1,593 |
| 1,199 |
| 394 | ||||
Loss on disposal of assets | 5 | 18 | (13) | |||||||
Gain on insurance claims | (190) | — | (190) | |||||||
Credit losses and adjustments to credit losses | (27) | 283 | (310) | |||||||
Transaction costs (3) | 17 | 14 | 3 | |||||||
Adjusted EBITDA | $ | 15,740 | $ | 6,118 | $ | 9,622 | ||||
| (1) | United States federal and state income taxes. |
| (2) | Represents stock-based compensation expense related to restricted stock awards. |
| (3) | Costs related to the evaluation of potential acquisitions. |
Three Months Ended March 31, 2022 Compared to Three Months Ended March 31, 2021: EBITDA and Adjusted EBITDA
EBITDA increased $9.7 million to $14.3 million for the three months ended March 31, 2022 compared to $4.6 million for the three months ended March 31, 2021. Adjusted EBITDA increased $9.6 million to $15.7 million for the three months ended March 31, 2022 compared to $6.1 million for the three months ended March 31, 2021. 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
Overview
Our primary sources of liquidity to date have been cash flows from operations, borrowings under our credit agreements and proceeds from equity offerings. Our primary uses of capital have been to fund ongoing operations, 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, 2022, cash and cash equivalents totaled $25.1 million. We have no borrowings outstanding under our Credit Agreement and have $50.0 million of available borrowing capacity. We believe that our cash on hand, operating cash flow and available borrowings under our Credit Agreement will be sufficient to fund our operations for at least the next 12 months.
Cash Flows
The following table summarizes our cash flows for the periods indicated:
Three Months Ended | |||||||||
March 31, | |||||||||
2022 | 2021 | Change | |||||||
(in thousands) | |||||||||
Net cash provided by operating activities |
| $ | 6,269 |
| $ | 2,766 | $ | 3,503 | |
Net cash used in investing activities | (11,507) | (2,607) | (8,900) | ||||||
Net cash used in financing activities | (6,131) | (5,465) | (666) | ||||||
Net change in cash | $ | (11,369) | $ | (5,306) | $ | (6,063) | |||
Significant Sources and Uses of Cash Flows
Operating Activities. Net cash provided by operating activities was $6.3 million for the three months ended March 31, 2022, compared to net cash provided by operating activities of $2.8 million for the three months ended March 31, 2021. The increase of $3.5 million in operating cash flow was primarily attributable to increases in working capital.
Investing Activities. Net cash used in investing activities was $11.5 million for the three months ended March 31, 2022, compared to net cash used in investing activities of $2.6 million for the three months ended March 31, 2021. The increase in investing activities of $8.9 million is primarily due to capital expenditures related to enhancements to our fleet and for new technologies.
Financing Activities. Net cash used in financing activities of $6.1 million for the three months ended March 31, 2022 was primarily related to quarterly dividends of $4.9 million and $1.0 million of payments related to vesting of stock-based compensation. Net cash used in financing activities of $5.5 million for the three months ended March 31, 2021 was primarily related to quarterly dividends of $4.8 million and $0.6 million of payments related to vesting of stock-based compensation.
Capital Sources
Senior Secured Credit Facility
See Note 4. “Debt” to our condensed consolidated financial statements as of March 31, 2022, 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
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operations. We have no material off balance sheet arrangements as of March 31, 2022, except for purchase commitments under supply agreements disclosed below.
As of March 31, 2022, we expect to pay approximately $0.2 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, 2022, we had purchase obligations of approximately $27.0 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, 2022 from the amounts listed under 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, 2021 for additional information.
Recent Accounting Pronouncements
Recently Adopted Accounting Standards
None.
Recently Issued Accounting Standards
See Note 2. “Summary of Significant Accounting Policies – Recently Issued Accounting Standards” to our condensed consolidated financial statements as of March 31, 2022, for a discussion of recently issued accounting standards.
Under the Jumpstart Our Business Startups Act (the “JOBS Act”), we meet the definition of an “emerging growth company,” which allows us to have an extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act, however, we elected to opt out of such exemption (this election is irrevocable).
Off Balance Sheet Arrangements
We have no material off balance sheet arrangements. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such financing arrangements.
Item 3.Quantitative and Qualitative Disclosures about Market Risk
For quantitative and qualitative disclosures about market risk, see Part II, Item 7A. “Quantitative and Qualitative Disclosures about Market Risk” in our Annual Report on Form 10-K for the year ended December 31, 2021. Our exposure to market risk has not changed materially since December 31, 2021.
Credit Risk
The majority of our accounts receivable have payment terms of 60 days or less. As of March 31, 2022, two customers collectively accounted for 44% of our total accounts receivable. As of December 31, 2021, two customers collectively accounted for 42% of our total accounts receivable. We mitigate the associated credit risk by performing credit evaluations and monitoring the payment patterns of our customers. Please see Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021 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 March 31, 2022. 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 March 31, 2022, our principal executive officer and principal financial officer have concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
There were no changes in our system of internal control over financial reporting (as defined in Rule 13a-15(f) and Rule 15d-15(f) under the Exchange Act) during the quarter ended March 31, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Due to the nature of our business, we may become, from time to time, involved in routine litigation or subject to disputes or claims related to our business activities. In the opinion of our management, there are no pending litigation, disputes or claims against us which, if decided adversely, will have a material adverse effect on our financial condition, cash flows or results of operations.
Item 1A. Risk Factors
Factors that could materially adversely affect our business, financial condition, operating results or liquidity and the trading price of our Class A common stock are described under Part I, Item 1A. “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the SEC on February 24, 2022. 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, 2021.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Unregistered Sales of Equity Securities
None.
Issuer Purchases of Equity Securities
During the current quarter, we repurchased the shares of Class A common stock as shown in the table below, to satisfy tax withholding obligations upon the vesting of restricted stock awarded to certain of our employees:
Total Number of | Average Price | ||||||
Shares | Paid Per | ||||||
Period | Purchased | Share | |||||
January 1 - January 31 | — | $ | — | ||||
February 1 - February 28 | — | — | |||||
March 1 - March 31 | 95,514 | 12.97 | |||||
Total | 95,514 | $ | 12.97 | ||||
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 | ||
10.1† | ||
10.2 | ||
10.3 | ||
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* | 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 – 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
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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. |
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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. | ||
April 28, 2022 | By: | /s/ William A. Zartler |
William A. Zartler | ||
Chairman and Chief Executive Officer | ||
(Principal Executive Officer) | ||
April 28, 2022 | By: | /s/ Kyle S. Ramachandran |
Kyle S. Ramachandran | ||
President and Chief Financial Officer | ||
(Principal Financial Officer) | ||
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