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 |
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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 | 17 | |
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (this “Quarterly Report”) includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Statements that are predictive in nature, that depend upon or refer to future events or conditions or that include the words “believe,” “expect,” “anticipate,” “intend,” “estimate,” “could,” “may,” “continue,” “predict,” “potential” and other expressions that are predictions of or indicate future events and trends and that do not relate to historical matters identify forward-looking statements. Our forward-looking statements include statements about our business strategy, our industry, our future profitability, our expected capital expenditures and the impact of such expenditures on our performance, management changes, current and potential future long-term contracts, the costs of being a publicly traded corporation, our capital programs and our future business and financial performance. In addition, our forward-looking statements address the various risks and uncertainties associated with extraordinary market environments and the expected impact on our businesses, results of operations, and earnings.
A forward-looking statement may include a statement of the assumptions or bases underlying the forward-looking statement. We believe that we have chosen these assumptions or bases in good faith and that they are reasonable. You are cautioned not to place undue reliance on any forward-looking statements. You should also understand that it is not possible to predict or identify all such factors and should not consider the following list to be a complete statement of all potential risks and uncertainties. Factors that could cause our actual results to differ materially from the results contemplated by such forward-looking statements include:
● | the level of domestic capital spending and access to capital markets by the oil and natural gas industry and uncertainty regarding the future actions of oil producers, including the members of the Organization of the Petroleum Exporting Countries (OPEC) and Russia and the actions taken to set, maintain or cut production levels; |
● | developments and uncertainty in the global economy and the resulting impacts to the demand and supply for crude oil and natural gas or volatility of oil and natural gas prices, and therefore the demand for the services we provide and the commercial opportunities available to us; |
● | geopolitical risks, including the war between Russia and Ukraine, the Israel and Hamas conflict and continued hostilities in the Middle East which could each 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, increased interest rates, central bank policy, bank failures and associated liquidity risks and supply chain constraints, including changes in market price and availability of materials and labor; |
● | 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; |
● | epidemics or pandemics, including the effects of related public health concerns and the impact of continued actions taken by governmental authorities and other third parties in response to pandemics and their impact on commodity prices, supply and demand considerations and storage capacity; |
● | 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; |
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● | actions taken by our customers, competitors and third-party operators; |
● | changes in the availability and cost of capital; |
● | our ability to successfully implement our business strategy; |
● | increases in tax rates or the enactment of taxes that specifically impact exploration and production related operations resulting in an increase in the amount of taxes owed by us; |
● | the effects of existing and future laws, rulings, governmental regulations and accounting standards and statements (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, including the expected timing and closing of the MER Acquisition (as defined below); |
● | the possibility that the required shareholder approval related to the MER Acquisition may not be obtained; |
● | the risk that a condition to closing the MER Acquisition may not be satisfied; |
● | the risk that either party to the MER Acquisition may terminate the definitive agreement upon the occurrence of certain circumstances or that the closing of the MER Acquisition might be delayed or not occur at all; |
● | natural or man-made disasters and other external events that may disrupt our manufacturing operations; |
● | uncertainty regarding our future operating results; 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 Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2023 and under Part II, Item 1A. “Risk Factors” of 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 per share amounts)
(Unaudited)
| June 30, | December 31, | ||||
2024 | 2023 | |||||
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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Accounts receivable - related party | | | ||||
Prepaid expenses and other current assets |
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Inventories |
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Assets held for sale | — | | ||||
Total current assets |
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Property, plant and equipment, net |
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Non-current inventories | | | ||||
Non-current receivables, net of allowances of $ | | | ||||
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 credit 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 | | | ||||
Credit agreement, net of current | — | | ||||
Finance lease liabilities, net of current |
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Payables related to Tax Receivable Agreement, net of current | | | ||||
Other long-term liabilities | | | ||||
Total liabilities |
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Commitments and contingencies (Note 10) |
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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 Oilfield Infrastructure, Inc. |
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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 per share amounts)
(Unaudited)
Three Months Ended | Six Months Ended | |||||||||||
June 30, | June 30, | |||||||||||
| 2024 |
| 2023 |
| 2024 |
| 2023 | |||||
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Revenue | $ | | $ | | $ | | $ | | ||||
Revenue - related parties | | | |
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Total revenue | | | |
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Operating costs and expenses: |
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Cost of services (exclusive of depreciation and amortization) | | | |
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Depreciation and amortization |
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Gain on reversal of property tax contingency | ( | — | ( |
| — | |||||||
Selling, general and administrative |
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Other operating expense (income), net | | ( | |
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Total operating costs and expenses |
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Operating income |
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Interest expense, net |
| ( |
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Income before income tax expense |
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Provision for income taxes |
| ( |
| ( |
| ( |
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Net income | | | |
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Less: net income related to non-controlling interests | ( | ( | ( |
| ( | |||||||
Net income attributable to Solaris Oilfield Infrastructure, Inc. | | | | | ||||||||
Less: income attributable to participating securities | ( | ( | ( | ( | ||||||||
Net income attributable to Class A common shareholders | $ | | $ | | $ | | $ | | ||||
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Earnings per share of Class A common stock – basic | $ | | $ | | $ | | $ | | ||||
Earnings per share of Class A common stock – diluted | $ | | $ | | $ | | $ | | ||||
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Basic weighted-average shares of Class A common stock outstanding | | | |
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Diluted weighted-average shares of Class A common stock outstanding | | | |
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]
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, except per share amounts)
(Unaudited)
Class A | Class B | Additional | Non- | Total | ||||||||||||||||||
Common Stock | Common Stock | Paid-in | Retained | controlling | Stockholders' | |||||||||||||||||
| Shares |
| Amount |
| Shares |
| Amount |
| Capital |
| Earnings |
| Interest |
| Equity | |||||||
Balance at December 31, 2023 | | $ | | | $ | — | $ | | $ | | $ | | $ | | ||||||||
Share repurchases and retirements | ( | ( | — | — | ( | ( | ( | ( | ||||||||||||||
Net effect of deferred tax asset and payables related to the vesting of restricted stock | — | — | — | — | ( | — | — | ( | ||||||||||||||
Stock-based compensation | — | — | — | — | | — | | | ||||||||||||||
Grants of restricted stock, net of forfeitures | | — | — | — | — | — | — | — | ||||||||||||||
Vesting of restricted stock | — | | — | — | | — | ( | — | ||||||||||||||
Vesting of performance-based restricted stock units | | — | — | — | | — | ( | — | ||||||||||||||
Cancelled shares withheld for taxes from vesting of restricted stock | ( | ( | — | — | ( | — | ( | ( | ||||||||||||||
Distributions to non-controlling interest unitholders | — | — | — | — | — | — | ( | ( | ||||||||||||||
Dividends paid ($ | — | — | — | — | — | ( | — | ( | ||||||||||||||
Net income | — | — | — | — | — | | | | ||||||||||||||
Balance at March 31, 2024 | | $ | | | $ | — | $ | | $ | | $ | | $ | | ||||||||
Stock-based compensation | — | — | — | — | | — | | | ||||||||||||||
Grants of restricted stock, net of forfeitures | ( | — | — | — | — | — | — | — | ||||||||||||||
Vesting of restricted stock | — | — | — | — | | — | ( | — | ||||||||||||||
Cancelled shares withheld for taxes from vesting of restricted stock | ( | — | — | — | ( | — | — | ( | ||||||||||||||
Distributions to non-controlling interest unitholders | — | — | — | — | — | — | ( | ( | ||||||||||||||
Dividends paid ($ | — | — | — | — | — | ( | — | ( | ||||||||||||||
Net income | — | — | — | — | — | | | | ||||||||||||||
Balance at June 30, 2024 | | $ | | | $ | — | $ | | $ | | $ | | $ | |
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, except per share amounts)
(Unaudited)
Class A | Class B | Additional | Non- | Total | ||||||||||||||||||
Common Stock | Common Stock | Paid-in | Retained | controlling | Stockholders' | |||||||||||||||||
| Shares |
| Amount |
| Shares |
| Amount |
| Capital |
| Earnings |
| Interest |
| Equity | |||||||
Balance at December 31, 2022 | | | | — | | | | | ||||||||||||||
Share repurchases and retirements | ( | ( | — | — | ( | ( | ( | ( | ||||||||||||||
Net effect of deferred tax asset and payables related to the vesting of restricted stock | — | — | — | — | | — | — | | ||||||||||||||
Stock-based compensation | — | — | — | — | | — | | | ||||||||||||||
Grants of restricted stock, net of forfeitures | | — | — | — | — | — | — | — | ||||||||||||||
Vesting of restricted stock | — | | — | — | | — | ( | — | ||||||||||||||
Cancelled shares withheld for taxes from vesting of restricted stock | ( | ( | — | — | ( | ( | ( | ( | ||||||||||||||
Distributions to non-controlling interest unitholders | — | — | — | — | — | — | ( | ( | ||||||||||||||
Dividends paid ($ | — | — | — | — | — | ( | — | ( | ||||||||||||||
Net income | — | — | — | — | — | | | | ||||||||||||||
Balance at March 31, 2023 | | $ | | | $ | — | $ | | $ | | $ | | $ | | ||||||||
Share repurchases and retirements | ( | ( | — | — | ( | ( | ( | ( | ||||||||||||||
Stock-based compensation | — | — | — | — | | — | | | ||||||||||||||
Grants of restricted stock, net of forfeitures | ( | — | — | — | — | — | — | — | ||||||||||||||
Vesting of restricted stock | — | | — | — | | — | ( | — | ||||||||||||||
Cancelled shares withheld for taxes from vesting of restricted stock | ( | ( | — | — | ( | ( | ( | ( | ||||||||||||||
Distributions to non-controlling interest unitholders | — | — | — | — | — | — | ( | ( | ||||||||||||||
Dividends paid ($ | — | — | — | — | — | ( | — | ( | ||||||||||||||
Net income | — | — | — | — | — | | | | ||||||||||||||
Balance at June 30, 2023 | | $ | | | $ | — | $ | | $ | | $ | | $ | |
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)
Six Months Ended | ||||||
June 30, | ||||||
| 2024 |
| 2023 | |||
Cash flows from operating activities: |
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Net income |
| $ | |
| $ | |
Adjustment to reconcile net income to net cash provided by operating activities: |
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Depreciation and amortization |
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Loss (gain) on disposal of assets |
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Stock-based compensation |
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Amortization of debt issuance costs |
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Allowance for credit losses | | ( | ||||
Inventory write-off | | — | ||||
Deferred income tax expense | | | ||||
Other | ( | ( | ||||
Changes in operating assets and liabilities: |
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Accounts receivable |
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Accounts receivable - related party | ( | ( | ||||
Prepaid expenses and other current assets |
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Inventories |
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Accounts payable |
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Accrued liabilities |
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Property tax contingency | ( | — | ||||
Payments pursuant to Tax Receivable Agreement | — | ( | ||||
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 claims | | | ||||
Proceeds from disposal of property, plant and equipment | | | ||||
Net cash used in investing activities |
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Cash flows from financing activities: |
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Share repurchases and retirements | ( | ( | ||||
Distributions to non-controlling interest unitholders | ( | ( | ||||
Dividends paid to Class A common stock shareholders | ( | ( | ||||
Payments under finance leases |
| ( |
| ( | ||
Proceeds from issuance of insurance notes payable | | | ||||
Payments under insurance premium financing |
| ( |
| ( | ||
Payments related to debt issuance costs | — | ( | ||||
Cancelled shares withheld for taxes from vesting of restricted stock | ( | ( | ||||
Borrowings under the credit agreement | | | ||||
Repayments of credit agreement | ( | — | ||||
Net cash used in financing activities |
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Net (decrease) increase in cash and cash equivalents |
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Cash and cash equivalents at beginning of period |
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Cash and cash equivalents at end of period |
| $ | |
| $ | |
Non-cash investing and financing activities: |
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Capitalized depreciation in property, plant and equipment |
| $ | |
| $ | |
Capitalized stock-based compensation | | | ||||
Property, plant and equipment additions incurred but not paid at period-end | | | ||||
Reclassification of assets held for sale to property, plant and equipment | | — | ||||
Additions to property, plant and equipment through finance leases | | | ||||
Cash paid for: |
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Interest |
| $ | |
| $ | |
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 and per share amounts)
1. Description of Business
We design and manufacture specialized equipment, which combined with field technician support, last mile and mobilization 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. We service most 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 a non-controlling interest related to the portion of the units in Solaris LLC (the “Solaris LLC Units”) not owned by Solaris Inc., which will reduce net income attributable to the holders of Solaris Inc.’s Class A common stock.
The accompanying interim unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”). These financial statements reflect all normal recurring adjustments that are necessary for fair presentation. Operating results for the three and six months ended June 30, 2024 and 2023 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, 2023 and notes thereto.
All material intercompany transactions and balances have been eliminated upon consolidation.
Reclassifications
Our current period presentation of outstanding shares of Class A common stock includes our unvested restricted stock grants. As a result, our prior period presentation was made to conform to current period presentation and had no effect on previously reported basic and diluted earnings per share. In addition, certain reclassifications of prior period balances have been made to conform to the current period presentation.
Allowance for Credit Losses
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. Along with the expected credit loss percentage approach, the Company applies a case-by-case review on individual trade receivables when deemed appropriate. The related expense associated with the recognition of the allowance for credit losses was included in other operating expense on our condensed consolidated statements of operations. Adjustments to the allowance may be required depending on how potential issues are resolved and when receivables are collected. Accounts deemed uncollectible are
8
written off against the allowance for credit losses when our customers’ financial condition deteriorates, impairing their ability to make payments, including in cases of customer bankruptcies.
The following activity related to our allowance for credit losses on customer receivables reflects the estimated impact of the current economic environment on our receivable balance.
Three Months Ended | Six Months Ended | |||||||||||
June 30, | June 30, | |||||||||||
2024 | 2023 | 2024 | 2023 | |||||||||
Balance at beginning of period | $ | | $ | | $ | | $ | | ||||
Provision for credit losses, net of recoveries |
| ( |
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Write-offs |
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Balance at end of period | $ | | $ | | $ | | $ | |
Revenue Recognition
The Company recognizes revenue in accordance with Accounting Standards Codification (“ASC”) Topic 606, “Revenues from Contracts with Customers”. We recognize revenue 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. 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 normally on thirty- to sixty-day payment terms.
Our contracts may contain bundled pricing covering multiple performance obligations, such as contracts containing a combination of systems, mobilization services and / or sand transportation coordination services. In these instances, 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.
Variable consideration typically may relate to discounts, price concessions and incentives. The Company estimates variable consideration based on the amount of consideration we expect to receive. The Company accrues revenue on an ongoing basis to reflect updated information for variable consideration as performance obligations are met.
Disaggregation of Revenue
The following table summarizes revenues from our contracts disaggregated by revenue generating activity contained therein for the three and six months ended June 30, 2024 and 2023:
Three Months Ended | Six Months Ended | |||||||||||
June 30, | June 30, | |||||||||||
2024 | 2023 | 2024 | 2023 | |||||||||
Wellsite services | $ | | $ | | $ | | $ | | ||||
Transloading and Other | | | | | ||||||||
Total revenue | $ | | $ | | $ | | $ | |
Fair Value Measurements
The Company’s financial assets and liabilities, as well as certain nonrecurring fair value measurements such as goodwill impairment and long-lived assets impairment, are to be measured using inputs from the three levels of the fair value hierarchy, of which the first two are considered observable and the last unobservable, which are as follows:
● | Level 1 – Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date; |
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● | Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active or other inputs corroborated by observable market data for substantially the full term of assets or liabilities; and |
● | Level 3 – Unobservable inputs that reflect the Company’s assumptions that the market participants would use in pricing assets or liabilities based on the best information available. |
The carrying value of the Company’s financial instruments, consisting of cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities and other current liabilities including insurance premium financing, approximate their fair value due to their short-term nature. The carrying amounts of the Company’s borrowings under the credit agreement approximate fair value based on their nature, terms, and variable interest rates.
3. Property, Plant and Equipment
Property, plant and equipment consists of the following:
| June 30, |
| December 31, | |||
| 2024 |
| 2023 | |||
Systems and related equipment | $ | | $ | | ||
Systems in process | |
| | |||
Vehicles |
| |
| | ||
Machinery and equipment |
| |
| | ||
Buildings |
| |
| | ||
Computer hardware and software |
| |
| | ||
Land |
| |
| | ||
Furniture and fixtures | |
| | |||
Property, plant and equipment, gross | $ | | $ | | ||
Less: accumulated depreciation |
| ( |
| ( | ||
Property, plant and equipment, net | $ | | $ | |
During the three months ended June 30, 2024 and 2023, we recorded depreciation expense of $
During the six months ended June 30, 2024, we reclassified $
4
4. Accrued Liabilities
Accrued liabilities consist of the following:
| June 30, |
| December 31, | |||
| 2024 |
| 2023 | |||
Property, plant and equipment | $ | — | $ | | ||
Employee-related expenses | | | ||||
Selling, general and administrative | | | ||||
Cost of services | | | ||||
Excise, franchise and sales taxes |
| |
| | ||
Ad valorem taxes |
| |
| | ||
Accrued liabilities | $ | | $ | |
10
5. Senior Secured Credit Facility
Our senior secured credit facility matures on April 25, 2025. As of June 30, 2024, the outstanding balance of $
As of June 30, 2024, we were in compliance with all covenants of our senior secured credit facility and had the capacity to draw an additional $
6. Other Current Liabilities
As of June 30, 2024 and December 31, 2023, the other current liabilities balance consisted of insurance premium financing of $
In the second quarter of 2024, we entered into insurance premium financing agreements with an aggregate financed amount of $
In the second quarter of 2023, we entered into insurance premium financing agreements with a financed amount of $
7. Equity
Dividends
Solaris LLC paid dividend distributions totaling $
Share Repurchase Program
On March 1, 2023, the Company’s board of directors authorized a share repurchase plan to repurchase up to $
Earnings Per Share
Basic earnings per share of Class A common stock is computed by dividing net income attributable to Class A common stockholders 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.
11
The following table sets forth the calculation of earnings per share for the three and six months ended June 30, 2024 and 2023:
Three Months Ended | Six Months Ended | |||||||||||
Basic earnings per share: | 2024 | 2023 | 2024 |
| 2023 | |||||||
Numerator (in millions) | ||||||||||||
Net income attributable to Solaris Oilfield Infrastructure, Inc. | $ | | $ | | $ | | $ | | ||||
Less: income attributable to participating securities (1) | ( | ( | ( | ( | ||||||||
Net income attributable to Class A common stockholders | $ | | $ | | $ | | $ | | ||||
Denominator | ||||||||||||
Weighted average number of unrestricted outstanding Class A common stock used to calculate basic earnings per share | | | | | ||||||||
Diluted weighted-average shares of Class A common stock outstanding used to calculate diluted earnings per share | | | | | ||||||||
Earnings per share of Class A common stock - basic | $ | | $ | | $ | | $ | | ||||
Earnings per share of Class A common stock - diluted | $ | | $ | | $ | | $ | |
(1) | The Company’s unvested restricted stock awards are participating securities because they entitle the holders to non-forfeitable rights to dividends until the awards vest or are forfeited. |
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 | Six Months Ended | |||||||||||
| 2024 | 2023 | 2024 |
| 2023 | |||||||
Class B common stock | | | | | ||||||||
Restricted stock awards | | | | | ||||||||
Performance-based restricted stock units | | | | | ||||||||
Stock options | | | | | ||||||||
Total | | | | |
8. Income Taxes
Income Taxes
Solaris Inc. is a corporation and, as a result, is subject to United States federal, state and local income taxes. Solaris LLC is treated as a partnership for United States federal income tax purposes and therefore does not pay United States federal income tax on its taxable income. Instead, the Solaris LLC unitholders, including Solaris Inc., are liable for United States federal income tax on their respective shares of Solaris LLC’s taxable income reported on the unitholders’ United States federal income tax returns. Solaris LLC is liable for income taxes in those states not recognizing its status as a partnership for United States federal income tax purposes.
For the three months ended June 30, 2024 and 2023, we recognized a combined United States federal and state expense for income taxes of $
12
and six months ended June 30, 2024 and 2023, 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.
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
On May 17, 2017, in connection with its initial public offering, Solaris Inc. entered into a Tax Receivable Agreement (the “Tax Receivable Agreement”) with the then-existing members of Solaris LLC. The Tax Receivable Agreement was later amended on June 27, 2023. As of June 30, 2024, our liability under the Tax Receivable Agreement was $
The projection of future taxable income involves significant judgment. Actual taxable income may differ from our estimates, which could significantly impact our liability under the Tax Receivable Agreement. Therefore, in accordance with ASC 450, Contingencies, we have recorded a liability under the Tax Receivable Agreement related to the tax savings we may realize from certain increases in tax basis and certain tax benefits attributable to imputed interest as a result of Solaris Inc.’s acquisition (or deemed acquisition for United States federal income tax purposes) of Solaris LLC Units in connection with the IPO or pursuant to previous exercises of the Redemption Right or the Call Right (each as defined in the Solaris LLC Agreement) and additional tax basis arising from any payments Solaris Inc. makes under the Tax Receivable Agreement. Solaris LLC may make cash distributions to Solaris Inc. in order for Solaris Inc. to satisfy its obligations under the Tax Receivable Agreement and will be required to distribute cash pro rata to each of the other members of Solaris LLC, in accordance with the number of Solaris LLC Units owned by each member at that time.
9. Concentrations
For the three months ended June 30, 2024, three customers accounted for
13
revenues. As of June 30, 2024, three customers accounted for
For the three months ended June 30, 2024, one supplier accounted for
10. Commitments and Contingencies
Tax Matters
We are subject to a number of state and local taxes that are not income-based. As many of these taxes are subject to assessment and audit by the taxing authorities, it is possible that an assessment or audit could result in additional taxes due. We accrue additional taxes when we determine that it is probable that we will have incurred a liability and we can reasonably estimate the amount of the liability. On June 16, 2022, Cause Number CV20-09-372, styled Solaris Oilfield Site Services v. Brown County Appraisal District, was presented to the 35th District Court of Brown County, Texas. The 35th District Court of Brown County ruled in favor of Brown County Appraisal District regarding the disqualification of our equipment for certain property tax exemptions. On July 20, 2022, we filed an appeal with the Eleventh District of Texas – Eastland Court of Appeals, and an appellate hearing relating thereto was held on April 13, 2023. A final ruling from the Eastland Court of Appeals was received on April 18, 2024. The appellate court ruled in our favor and upheld most, but not all, of our disputed property tax exemptions. On June 14, 2024, we reached a settlement agreement with Brown County Appraisal District for $
Litigation and Claims
In the normal course of business, the Company is subjected to various claims, legal actions, contract negotiations and disputes. The Company provides for losses, if any, in the year in which they can be reasonably estimated. In management’s opinion, there are currently no such matters outstanding that would have a material effect on the accompanying condensed consolidated financial statements other than the following.
On February 28, 2024, the Company was served with a lawsuit by Masaba Inc. in the Wyoming District Court related to alleged intellectual property infringement. The complaint seeks, among other relief, unspecified compensatory damages, rescission, pre-judgment and post-judgment interest, costs and expenses. The Company believes these claims are without merit and will vigorously defend against them. At this time, we are unable to predict the ultimate outcome of this case or estimate the range of possible loss, if any.
Other Commitments
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. The total future guarantee under the guarantee of lease agreement with Solaris Energy Management, LLC is $
11. Related Party Transactions
The Company incurs costs for services provided by Solaris Energy Management, LLC, a company owned by William A. Zartler, the Chief Executive Officer and Chairman of the Board. These costs include rent paid for office space, travel services and other administrative costs, included in selling, general and administrative costs and other operating expense in the condensed consolidated statement of operations. For the three months ended June 30, 2024 and
14
2023, Solaris LLC paid $
As of June 30, 2024, THRC Holdings, LP, an entity managed by THRC Management, LLC (collectively, “THRC”), owned shares representing
The Company is the dedicated wellsite sand storage provider (“Services”) for certain THRC Affiliates. The Company provides volume-based pricing for the Services and may be required to pay up to $
12. Subsequent Events
MER Acquisition
On July 9, 2024, Solaris Inc. and Solaris LLC entered into a definitive agreement to acquire MER, a premier provider of distributed power solutions serving the energy and commercial and industrial end-markets (the “MER Acquisition”). Transaction consideration includes $
The Company’s board of directors has approved the MER Acquisition. The proposed transaction is contingent upon shareholder approval of the issuance of shares of the Company’s Class B common stock, receipt of regulatory approvals and other customary closing conditions. The Company anticipates the transaction to close by the end of the third quarter of 2024.
Senior Secured Bridge Term Loan Facility
On July 9, 2024, in connection with the planned MER Acquisition, the Company secured committed financing from Banco Santander, Texas Capital Securities and Woodforest National Bank in the form of a $
Secured Demand Note
On July 30, 2024, Solaris LLC entered into a definitive agreement whereby Solaris LLC loaned $
15
financing agreement, the Company drew $
Dividends
On
16
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
References to “we,” “us,” “our,” “Solaris Inc.” or the “Company” refer to Solaris Oilfield Infrastructure, Inc. (either individually or together with its subsidiaries, as the context requires). The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the accompanying financial statements and related notes. The following discussion contains “forward-looking statements” that reflect our plans, estimates, beliefs and expected performance. Our actual results may differ materially from those anticipated as discussed in these forward-looking statements as a result of a variety of risks and uncertainties, including those described above in “Cautionary Statement Regarding Forward-Looking Statements” included elsewhere in this Quarterly Report and “Risk Factors” included in this Quarterly Report and in our Annual Report on Form 10-K for the year ended December 31, 2023, as updated by our subsequent filings with the SEC, all of which are difficult to predict. In light of these risks, uncertainties and assumptions, the forward-looking events discussed may not occur. We assume no obligation to update any of these forward-looking statements except as otherwise required by law.
Overview
We design and manufacture specialized equipment, which combined with field technician support, last mile and mobilization 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. We service most active oil and natural gas basins in the United States.
Recent Trends and Outlook
Demand for our services is predominantly influenced by the level of oil and natural gas well drilling and completion activity in the U.S. During the quarter ended June 30, 2024, U.S. drilling and completion activity, as measured by the Baker Hughes U.S. Land Rig Count, was down 7% which reflects the net impact of a 5% decrease in the number of oil-directed rigs and a 13% decrease in gas-directed rigs. Average WTI oil prices remained in a range of $70 to $90 per barrel during the quarter ended June 30, 2024. Average Henry Hub natural gas prices remained in a low-$2 per MMBtu range, which reflects a 15% decline from the start of the year and was the primary driver of the decrease in gas-directed drilling activity.
For the second quarter ended June 30, 2024, our fully utilized total system count averaged 92 systems, which dropped from 102 systems for the first quarter ended March 31, 2024 and was relatively in line with overall drilling and completion trends in the U.S.
Today oil-directed drilling activity comprises over 80% of the total Baker Hughes U.S. Land rig count. Oil prices currently remain in the mid-$70s per barrel range, which we believe should support a sustained level of oil-directed U.S. drilling and completion activity. For the remainder of 2024, we expect the Company’s revenue and profitability to track the overall direction of U.S. drilling and completion activity.
Our capital expenditures of approximately $4 million during the first six months of 2024 were down approximately 90% compared to the first six months of 2023 following the completion of our prior growth capital program in 2023.
The sustainability of favorable supply-demand dynamics and a strong commodity environment will depend on multiple factors, including any supply chain disruptions, potential regulatory changes, uncertainty around a potential economic slowdown and potential impacts from geopolitical disruptions, including the war in Ukraine and continued conflicts in the Middle East. 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.
17
Recent Developments
MER Acquisition
On July 9, 2024, Solaris Inc. and Solaris LLC entered into a definitive agreement to acquire MER, a premier provider of distributed power solutions serving the energy and commercial and industrial end-markets (the “MER Acquisition”). Transaction consideration includes $60.0 million of cash, subject to certain adjustments based on the Company’s capital expenditures prior to the close of the transaction (including the obligation by the Company to assume MER’s acquisition of approximately $308.0 million of on-order turbines); and the issuance of approximately 16.5 million Solaris LLC Units and an equal number of shares of the Company’s Class B common stock to MER’s founders and management team, who will join the Company post-closing.
The Company’s board of directors has approved the MER Acquisition. The proposed transaction is contingent upon shareholder approval of the issuance of shares of the Company’s Class B common stock, receipt of regulatory approvals and other customary closing conditions. The Company anticipates the transaction to close by the end of the third quarter of 2024.
Senior Secured Bridge Term Loan Facility
On July 9, 2024, in connection with the planned MER Acquisition, we secured committed financing from Banco Santander, Texas Capital Securities and Woodforest National Bank in the form of a $300.0 million senior secured bridge term loan facility with a 364-day term (“Bridge Loan”). We paid $4.8 million in loan structuring and commitment fees on the same day. Funds from the Bridge Loan are undrawn and only available to us if we close on the loan. We expect to obtain alternative financing for our cash needs relating to the MER acquisition prior to closing the transaction; if this alternative financing is obtained, we would not close on the Bridge Loan.
Secured Demand Note
On July 30, 2024, Solaris LLC entered into a definitive agreement whereby Solaris LLC loaned $29.8 million (the “Loan”) to MER to fund certain progress payments to meet MER’s outstanding commitments. In connection with this financing agreement, the Company drew $30.0 million from its existing senior secured credit facility. The Loan bears interest at 10% and is fully secured by substantially all of MER’s assets. If the Loan is not called, payment would be due on December 6, 2024.
18
Results of Operations
Three and Six Months Ended June 30, 2024 Compared to Three and Six Months Ended June 30, 2023
Three Months Ended | Six Months Ended | |||||||||||||||||
June 30, | June 30, | |||||||||||||||||
| 2024 |
| 2023 |
| Change |
| 2024 |
| 2023 |
| Change | |||||||
(in thousands) | (in thousands) | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Revenue | $ | 69,640 | $ | 69,925 | $ | (285) | $ | 134,275 | $ | 147,753 | $ | (13,478) | ||||||
Revenue - related parties | 4,246 | 7,277 | (3,031) |
| 7,501 |
| 12,171 |
| (4,670) | |||||||||
Total revenue | 73,886 | 77,202 | (3,316) | 141,776 | 159,924 | (18,148) | ||||||||||||
Operating costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Cost of services (exclusive of depreciation and amortization) | 46,131 | 45,652 | 479 | 86,018 | 98,875 | (12,857) | ||||||||||||
Depreciation and amortization |
| 9,565 |
| 9,071 |
| 494 |
| 19,499 |
| 17,488 |
| 2,011 | ||||||
Gain on reversal of property tax contingency | (2,483) | — | (2,483) | (2,483) | — | (2,483) | ||||||||||||
Selling, general and administrative |
| 8,259 |
| 6,825 |
| 1,434 |
| 16,249 |
| 13,363 |
| 2,886 | ||||||
Other operating expense (income), net | 560 |
| (125) |
| 685 | 683 | (463) | 1,146 | ||||||||||
Total operating costs and expenses |
| 62,032 |
| 61,423 |
| 609 |
| 119,966 |
| 129,263 |
| (9,297) | ||||||
Operating income |
| 11,854 |
| 15,779 |
| (3,925) |
| 21,810 |
| 30,661 |
| (8,851) | ||||||
Interest expense, net |
| (685) |
| (879) |
| 194 |
| (1,484) |
| (1,338) |
| (146) | ||||||
Income before income tax expense |
| 11,169 |
| 14,900 |
| (3,731) |
| 20,326 |
| 29,323 |
| (8,997) | ||||||
Provision for income taxes |
| (1,345) |
| (2,659) |
| 1,314 |
| (3,202) |
| (5,145) |
| 1,943 | ||||||
Net income | 9,824 | 12,241 | (2,417) | 17,124 | 24,178 | (7,054) | ||||||||||||
Less: net income related to non-controlling interests | (3,616) | (4,709) | 1,093 | (6,599) | (9,077) | 2,478 | ||||||||||||
Net income attributable to Solaris Oilfield Infrastructure, Inc. | $ | 6,208 | $ | 7,532 | $ | (1,324) | $ | 10,525 | $ | 15,101 | $ | (4,576) |
Revenue
Total revenue decreased by $3.3 million, or 4%, to $73.9 million in the second quarter of 2024 compared to $77.2 million in the same period of 2023. This result was primarily due to a decrease in fully utilized systems, which dropped to 92 for the second quarter of 2024 from 108 for the second quarter of 2023. This decrease was partially offset by an increase in last mile tonnage in the second quarter of 2024 compared to the same period of 2023.
Total revenue decreased by $18.1 million, or 11%, to $141.8 million in the first six months of 2024 compared to $159.9 million in the same period of 2023. This result was primarily due to a decrease in last mile logistics services revenue. The decrease in revenue was also due to a decrease in fully utilized systems, which dropped to 97 for the first six months of 2024 from 113 for the first six months of 2023.
Cost of Services
Cost of services, excluding depreciation and amortization expense, slightly increased by $0.5 million, or 1%, to $46.1 million in the second quarter of 2024 compared to $45.7 million in the same period of 2023, primarily due to a $2.9 million increase in last mile and ancillary service costs associated with an increase in last mile tonnage. This increase was almost offset by a $0.6 million reduction in system costs due to lower fully utilized system count and reversal of $1.8 million accrued property taxes following a settlement agreement with Brown County Appraisal District. Refer to Note 10, “Commitments and Contingencies,” in the notes to the condensed consolidated financial statements for additional information.
Cost of services, excluding depreciation and amortization expense, decreased by $12.9 million, or 13%, to $86.0 million in the first six months of 2024 compared to $98.9 million in the same period of 2023. This result was primarily
19
due to the reversal of accrued property taxes following settlement with Brown County Appraisal District discussed above, cost saving efforts on ancillary services and lower system count.
Cost of services, excluding depreciation and amortization, as a percentage of revenue was 62% and 61% for the three and six months ended June 30, 2024, respectively, compared to 59% and 62% for the same periods ended June 30, 2023.
Depreciation and Amortization
Depreciation and amortization increased by $0.5 million, or 5%, to $9.6 million in the second quarter of 2024 compared to $9.1 million in the same period of 2023. Depreciation and amortization increased by $2.0 million, or 11%, to $19.5 million in the first six months of 2024, compared to $17.5 million in the same period of 2023. Depreciation increased primarily due to investment in capital spending to develop and upgrade the systems fleet, resulting in the addition of depreciable assets from June 30, 2023 to June 30, 2024.
Gain on Reversal of Property Tax Contingency
On June 14, 2024, we reached a settlement agreement with Brown County Appraisal District in Texas, following a favorable ruling by the Eastland Court of Appeals on April 18, 2024. As a result, in the three and six months ended June 30, 2024, we reversed $4.3 million of property tax expenses previously recorded through 2023 in connection with this case. Of this amount, $2.5 million was presented as gain on reversal of property tax contingency and $1.8 million reduced the costs of services in our condensed consolidated statements of operations.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by $1.4 million, or 21%, to $8.3 million in the second quarter of 2024 compared to $6.8 million in the same period of 2023. Selling, general and administrative expenses increased by $2.9 million, or 22%, to $16.2 million in the first six months of 2024 compared to $13.4 million in the same period of 2023. The increase in these periods was primarily due to an increase in salaries, benefits and wages driven by an increase in average headcount, as well as increased professional fees and office rent.
Other Operating Expense (Income), net
Other operating expense (income) increased by $0.7 million to $0.6 million in the second quarter of 2024 compared to income of $0.1 million in the same period of 2023. Other operating expense (income) increased by $1.1 million, to $0.7 million in the first six months of 2024 compared to income of $0.5 million in the same period of 2023. Other operating expense for the three and six months ended June 30, 2024 primarily relate to transaction costs and credit losses, partially offset with sales tax rebates, sublease income and other settlements. Other operating income for the three and six months ended June 30, 2023 primarily relate to gain on sale of assets and sales tax rebates.
Provision for Income Taxes
During the second quarter of 2024, we recognized a combined United States federal and state expense for income taxes of $1.3 million, a decrease of $1.3 million as compared to the $2.6 million income tax expense we recognized during the same period in 2023. During the first six months of June 30, 2024, we recognized a combined United States federal and state expense for income taxes of $3.2 million, a decrease of $1.9 million as compared to the $5.1 million income tax expense we recognized during the same period in 2023. This change was attributable to changes in operating gains. The effective combined United States federal and state income tax rates were 12.0% and 17.8% for the second quarter of 2024 and 2023, respectively. The effective combined United States federal and state income tax rates were 15.8% and 17.5% for the first six months of 2024 and 2023, 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 use them to assess our results of operations because it allows us, our investors and our lenders to compare our operating performance on a consistent basis across periods by removing the effects of varying levels of interest expense due to our capital structure, depreciation and amortization due to our asset base and other items that impact the comparability of financial results from period to period. We present EBITDA and Adjusted EBITDA because we believe they provide useful information regarding trends and other factors affecting our business in addition to measures calculated under generally accepted accounting principles in the United States (“GAAP”).
We define EBITDA as net income, plus (i) depreciation and amortization expense, (ii) interest expense and (iii) income tax expense. 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 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 the GAAP financial measure of net income to the non-GAAP financial measure of Adjusted EBITDA.
Three Months Ended | Six Months Ended | |||||||||||||||||
June 30, | June 30, | |||||||||||||||||
| 2024 |
| 2023 |
| Change |
| 2024 |
| 2023 |
| Change | |||||||
(in thousands) | (in thousands) | |||||||||||||||||
Net income |
| $ | 9,824 |
| $ | 12,241 |
| $ | (2,417) |
| $ | 17,124 |
| $ | 24,178 |
| $ | (7,054) |
Depreciation and amortization |
| 9,565 |
| 9,071 |
| 494 |
| 19,499 |
| 17,488 |
| 2,011 | ||||||
Interest expense, net |
| 685 |
| 879 |
| (194) |
| 1,484 |
| 1,338 |
| 146 | ||||||
Income taxes (1) |
| 1,345 |
| 2,659 |
| (1,314) |
| 3,202 |
| 5,145 |
| (1,943) | ||||||
EBITDA | $ | 21,419 | $ | 24,850 | $ | (3,431) | $ | 41,309 | $ | 48,149 | $ | (6,840) | ||||||
Property tax contingency (2) | (2,483) | — | (2,483) | (2,483) | — | (2,483) | ||||||||||||
Accrued property tax (3) | (1,794) | — | (1,794) | (1,794) | — | (1,794) | ||||||||||||
Stock-based compensation expense (4) |
| 2,659 |
| 1,924 |
| 735 |
| 4,876 |
| 3,904 |
| 972 | ||||||
Loss (gain) on disposal of assets | 30 | 4 | 26 | 42 | (357) | 399 | ||||||||||||
Credit (recoveries) losses | (174) | (2) | (172) | 126 | (2) | 128 | ||||||||||||
Transaction costs (5) | 1,013 | — | 1,013 | 1,058 | — | 1,058 | ||||||||||||
Other (6) | 127 | 49 | 78 | 350 | 249 | 101 | ||||||||||||
Adjusted EBITDA | $ | 20,797 | $ | 26,825 | $ | (6,028) | $ | 43,484 | $ | 51,943 | $ | (8,459) |
(1) | United States federal and state income taxes. |
(2) | Represents reversal of a portion of previously recognized property tax contingency following a settlement agreement with Brown County Appraisal District. |
(3) | Represents reversal of previously recognized accrued property tax expenses following a settlement agreement with Brown County Appraisal District, included in cost of services in the condensed consolidated statements of operations. |
(4) | Represents stock-based compensation expense related to restricted stock awards and performance-based restricted stock units. |
(5) | Represents transaction costs incurred for activities related to acquisition opportunities. |
(6) | Other includes the net effect of inventory write-offs and other settlements. |
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Three and Six Months Ended June 30, 2024 Compared to Three and Six Months Ended June 30, 2023: EBITDA and Adjusted EBITDA
EBITDA decreased $3.4 million to $21.4 million for the three months ended June 30, 2024 compared to $24.9 million for the three months ended June 30, 2023. Adjusted EBITDA decreased $6.0 million to $20.8 million for the three months ended June 30, 2024 compared to $26.8 million for the three months ended June 30, 2023. EBITDA decreased $6.8 million to $41.3 million for the six months ended June 30, 2024 compared to $48.1 million for the six months ended June 30, 2023. Adjusted EBITDA decreased $8.5 million to $43.5 million for the six months ended June 30, 2024 compared to $51.9 million for the six months ended June 30, 2023. The changes in EBITDA and Adjusted EBITDA were primarily due to the changes in revenues and expenses, discussed above.
Liquidity and Capital Resources
Overview
Our primary sources of liquidity to date have been cash flows from operations, borrowings under our credit agreement 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.
In connection with the MER Acquisition, we have secured a $300.0 million Bridge Loan with a 364-day term. Funds from the Bridge Loan are undrawn and only available to the Company if we close on the loan. We expect to obtain alternative financing for our cash needs relating to the MER acquisition prior to closing the transaction; if this alternative financing is obtained, we would not close on the Bridge Loan.
In July 2024, we borrowed $33.0 million from our senior secured credit facility, approximately $3.0 million of which was used to partly cover loan structuring and commitment fees for the Bridge Loan and $29.8 million was used for the Loan to MER. Currently, we have the capacity to draw an additional $14.8 million from our senior secured credit facility.
On July 25, 2024, our board of directors approved a quarterly cash dividend of $0.12 per share of Class A common stock, to be paid on September 6, 2024 to holders of record as of August 23, 2024, and a distribution of $0.12 per unit to Solaris LLC unitholders, which is subject to the same payment and record dates.
As of June 30, 2024, our senior secured credit facility had outstanding borrowings of $16.0 million. With the additional $33.0 million borrowed in July 2024, our total obligations under this facility amounted to $49.0 million, which is due within the next twelve months. We believe that our current cash reserves, operating cash flow, receipt of Loan repayment from MER, available borrowings under our senior secured credit facility and senior secured bridge term loan facility and the potential to issue additional equity, if needed, will provide adequate liquidity to meet our future operational needs, including repayment of outstanding debt obligations, dividend payments and financing the MER Acquisition.
Share Repurchase Program
The Company’s board of directors authorized a share repurchase program on March 1, 2023, with an approved limit of $50.0 million and no set term limits. During the three months ended June 30, 2024, we did not repurchase nor retire any shares of Class A common stock under the share repurchase program. During the six months ended June 30, 2024, we purchased and retired 1,108,349 shares of Class A common stock at an aggregate cost of $8.1 million, or $7.30 per share, under the share repurchase program. As of June 30, 2024, we have collectively repurchased and retired 4,272,127 shares of Class A common stock for $34.6 million, or $8.09 per share, resulting in $15.4 million remaining under the authorized share repurchase program.
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All purchases made pursuant to the authorized share repurchase plan were made in accordance with applicable securities laws from time to time in the open-market or through private transactions, depending on market conditions. Going forward, future purchases may be made pursuant to a trading plan meeting the requirements of Rule 10b-18 or Rule 10b-5 under the Exchange Act, and may be discontinued at any time.
Cash Flows
The following table summarizes our cash flows for the periods indicated:
Six Months Ended | |||||||||
June 30, | |||||||||
2024 | 2023 | Change | |||||||
(in thousands) | |||||||||
Net cash provided by operating activities |
| $ | 35,751 |
| $ | 43,797 | $ | (8,046) | |
Net cash used in investing activities | (3,640) | (39,896) | 36,256 | ||||||
Net cash used in financing activities | (32,885) | (3,365) | (29,520) | ||||||
Net change in cash | $ | (774) | $ | 536 | $ | (1,310) |
Significant Sources and Uses of Cash Flows
Operating Activities. Net cash provided by operating activities decreased to $35.8 million for the six months ended June 30, 2024, compared to $43.8 million for the same period in 2023. This $8.0 million decline is primarily attributed to reduced business activity, reflected in the decrease in our fully utilized systems and lower revenue from last-mile logistics services. Consequently, our net income, adjusted for non-cash items, was $44.9 million for the six months ended June 30, 2024, compared to $50.3 million in the same period in 2023. Additionally, changes in working capital led to a $9.1 million decrease in cash for the six months ended June 30, 2024, compared to a $6.5 million decrease in cash in the same period in 2023.
Investing Activities. Net cash used in investing activities was $3.6 million for the six months ended June 30, 2024, a significant decrease from $39.9 million during the same period in 2023. The $36.3 million reduction is mainly attributed to decreased capital expenditures following the completion of our previous growth capital program in 2023.
Financing Activities. For the six months ended June 30, 2024, net cash used in financing activities totaled $32.9 million. This amount primarily reflects net repayments of $14.0 million on our credit agreement, $8.1 million for share repurchases, $7.3 million in quarterly dividends to Class A common stock shareholders and $3.3 million in distributions to Solaris LLC unitholders. In comparison, net cash used in financing activities was $3.4 million for the six months ended June 30, 2023. This was largely due to $25.8 million spent on share repurchases, $7.0 million in quarterly dividends to Class A common stock shareholders and $3.5 million in distributions to Solaris LLC unitholders, partially offset by $35.0 million in net borrowings under our senior secured credit facility.
Future Uses of Cash
Our material cash commitments consist primarily of obligations under our senior secured credit facility, Tax Receivable Agreement, insurance premium financing, obligations under our finance and operating leases, dividend payments, purchase obligations as part of normal operations and financing of our planned MER Acquisition, which we expect to close by the end of the third quarter of 2024.
Critical Accounting Estimates
We had no material changes in our critical accounting estimates during the three and six months ended June 30, 2024, see Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” in our Annual Report on Form 10-K for the year ended December 31, 2023 for additional information.
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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, 2023. Our exposure to market risk has not changed materially since December 31, 2023.
Credit Risk
The majority of our accounts receivable have payment terms of 60 days or less. As of June 30, 2024, three customers accounted for 17%, 12% and 11% of our total accounts receivable. As of December 31, 2023, two customers accounted for 12% and 10% 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, 2023 for more information regarding credit risk of our customers.
Item 4.Controls and Procedures
Disclosure Controls and Procedures
In accordance with Exchange Act Rules 13a-15 and 15d-15, we have evaluated, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of June 30, 2024. Disclosure controls refer to controls and procedures designed to provide reasonable assurance that the information required to be disclosed by us in reports that we file under the Exchange Act is accumulated and communicated by our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure and is recorded, processed, and summarized and reported within the time periods specified in the rules and forms of the SEC. Based on the evaluation of our disclosure controls and procedures as of June 30, 2024, our principal executive officer and principal financial officer have concluded that, as of such date, our disclosure controls and procedures were effective in our internal control over financial reporting.
Changes in Internal Control over Financial Reporting
There were no changes in our system of internal control over financial reporting (as defined in Rule 13a-15(f) and Rule 15d-15(f) under the Exchange Act) during the quarter ended June 30, 2024 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, could have a material adverse effect on our financial condition, cash flows or results of operations other than the lawsuit by Masaba Inc. as discussed in Note 10. “Commitments and Contingencies” included in the notes to unaudited condensed consolidated financial statements contained herein.
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, 2023, as filed with the SEC on February 27, 2024. 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, 2023 except as disclosed herein.
The Company’s ability to complete the MER Acquisition is subject to various closing conditions, including obtaining the required shareholder approval and regulatory clearance, which may impose conditions that could adversely affect the Company or cause the MER Acquisition not to be completed.
The MER Acquisition is subject to a number of conditions to closing as specified in the definitive agreement. These closing conditions include, among others, including (i) approval of the stock issuance by Company shareholders, (ii) the Class A common stock issuable upon exchange of the Solaris LLC Units and shares of Class B common stock to be issued as consideration having been authorized for listing on the NYSE, (iii) the expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, (iv) the absence of any injunction, order, decree or law preventing, prohibiting or making illegal the consummation of the MER Acquisition, (v) with respect to each party, (A) the accuracy of the other party’s representations and warranties, subject to specified materiality qualifications, (B) compliance by the other party with its covenants in the definitive agreement in all material respects and (C) the absence of a “Material Adverse Effect” (as defined in the definitive agreement) with respect to the other party since the date of the definitive agreement that is continuing and (vi) in the case of the Company, the receipt of certain required financial statements and corresponding interim financial statements of MER as of and for any quarterly period(s) ended more than 45 days prior to the closing of the MER Acquisition.
No assurance can be given that the required shareholder approval and regulatory clearance will be obtained or that the other required conditions to the closing of the MER Acquisition will be satisfied. Even if regulatory clearance is obtained, no assurance can be given as to the terms, conditions and timing of such clearance, including whether any required conditions will materially adversely affect the combined company following the closing of the MER Acquisition. Any delay in completing the MER Acquisition could cause the combined company not to realize, or to be delayed in realizing, some or all of the benefits that Solaris Inc. and MER expect to achieve if the MER Acquisition is successfully completed within its expected time frame. Solaris Inc. can provide no assurance that these conditions will not result in the abandonment or delay of the MER Acquisition. The occurrence of any of these events individually or in combination could have a material adverse effect on the Company’s results of operations and the trading price of the Class A common stock.
Because the cash consideration is subject to certain adjustments, MER does not have full certainty as to the final cash consideration amount that will be paid, and such amount may be materially higher than was anticipated upon the Company’s entry into the definitive agreement.
Pursuant to the definitive agreement, the cash consideration to be paid in connection with the contribution is subject to certain adjustments.
Because certain of the individual items forming the adjustments to be made to the cash consideration are not knowable with full certainty by the Company prior to the contribution, the final cash consideration paid by Solaris LLC
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may be materially higher than the base cash consideration of $60 million. If the cash consideration is materially higher than expected, the value of the contribution to the Company and its current stockholders may be materially less than was anticipated upon the Company’s entry into the definitive agreement.
Combining the Company’s business with MER’s may be more difficult, costly or time-consuming than expected and the combined company may fail to realize the anticipated benefits of the contribution, which may adversely affect the combined company’s business results and negatively affect the value of the Class A common stock.
The success of the contribution will depend on, among other things, the ability of the two companies to combine their businesses in a manner that facilitates growth opportunities and realizes expected cost savings. The combined company may encounter difficulties in integrating the Company’s and MER’s businesses and realizing the anticipated benefits of the contribution. The combined company must achieve the anticipated improvement in free cash flow generation and returns and achieve the planned cost savings without adversely affecting current revenues and operations. If the combined company is not able to successfully achieve these objectives, the anticipated benefits of the contribution may not be realized fully, or at all, or may take longer to realize than expected.
The contribution involves the combination of two companies which currently operate, and until the completion of the contribution will continue to operate, as independent companies. There can be no assurances that the businesses can be integrated successfully. It is possible that the integration process could result in the loss of key employees from both companies; the loss of commercial and vendor partners; the disruption of the Company’s, MER’s or both companies’ ongoing businesses; inconsistencies in standards, controls, procedures and policies; unexpected integration issues; higher than expected integration costs and an overall post-completion integration process that takes longer than originally anticipated.
The combined company will be required to devote management attention and resources to integrating its business practices and operations, and prior to the contribution, management attention and resources will be required to plan for such integration. An inability to realize the full extent of the anticipated benefits of the contribution and the other transactions contemplated by the definitive agreement, as well as any delays encountered in the integration process, could have an adverse effect upon the revenues, level of expenses and operating results of the combined company, which may adversely affect the value of the common stock of the combined company.
In addition, the actual integration may result in additional and unforeseen expenses, and the anticipated benefits of the integration plan may not be realized. There are a large number of processes, policies, procedures, operations and technologies and systems that must be integrated in connection with the contribution and the integration of MER’s business. Although the Company expects that the elimination of duplicative costs, strategic benefits, and additional income, as well as the realization of other efficiencies related to the integration of the business, may offset incremental transaction and contribution-related costs over time, any net benefit may not be achieved in the near term or at all. If the Company and MER are not able to adequately address integration challenges, the Company may be unable to successfully integrate operations or realize the anticipated benefits of the integration of the two companies.
Finally, Solaris LLC intends to use a combination of debt financing and free cash flow generated from the legacy Solaris Inc. business to fund the cash due at closing, in addition to the acquisition of approximately $308 million of on-order turbines MER has previously committed to purchase. Although Solaris Inc.’s obligation to complete the contribution is not conditioned upon obtaining financing, Solaris Inc. has secured committed financing from a group led by Banco Santander in the form of a $300 million 364-day senior secured bridge term loan facility. The Company expects to obtain alternative financing for its cash needs relating to the contribution prior to closing, in which case it would not expect to draw upon the Santander Facility; however, the Company may be unable to obtain such alternative financing on attractive terms or at all. If the Company is unable to obtain such alternative financing prior to closing such that the Company draws from the Santander Facility at closing of the contribution, the Company expects to refinance the Santander Facility promptly thereafter.
The ownership percentage of current Solaris Inc. stockholders will be significantly diluted by the issuance of Class B common stock in connection with the MER Acquisition.
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The issuance of Class B common stock in connection with the MER Acquisition will result in significant dilution of the ownership percentage of the Company of current Company stockholders following the contribution. Based on the estimated number of shares of the Company’s Class A and Class B common stock outstanding immediately prior to the execution of the definitive agreement, current Company stockholders are expected to own approximately 73% of the Company following the contribution, whereas the holders of the issued and outstanding equity interests of MER are expect to own approximately 27% of the Company following the contribution. Consequently, current Company stockholders will, as a general matter, have less influence over the management and policies of the Company following the contribution as compared to their influence over the Company prior to the contribution.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Unregistered Sales of Equity Securities
None.
Issuer Purchases of Equity Securities
The following table presents the total number of shares of our Class A common stock that we purchased during the three months ended June 30, 2024, and the average price paid per share:
Total Number of | ||||||||||||
Shares | Maximum Dollar | |||||||||||
Purchased | Value of Shares | |||||||||||
Total Number of | Average Price | as Part of Publicly | that May Yet be | |||||||||
Shares | Paid Per | Announced | Purchased Under | |||||||||
Period | Purchased (1) | Share | Plan (2) | the Plan (2) | ||||||||
April 1 - April 30 | 1,151 | 8.16 | — | 15,440,555 | ||||||||
May 1 - May 31 | — | — | — | 15,440,555 | ||||||||
June 1 - June 30 | 2,412 | 8.93 | — | 15,440,555 | ||||||||
Total | 3,563 | $ | 8.68 | — |
(1) | Consists of shares purchased to satisfy tax withholding obligations upon the vesting of restricted stock awarded to certain of our employees. |
(2) | On March 1, 2023, the Company’s board of directors authorized a plan to repurchase up to $50 million of our Class A common stock. |
Item 3.Defaults upon Senior Securities
None.
Item 4.Mine Safety Disclosures
None.
Item 5.Other Information
During the three months ended June 30, 2024, no director or officer of the Company
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Item 6.Exhibits
Exhibit No. | Description | |
---|---|---|
2.1# | ||
10.1# | ||
3.1 | ||
3.2 | ||
3.3 | ||
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 (Embedded within the Inline XBRL document and included in Exhibit 101) |
* Filed herewith.
** Furnished herewith. Pursuant to SEC Release No. 33-8212, this certification will be treated as “accompanying” this Quarterly Report on Form 10-Q and not “filed” as part of such report for purposes of Section 18 of the Exchange Act or otherwise subject to the liability of Section 18 of the Exchange Act, and this certification will not be deemed
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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.
# The exhibits and schedules have been omitted pursuant to Item 601(b)(2) of Regulation S-K and will be provided to the Securities and Exchange Commission upon request.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
SOLARIS OILFIELD INFRASTRUCTURE, INC. | ||
August 9, 2024 | By: | /s/ William A. Zartler |
William A. Zartler | ||
Chairman and Chief Executive Officer | ||
(Principal Executive Officer) | ||
August 9, 2024 | By: | /s/ Kyle S. Ramachandran |
Kyle S. Ramachandran | ||
President and Chief Financial Officer | ||
(Principal Financial Officer) |
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