PART 1: FINANCIAL INFORMATION

Item 1:     Financial Statements

SOLARIS OILFIELD INFRASTRUCTURE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)

		September 30,			December 31,
		2017			2016
Assets
Current assets:
Cash		$	53,996		$	3,568
Accounts receivable, net			9,543			4,510
Prepaid expenses and other current assets			4,011			403
Inventories			6,675			1,365
Total current assets			74,225			9,846
Property, plant and equipment, net			100,006			54,350
Goodwill			13,004			13,004
Intangible assets, net			67			36
Deferred tax assets			29,648			—
Other assets			239			—
Total assets		$	217,189		$	77,236
Liabilities and Members’ Equity
Current liabilities:
Accounts payable		$	5,209		$	705
Accrued liabilities			4,733			2,144
Current portion of capital lease obligations			33			26
Current portion of notes payable			—			169
Current portion of senior secured credit facility			—			31
Total current liabilities			9,975			3,075
Capital lease obligations, net of current portion			186			213
Notes payable, net of current portion			—			282
Senior secured credit facility, net of current portion			—			2,320
Payable related to parties pursuant to tax receivable agreements			11,475			—
Other long-term liabilities			154			—
Total liabilities			21,790			5,890
Commitments and contingencies (Note 12)
Stockholders' and Members’ equity:
Members’ equity			—			69,267
Preferred stock, $0.01 par value, 50,000 shares authorized, none issued and outstanding			—			—
Class A common stock, $0.01 par value, 600,000 shares authorized, 10,100 shares issued and outstanding as of September 30, 2017 and none issued and outstanding as of December 31, 2016			101			—
Class B common stock, $0.00 par value, 180,000 shares authorized, 32,366 shares issued and outstanding as of September 30, 2017 and none issued and outstanding as of December 31, 2016			—			—
Additional paid-in capital			60,657			—
Accumulated earnings			1,536			2,079
Total stockholders' equity attributable to Solaris and members' equity			62,294			71,346
Non-controlling interest			133,105			—
Total stockholders' and members' equity			195,399			71,346
Total liabilities, stockholders' and members’ equity		$	217,189		$	77,236

 

The accompanying notes are an integral part of these 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						Nine Months Ended
		September 30,						September 30,
		2017			2016			2017			2016
Revenue:
Proppant management system rental		$	15,062		$	3,846		$	34,560		$	8,679
Proppant management system services			3,416			902			7,631			2,189
Total revenue			18,478			4,748			42,191			10,868
Operating costs and expenses:
Cost of proppant management system rental (excluding $1,523 and $857, and $3,748 and $2,418, of depreciation and amortization for the three and nine months ended September 30, 2017 and 2016, respectively, shown separately)			641			386			1,588			1,181
Cost of proppant management system services (excluding $129 and $42, and $283 and $111, of depreciation and amortization for the three and nine months ended September 30, 2017 and 2016, respectively, shown separately)			3,933			1,501			8,640			3,301
Depreciation and amortization			1,742			959			4,276			2,739
Salaries, benefits and payroll taxes (1)			2,942			635			5,687			1,992
Selling, general and administrative (excluding $90 and $60, and $245 and $210, of depreciation and amortization for the three and nine months ended September 30, 2017 and 2016, respectively, shown separately)			1,176			543			3,653			1,842
Other operating expenses			(38)			—			3,770			—
Total operating costs and expenses			10,396			4,024			27,614			11,055
Operating income (loss)			8,082			724			14,577			(187)
Interest expense			(27)			(5)			(71)			(14)
Other income (expense)			(32)			6			(119)			7
Total other income (expense)			(59)			1			(190)			(7)
Income (loss) before income tax expense			8,023			725			14,387			(194)
Provision for income taxes			(617)			(14)			(1,137)			(26)
Net income (loss)			7,406			711			13,250			(220)
Less: net (income) loss related to Solaris LLC			—			(711)			(3,665)			220
Less: net (income) related to non-controlling interests			(6,027)			—			(8,049)			—
Net income attributable to Solaris		$	1,379		$	—		$	1,536		$	—
Earnings per share of Class A common stock - basic (2)		$	0.13		$	—		$	0.14		$	—
Earnings per share of Class A common stock - diluted (2)		$	0.12		$	—		$	0.14		$	—
Basic weighted-average shares of Class A common stock outstanding (2)			10,100			—			10,100			—
Diluted weighted-average shares of Class A common stock outstanding (2)			10,563			—			10,552			—

 

 

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

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SOLARIS OILFIELD INFRASTRUCTURE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ AND  MEMBERS’ EQUITY

(In thousands)

(Unaudited)

																								Total
					Class A					Class B														Stockholders'
					Common Stock					Common Stock					Additional			Accumulated			Non-			and
		Members’													Paid-in			Earnings/			controlling			Members’
		Equity			Shares		Amount			Shares		Amount			Capital			(Deficit)			Interest			Equity
Balance at December 31, 2016		$	71,346		—		$	—		—		$	—		$	—		$	—		$	—		$	71,346
Additional members’ equity related to accrued interest on notes receivable that were exchanged for membership units prior to the Reorganization			84		—			—		—			—			—			—			—			84
Accrued interest related to notes receivable that were exchanged for membership units prior to the Reorganization			(84)		—			—		—			—			—			—			—			(84)
Proceeds from pay down of promissory note and interest related to membership units prior to the Reorganization			3,724		—			—		—			—			—			—			—			3,724
Unit-based compensation expenses prior to the Reorganization			43		—			—		—			—			—			—			—			43
Net Income prior to the Reorganization			3,665		—			—		—			—			—			—			—			3,665
Effect of the Reorganization			(78,778)		10,100			101		32,366			—			77,256			—			125,056			123,635
Deferred tax asset and payable related to parties pursuant to Tax Receivable Agreements from the Reorganization			—		—			—		—			—			(19,149)			—			—			(19,149)
Stock-based compensation subsequent to the Reorganization			—		—			—		—			—			2,054			—			—			2,054
Additional members’ equity related to accrued interest on notes receivable that were exchanged for membership units subsequent to the Reorganization																21									21
Accrued interest related to notes receivable that were exchanged for membership units subsequent to the Reorganization																(21)									(21)
Proceeds from pay down of promissory note and interest related to membership units subsequent to the Reorganization			—		—			—		—			—			496			—			—			496
Net income subsequent to the Reorganization			—		—			—		—			—			—			1,536			8,049			9,585
Balance at September 30, 2017		$	—		10,100		$	101		32,366		$	—		$	60,657		$	1,536		$	133,105		$	195,399

 

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

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SOLARIS OILFIELD INFRASTRUCTURE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

		For the Nine Months Ended
		September 30,
		2017			2016
Cash flows from operating activities:
Net income (loss)		$	13,250		$	(220)
Adjustment to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization			4,276			2,739
Loss on disposal of asset			451			—
Provision for bad debt			—			85
Stock-based compensation			2,097			108
Amortization of debt issuance costs			35			—
Amortization of prepaid expenses and other assets			879			—
Deferred income tax expense			1,059			—
Other			(19)			—
Changes in assets and liabilities:
Accounts receivable			(5,033)			(2,169)
Prepaid expenses and other assets			(4,504)			3
Inventories			(6,675)			507
Accounts payable			4,504			154
Accrued liabilities			2,679			(439)
Net cash provided by operating activities			12,999			768
Cash flows from investing activities:
Investment in property, plant and equipment			(49,015)			(5,926)
Investment in intangible assets			(34)			(25)
Net cash used in investing activities			(49,049)			(5,951)
Cash flows from financing activities:
Payments under capital leases			(20)			(19)
Payments under notes payable			(451)			(142)
Proceeds from borrowings under the credit facility			3,000			—
Repayment of credit facility			(5,500)			—
Proceeds from pay down of promissory note related to membership units			4,303			—
Payments related to debt issuance costs			(111)			—
Proceeds from issuance of Class A common stock sold in initial public offering, net of offering costs			111,075			—
Distributions paid to unitholders			(25,818)			—
Net cash provided by (used in) financing activities			86,478			(161)
Net increase (decrease) in cash			50,428			(5,344)
Cash at beginning of period			3,568			6,923
Cash at end of period		$	53,996		$	1,579
Non-cash activities
Investing:
Capitalized depreciation in property, plant and equipment		$	492		$	515
Financing:
Notes payable issued for property, plant and equipment			—			257
Accrued interest from notes receivable issued for membership units			109			250
Cash paid for:
Interest			96			14
Income taxes			45			35

 

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

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SOLARIS OILFIELD INFRASTRUCTURE, INC.

Notes to the Condensed Consolidated Financial Statements

(Dollars in thousands)

1.    Organization and Background of Business

Description of Business

We manufacture and provide patented proppant management systems that unload, store and deliver proppant at oil and natural gas well sites. The systems are designed to address the challenges associated with transferring large quantities of proppant to the well site, including the cost and management of last mile logistics.

The systems are deployed in many of the most active oil and natural gas basins in the U.S., including the Permian Basin, the Eagle Ford Shale, the SCOOP/STACK Formations and the Haynesville Shale.

We are also developing the first independent, unit-train capable, high speed transload facility in Oklahoma. We expect construction to be fully completed in August 2018. In July 2017, we entered into a seven-year contract with a leading STACK exploration and production company to provide proppant transloading service at the facility.

Initial Public Offering

Solaris Oilfield Infrastructure, Inc. (“Solaris” or the “Company”) was incorporated on February 2, 2017 as a Delaware corporation.

Solaris was formed for the purpose of completing an initial public offering of equity (the “IPO” or the “Offering”) and related transactions in order to carry on the business of Solaris Oilfield Infrastructure, LLC and its subsidiaries (“Solaris LLC”) . On May 11, 2017, i n connection with the closing of the offering, Solaris became a holding company whose sole material asset consists of units in Solaris LLC (“Solaris LLC Units”). Solaris became the managing member of Solaris LLC and is responsible for all operational, management and administrative decisions relating to Solaris LLC’s business.

On May 17, 2017, Solaris completed the Offering of 10,100,000 shares of the Class A common stock, par value $0.01 per share (“Class A Common Stock”), at a price to the public of $12.00 per share ($11.28 net of underwriting discounts and commissions). After deducting underwriting discounts and commissions payable by Solaris, Solaris received net proceeds of approximately $113.9 million. After deducting offering expenses of approximately $2.8 million, Solaris received approximately $111.1 million. Solaris contributed all of the net proceeds of the IPO to Solaris LLC in exchange for Solaris LLC Units. Solaris LLC used the net proceeds (i) to fully repay borrowings under its Credit Facility (as defined below) of $5.5  million, (ii) to pay approximately $3.1 million in cash bonuses to certain employees and consultants and (iii) to distribute approximately $25.8 million to its existing members (the “Original Investors”) as part of the corporate reorganization undertaken in connection with the IPO. Solaris LLC has used a portion of the proceeds and intends to continue to use the remaining proceeds for general corporate purposes, including funding the remainder of its 2017 capital program.

As the sole managing member of Solaris LLC, Solaris operates and controls all of the business and affairs of Solaris LLC, and through Solaris LLC and its subsidiaries, conducts its business. As a result, Solaris consolidates the financial results of Solaris LLC and its subsidiaries and reports non-controlling interest related to the portion of Solaris LLC Units not owned by Solaris, which will reduce net income (loss) attributable to the holders of Solaris’ Class A Common Stock.   As of September 30, 2017, Solaris owned 25.9% of Solaris LLC,  including unvested restricted stock.

 

Reorganization Transactions

In connection with the IPO, we completed a series of reorganization transactions on May 17, 2017 (the “Reorganization Transactions”), including:

a)

Solaris LLC’s limited liability company agreement was amended and restated to, among other things, appoint Solaris as sole managing member, and all of the membership interests in Solaris LLC held by the

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2.    Summary of Significant Accounting Policies

Basis of Presentation and Consolidation

The accompanying interim unaudited condensed consolidated financial statements of Solaris have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). These financial statements reflect all normal recurring adjustments that are necessary for fair presentation. Operating results for the three and nine months ended September 30, 2017 and 2016 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 should be read in conjunction with Solaris’ final prospectus, dated May 11, 2017, filed in connection with the IPO pursuant to Rule 424(b) under the Securities Act of 1933, as amended (the “Securities Act”), with the SEC on May 15, 2017 (the “Prospectus”).    

As discussed in Note 1, as a result of the Reorganization Transactions, the Company is the sole managing member for Solaris LLC and consolidates entities in which it has a controlling financial interest. The Reorganization Transactions were considered transactions between entities under common control. As a result, the financial statements for periods prior to the IPO and the Reorganization Transactions have been adjusted to combine the previously separate entities for presentation purposes.

Thus, for periods prior to the completion of the offering, the accompanying condensed consolidated financial statements include the historical financial position and results of operations of Solaris LLC and its subsidiaries, Solaris Oilfield Site Services Operating, LLC, Solaris Oilfield Early Property, LLC, Solaris Oilfield Site Services Personnel, LLC, Solaris Oilfield Infrastructure Personnel, LLC and Solaris Logistics, LLC (collectively, the “Subsidiaries”) . For periods after the completion of the offering, the financial position and results of operations include those of the Company and the Subsidiaries and report non-controlling interest related to the portion of Solaris LLC Units not owned by Solaris . All material intercompany transactions and balances have been eliminated upon consolidation.

Use of Estimates

The preparation of condensed consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Significant estimates used in the preparation of these condensed consolidated financial statements include, but are not limited to, depreciation associated with property, plant and equipment and related impairment considerations of those assets, and certain liabilities. Actual results could differ from management’s best estimates as additional information or actual results become available in the future, and those differences could be material.

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Cash

For the purposes of the statements of cash flows, the Company considers all short-term, highly liquid, investments with an original maturity of three months or less to be cash equivalents. Cash is deposited in demand accounts in federally insured domestic institutions to minimize risk. Accounts at each institution are insured by Federal Deposit Insurance Corporation. Cash balances at times may exceed federally-insured limits. We have not incurred losses related to these deposits.

Accounts Receivable

Accounts receivable consists of trade receivables recorded at the invoice amount, plus accrued revenue that is earned but not yet billed, less an estimated allowance for doubtful accounts (if any). Accounts receivable are generally due within 60 days or less, or in accordance with terms agreed with customers, and are stated at amounts due from customers net of any allowance for doubtful accounts. The Company considers accounts outstanding longer than the payment terms past due. The Company determines the allowance by considering a number of factors, including the length of time trade accounts receivable are past due, previous loss history, the customer’s current ability to pay its obligation, and the condition of the general economy and the industry as a whole. Accounts receivable are written off when they are deemed uncollectible, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts. As of December 31, 2016, Solaris LLC had $131 of allowance for doubtful accounts which was subsequently deemed uncollectible. The allowance for doubtful accounts of $131 and the related accounts receivable balance were fully extinguished in the first quarter of 2017. Allowance for doubtful accounts is zero as of September 30, 2017.

Inventories

Inventories consist of materials used in the manufacturing of the Company’s systems, which include raw materials and purchased parts. Inventory purchases are recorded initially at cost, adjusted each quarter to measure inventory at the lower of cost or net realizable value, where net realizable value approximates estimated selling prices in the ordinary course of business. Adjustments that reduce the average cost will be recognized as impairments in the condensed consolidated statements of operations. There were no impairments recorded for the three and nine months ended September 30, 2017 and 2016.

Property, Plant and Equipment

Property, plant and equipment are stated at cost, or fair value for assets acquired in a business combination, less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful service lives of the assets as noted below:

		Useful Life
Proppant management systems and related equipment		Up to 15 years
Machinery and equipment		2-10 years
Furniture and fixtures		5 years
Computer equipment		3 years
Vehicles		5 years
Buildings		15 years

 

Systems that are in the process of being manufactured are considered property, plant and equipment. However, the systems in process do not depreciate until they are fully completed. Systems in process are a culmination of material, labor and overhead.

Expenditures for maintenance and repairs are charged against income (loss) as incurred. Betterments that increase the value or materially extend the life of the related assets are capitalized. Upon sale or disposition of property and equipment, the cost and related accumulated depreciation and amortization are removed from the condensed consolidated financial statements and any resulting gain or loss is recognized in the condensed consolidated statements of operations.

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The Company, on occasion, has had vehicles that are pledged against the respective notes payables for those vehicles. As of September 30, 2017, there were no vehicles pledged against notes payable. As of December 31, 2016, the cost of vehicles pledged was $859.

Definite-lived Intangible Assets

As of September 30, 2017 and December 31, 2016, the Company reported $67 and $36, respectively, of costs that were capitalized as definite-lived intangible assets. These intangible assets are related to patents that were filed for its systems. Amortization on these assets is calculated on the straight-line method over the estimated useful lives of the assets, which is fifteen years based on estimates the Company believes are reasonable.

Goodwill

Goodwill represents the excess of the purchase price of a business over the estimated fair value of the identifiable assets acquired and liabilities assumed. The Company evaluates goodwill for impairment annually, as of October 31, or more often as facts and circumstances warrant. Factors such as unexpected adverse economic conditions, competition and market changes may require more frequent assessments. There was no impairment for the three and nine months ended September 30, 2017 and 2016.

Before employing detailed impairment testing methodologies, the Company may first evaluate the likelihood of impairment by considering qualitative factors relevant to the business, such as macroeconomic, industry, market or any other factors that have a significant bearing on fair value. If the Company first utilizes a qualitative approach and determines that it is more likely than not that goodwill is impaired, detailed testing methodologies are then applied. Otherwise, the Company concludes that no impairment has occurred. The Company may also choose to bypass a qualitative approach and opt instead to employ detailed testing methodologies, regardless of a possible more likely than not outcome. The first step in the goodwill impairment test is to compare the fair value of the business to the carrying amount of net assets, including goodwill, of the respective reporting unit. If the carrying amount of the business exceeds its fair value, step two in the goodwill impairment test requires goodwill to be written down to its implied fair value through a charge to operating expense based on a hypothetical purchase price allocation.

Impairment of Long-Lived Assets and Definite-lived Intangible Assets

Long-lived assets, such as property, plant, equipment and definite-lived intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable, such as insufficient cash flows or plans to dispose of or sell long-lived assets before the end of their previously estimated useful lives. If the carrying amount is not recoverable, the Company recognizes an impairment loss equal to the amount by which the carrying amount exceeds fair value. The Company estimates fair value based on projected future discounted cash flows. Fair value calculations for long-lived assets and intangible assets contain uncertainties because it requires the Company to apply judgment and estimates concerning future cash flows, strategic plans, useful lives and market performance. The Company also applies judgment in the selection of a discount rate that reflects the risk inherent in the current business model. There was no impairment for the three and nine months ended September 30, 2017 and 2016.

Revenue Recognition

The Company currently generates revenue primarily through the rental of its systems and related services, including transportation of its systems and field supervision and support. The system rentals and provision of related services are performed under a variety of contract structures, primarily master service agreements as supplemented by individual work orders detailing statements of work, pricing agreements and specific quotes. The master service agreements generally establish terms and conditions for the provision of the Company’s systems and service on a well site, indemnification, damages, confidentiality, intellectual property protection and payment terms and provisions. The services are generally priced based on prevailing market conditions at the time the services are provided, giving consideration to the specific requirements and activity levels of the customer.

All revenue is recognized when persuasive evidence of an arrangement exists, the service is complete, the amount is determinable and collectability is reasonably assured. Revenue is recognized as services are performed.

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Taxes collected from customers and remitted to governmental authorities are accounted for on a net basis and therefore are excluded from revenues in the condensed consolidated statements of operations.

Stock-based Compensation

The Company accounts for its stock-based compensation including grants of restricted stock and options in the condensed consolidated statements of operations based on their estimated fair values. The Company recognizes expense on a straight-line basis over the vesting period of the respective grant.

Solaris LLC previously sponsored a stock-based management compensation program called the 2015 Membership Unit Option Plan (the “Plan”). Solaris LLC accounted for the units under the Plan as compensation cost measured at the fair value of the award on the date of grant using the Black-Scholes option-pricing model.

In connection with the Offering, the options granted under the Plan were modified by a conversion into options under the Solaris Long-Term Incentive Plan (the “LTIP”). Refer also to Note 9.

Research and Development

The Company expenses research and development costs as incurred, which is included in selling, general and administrative expenses in the condensed consolidated statements of operations. For the three months ended September 30, 2017 and 2016, research and development costs were $1 and $42, respectively. For the nine months ended September 30, 2017 and 2016, research and development costs were $197 and $468, respectively.

Financial Instruments

The carrying value of the Company’s financial instruments, consisting of cash, accounts receivable, notes receivable, accounts payable and accrued expenses, approximates their fair value due to the short maturity of such instruments. Financial instruments also consist of the Revolving Facility and Advance Loan Facility (each as defined below), for which fair value approximates carrying value as the debt bears interest at a variable rate which is reflective of current rates otherwise available to the Company. Unless otherwise noted, it is management’s opinion that the Company is not exposed to significant interest, currency or credit risks arising from these financial instruments.

Fair Value Measurements

The Company’s financial assets and liabilities 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:

Income Taxes

Solaris is a corporation and as a result, is subject to U.S. federal, state and local income taxes.

We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events included in the condensed consolidated financial statements. Under this method, we determine deferred tax assets and liabilities on the basis of the differences between the book value and tax bases of assets and liabilities by using enacted tax rates in effect for the year in which the

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differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period in which the enactment date occurs.

We recognize deferred tax assets to the extent we believe these assets are more-likely-than-not to be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent results of operations.

We record uncertain tax positions on the basis of a two-step process in which (1) we determine whether it is more-likely-than-not the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions meeting the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50% likely to be realized upon ultimate settlement with the related tax authority.

Interest and penalties related to income taxes are included in the benefit (provision) for income taxes in our condensed consolidated statement of operations. We have not incurred any significant interest or penalties related to income taxes in any of the periods presented.

Solaris LLC is treated as a partnership for U.S. federal income tax purposes and therefore does not pay U.S. federal income tax on its taxable income. Instead, the Solaris LLC members are liable for U.S. federal income tax on their respective shares of the Company’s taxable income reported on the members’ U.S. federal income tax returns.

Our revenues are derived through transactions in several states, which may be subject to state and local taxes. Accordingly, we have recorded a liability for state and local taxes that management believes is adequate for activities as of September 30, 2017 and as of December 31, 2016.

We are subject to a franchise tax imposed by the State of Texas. The franchise tax rate is 1%, calculated on taxable margin. Taxable margin is defined as total revenue less deductions for cost of goods sold or compensation and benefits in which the total calculated taxable margin cannot exceed 70% of total revenue. Total expenses related to the Texas franchise tax were approximately $30 and $13 for the three months ended September 30, 2017 and 2016, respectively. Total expenses related to the Texas franchise tax were approximately $75 and $26 for the nine months ended September 30, 2017 and 2016, respectively.

Payable to Related Parties Pursuant to the Tax Receivable Agreement

In connection with the Offering, the Company entered into a Tax Receivable Agreement (the “Tax Receivable Agreement”) with the Original Investors and permitted transferees (each such person, a “TRA Holder”) on May 17, 2017. This agreement generally provides for the payment by Solaris to each TRA Holder of 85% of the net cash savings, if any, in U.S. federal, state and local income tax or franchise tax that Solaris actually realizes (computed using simplifying assumptions to address the impact of state and local taxes or is deemed to realize in certain circumstances) as a result of (i) certain increases in tax basis that occur as a result of Solaris’ acquisition (or deemed acquisition for U.S. federal income tax purposes) of all or a portion of such TRA Holder’s Solaris LLC Units in connection with the IPO or pursuant to the exercise of the Redemption Right or the Call Right (each as defined in Solaris LLC’s amended and restated limited liability company agreement) and (ii) imputed interest deemed to be paid by Solaris as a result of, and additional tax basis arising from, any payments Solaris makes under the Tax Receivable Agreement. Solaris will retain the benefit of the remaining 15% of these cash savings.

 

Environmental Matters

The Company is subject to various federal, state and local laws and regulations relating to the protection of the environment. Management has established procedures for the ongoing evaluation of the Company’s operations, to identify potential environmental exposures and to comply with regulatory policies and procedures. Environmental expenditures that relate to current operations are expensed or capitalized as appropriate. Expenditures that relate to an existing condition caused by past operations and do not contribute to current or future revenue generation are expensed as incurred. Liabilities are recorded when environmental costs are probable, and the costs can be reasonably estimated.

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The Company maintains insurance which may cover in whole or in part certain environmental expenditures. As of September 30, 2017 and December 31, 2016, there were no environmental matters deemed probable.

Segment Information

Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker, or decision-making group, in making decisions on how to allocate resources and assess performance. The Company’s chief operating decision maker is the Chief Executive Officer. The Company and the Chief Executive Officer view the Company’s operations and manage its business as one operating segment. All long-lived assets of the Company reside in the United States.

Recent Accounting Pronouncements

In May 2017, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2017 09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting (“ASU 2017-09”). ASU 2017-09 clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. ASU 2017-09 should be applied on a prospective basis and is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted in any interim period for public business entities or reporting periods for which financial statements have not yet been issued. The Company is currently evaluating the impact of adopting this guidance on its consolidated financial statements.

In February 2017, the FASB issued ASU No. 2017‑05, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610‑20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets ("ASU 2017‑05"). ASU 2017‑05 clarifies the scope of Subtopic 610‑20 and adds guidance for partial sales of nonfinancial assets. Subtopic 610‑20 was issued in May 2014 as part of ASU No. 2014‑09, Revenue from Contracts with Customers (Topic 606) and provides guidance for recognizing gains and losses from the transfer of nonfinancial assets in contracts with noncustomers. The amendments in ASU 2017‑05 clarify that a financial asset is within the scope of Subtopic 610‑20 if it meets the definition of an in substance nonfinancial asset. The amendments also clarify that nonfinancial assets within the scope of Subtopic 610‑20 may include nonfinancial assets transferred within a legal entity to a counterparty. The amendments in ASU 2017‑05 are effective at the same time as the amendments in ASU 2014‑09, which are effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Early adoption is permitted for interim or annual reporting periods beginning after December 15, 2016. An entity may elect to apply the amendments in ASU 2017‑05 either retrospectively to each period presented in the financial statements in accordance with the guidance on accounting changes (retrospective approach) or retrospectively with a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption (modified retrospective approach). The Company is currently evaluating the impact of adopting this guidance on its consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017‑04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017‑04”). ASU 2017‑04 simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Under the amendments in this update, an entity should perform its annual or interim, goodwill impairment test by comparing the fair value of a reporting unity with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. ASU 2017‑04 should be applied on a prospective basis and is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating the impact of adopting this guidance on its consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business (“ASU 2017-01”).  ASU 2017-01 clarifies the definition of a business for determining whether transactions should be accounted for as acquisitions or disposals of assets or businesses. ASU 2017-01 provides a screen for an entity to use to determine when a set of assets and activities is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset

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or a group of similar identifiable assets, the asset is not a business. If the screen is not met, ASU 2017-01 requires that to be considered a business, a set of assets and activities must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output. ASU 2017-01 also removes the evaluation of whether a market participant could replace missing elements. ASU 2017-01 09 is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years.  The Company adopted ASU 2016 09 in the third quarter of 2017 which did not have a material impact on the condensed consolidated financial statements.

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash ("ASU 2016-18"). ASU 2016-18 is intended to add and clarify guidance on the classification and presentation of restricted cash on the statement of cash flows. ASU 2016-18 requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The Company is in the initial stages of evaluating the potential impact this new standard may have on the consolidated financial statements.

In August 2016, the FASB issued ASU 2016‑15, Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments ("ASU 2016-15"), seeking to eliminate diversity in practice related to how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments in ASU 2016‑15 address eight specific cash flow issues and apply to all entities, including both business entities and not-for-profit entities that are required to present a statement of cash flows under FASB ASC 230, Statement of Cash Flows. The amendments in ASU 2016‑15 are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The new standard will be effective during the first quarter ending March 31, 2018. The Company is in the initial stages of evaluating the potential impact this new standard may have on the consolidated financial statements.

In March 2016, the FASB issued ASU 2016‑09, Compensation - Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting ("ASU 2016-09"). ASU 2016‑09 simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016‑09 is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. The Company adopted ASU 2016‑09 in the first quarter of 2017 which did not have a material impact on the condensed consolidated financial statements.

ASU 2016-09 requires prospective recognition of excess tax benefits resulting from stock-based compensation vesting and exercises to be recognized as a reduction of income taxes and reflected in operating cash flows.  Previously, these amounts would have been recognized in additional paid in capital and presented as a financing activity on the statement of cash flows.  No net excess tax benefits were recognized as a reduction of income taxes for the three or nine months ended September 30, 2017 and 2016.

The Company has elected to prospectively account for forfeitures as they occur per ASU 2016-09, contrary to previously estimating the expected forfeitures.  

ASU 2016-09 requires that employee taxes paid when an employer withholds shares for tax-withholding purposes to be reported as financing activities in the statement of cash flows.  Previously, these cash flows would have been included in operating activities.  The Company has elected to adopt this prospectively, as permitted by ASU 2016-09. This change resulted in no impact on the condensed consolidated statement of cash flows for the nine months ended September 30, 2017 and 2016.

In February 2016, the FASB issued ASU No. 2016‑02, Leases (Topic 842) , as part of a joint project with the International Accounting Standards Board to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. To satisfy the foregoing objective, the FASB is creating Topic 842, Leases, which supersedes Topic 840. Under the new guidance, a lessee will be required to recognize assets and liabilities for capital and operating leases with

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lease terms of more than 12 months. Additionally, this ASU will require disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases, including qualitative and quantitative requirements. For public business entities, the amendments are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. The new standard will be effective during the first quarter ending March 31, 2019. The Company is in the initial stages of evaluating the potential impact this new standard may have on the consolidated financial statements.

In July 2015, the FASB issued ASU No. 2015‑11, Inventory (Topic 330): Simplifying the Measurement of Inventory (“ASU 2015-11”). This ASU requires entities measuring inventories under the first-in, first-out or average cost methods to measure inventory at the lower of cost or net realizable value, where net realizable value is “estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.” Inventory was previously required to be measured at the lower of cost or market, where the measurement of market value had several potential outcomes. The provisions of this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The Company adopted ASU 2015‑11 in the first quarter of 2017 which did not have a material impact on the condensed consolidated financial statements.

In August 2014, the FASB issued ASU No. 2014‑15, Presentation of Financial Statements-Going Concern (Subtopic 205‑40)-Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”). ASU 2014‑15 provides guidance to U.S. GAAP about management’s responsibility to evaluate whether there is a substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. Specifically, ASU 2014‑15 (1) defines the term substantial doubt, (2) requires an evaluation of every reporting period including interim periods, (3) provides principles for considering the mitigating effect of management’s plan, (4) requires certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans, (5) requires an express statement and other disclosures when substantial doubt is not alleviated, and (6) requires an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). For public business entities, the amendments are effective for fiscal years ending after December 15, 2016, including interim periods within those fiscal years, with early adoption permitted. The Company adopted ASU 2014‑15 for the year ended December 31, 2016, which did not impact the condensed consolidated financial statements.

In May 2014, the FASB issued ASU No. 2014‑09, Revenue from Contracts with Customers (“ASU 2014-09”). The objective of ASU 2014‑19 is to establish a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and will supersede most of the existing revenue recognition guidance, including industry-specific guidance. The core principle of ASU 2014‑09 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In applying the new guidance, an entity will (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract;(3) determine the transaction price; (4) allocate the transaction price to the contract’s performance obligations; and (5) recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2014‑09 applies to all contracts with customers except those that are within the scope of other topics in the FASB Accounting Standards Codification. The new guidance is effective for annual reporting periods (including interim periods within those periods) beginning after December 15, 2017 for public companies. Early adoption is permitted for annual reporting periods beginning after December 15, 2016, including interim periods within that year. Entities have the option of using either a full retrospective or modified approach to adopt ASU 2014‑09. The Company is substantially complete with our analysis to review revenue streams, customer contracts and transactions that may be impacted by the adoption of this ASU. To date, the Company has not identified changes to its revenue recognition policies that would result in a material adjustment to its financial position, results of operations or cash flows. The Company still needs to establish proper presentation and disclosures. The Company has not yet selected a transition method. We intend to adopt ASU 2014-09 as of its effective date in the first quarter of 2018.

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3.    Prepaid Expenses and Other Current Assets

Prepaid expenses and other currents assets were comprised of the following at September 30, 2017 and December 31, 2016:

		September 30,			December 31,
		2017			2016
Prepaid purchase orders		$	2,850		$	126
Prepaid insurance			662			69
Deposits			237			114
Other receivables			262			94
Prepaid expenses and other current assets		$	4,011		$	403

 

Prepaid purchase orders have increased primarily related to deposits with vendors for steel and generators used in the manufacturing and operation of our systems.

 

4.    Property, Plant and Equipment

Property, plant and equipment was comprised of the following at September 30, 2017 and December 31, 2016:

		September 30,			December 31,
		2017			2016
Proppant management systems and related equipment		$	89,011		$	51,899
Machinery and equipment			4,269			3,916
Furniture and fixtures			78			7
Computer equipment			1,552			829
Vehicles			3,323			1,235
Buildings			3,237			3,008
Logistics systems in process			4,793			—
Proppant management systems in process			5,999			1,252
Land			578			578
Property, plant and equipment, gross			112,840			62,724
Less: accumulated depreciation			(12,834)			(8,374)
Property, plant and equipment, net		$	100,006		$	54,350

 

Depreciation expense for the three months ended September 30, 2017 and 2016 was $1,742 and $959, respectively, of which $1,523 and $857 is attributable to cost of proppant management system rental, $129 and $42 is attributable to cost of proppant management system services, and $90 and $60 is attributable to selling, general and administrative expenses, respectively. Depreciation expense for the nine months ended September 30, 2017 and 2016 was $4,276 and $2,739, respectively, of which $3,748 and $2,418 is attributable to cost of proppant management system rental, $283 and $111 is attributable to cost of proppant management system services, and $245 and $210 is attributable to selling, general and administrative expenses, respectively. The Company capitalized $172 and $173 of depreciation expense associated with machinery and equipment used in the manufacturing of its systems for the three months ended as of September 30, 2017 and 2016, respectively. The Company capitalized $492 and $515 of depreciation expense associated with machinery and equipment used in the manufacturing of its systems for the nine months ended as of September 30, 2017 and 2016, respectively.

In July 2017, the company acquired a lease for $250 in connection with the Kingfisher Facility described in Note 12. Refer to Note 12 for commitments and contingencies in connection with additional construction plans for this asset.  This asset as well as construction costs incurred through September 30, 2017 are recognized in property, plant and equipment as Logistics systems in process.

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5.    Accrued Liabilities

Accrued liabilities were comprised of the following:

		September 30,			December 31,
		2017			2016
Employee related expenses		$	2,374		$	1,237
Accrued real estate taxes			357			440
Accrued excise, franchise and sales taxes			335			83
Accrued operating expenses and other (1)			1,667			384
Accrued liabilities		$	4,733		$	2,144

 

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(1)Accrued operating expenses and other has increased as a result of increases in manufacturing costs associated with adding systems and increases in general and administrative costs.

 

6.    Capital Leases

Solaris LLC leases property from the City of Early, Texas under an agreement classified as a capital lease. The lease expires on February 28, 2025. The capital lease obligation is payable in monthly installments of $3 including imputed interest at a rate of 3.25%.

Future principal minimum payments under the capital lease are as follows:

Year Ending December 31,		Amount
2017 (remainder of)		$	8
2018			33
2019			33
2020			33
2021			33
Thereafter			107
Total payments			247
Less: amount representing imputed interest at 3.25%			(28)
Present value of payments			219
Less: current portion			(33)
Capital lease obligation, net of current portion		$	186

 

 

7.    Notes Payable

Solaris LLC has, on occasion, financed its annual insurance policies and certain vehicles. As of September 30, 2017, there were no outstanding notes payable.

Notes payable was comprised of the following at September 30, 2017 and December 31, 2016:

		September 30,			December 31,
		2017			2016
Notes payable to insurance finance company		$	—		$	11
Notes payable to vehicle companies			—			440
Total notes payable			—			451
Less: current maturities			—			(169)
Notes payable, net of current portion		$	—		$	282

 

 

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8.    Senior Secured Credit Facility

On May 17, 2017, the Company entered into an amendment (the “First Amendment”) to the Credit Agreement, dated as of December 1, 2016 (the “Credit Agreement” and as amended by the First Amendment, the “Amended Credit Facility”) by and among the Company, as borrower, each of the lenders party thereto and Woodforest National Bank, as administrative agent (the “Administrative Agent”). The First Amendment, among other things, modified the terms of the Credit Agreement to (i) increase the Credit Agreement’s revolving credit commitments (the “Revolving Facility”) from $1.0 million to $20.0 million, (ii) decrease the Credit Agreement’s advance term loan commitments (the “Advance Loan Facility”) from $10.0 million to $0 and (iii) amend both the scheduled maturity date of the Revolving Facility and the Advance Loan Facility to be May 17, 2021. Additionally, the First Amendment increased the accordion feature of the Revolving Facility from $1.0 million to $10.0 million, which may be elected by the Company at any time prior to the scheduled maturity date of the Revolving Facility so long as no default or event of default shall have occurred and be continuing and provided that no lender has any obligation to increase its own revolving credit commitment.

The Amended Credit Facility permits extensions of credit up to the lesser of $20.0 million and a borrowing base that is determined by calculating the amount equal to the sum of (i) 80% of the Eligible Accounts (as defined in the Amended Credit Facility), (ii) 65% of the Eligible Inventory/Equipment Value (Appraised) (as defined in the Amended Credit Facility) and (iii) 75% of the Eligible Inventory/Equipment Value (New Build, Acquired or Upgraded) (as defined in the Amended Credit Facility). The borrowing base is calculated on a monthly basis pursuant to a borrowing base certificate delivered by us to the Administrative Agent and an annual appraisal on the equipment delivered to the Administrative Agent (provided that the Administrative Agent may, at its discretion, require a desktop appraisal on equipment every six months). As of September 30, 2017, the borrowing base certificate delivered by us under the Revolving Facility reflected a borrowing base as of such date of $20.0 million.

Borrowings under the Amended Credit Facility bear interest at a one-month London Interbank Offered Rate, or LIBOR, plus an applicable margin and interest shall be payable monthly. The applicable margin ranges from 3.00% to 4.00% depending on our leverage ratio. The Revolving Facility also includes a monthly commitment fee that we pay on undrawn amounts of the Revolving Facility in a range from 0.1875% to 0.50% depending on our leverage ratio; provided, however that we will not be required to pay such commitment fee for any month when we have outstanding borrowings greater than 50.0% of the commitments under the Revolving Facility. During the continuance of an event of default, overdue amounts under the Amended Credit Facility has a scheduled maturity date of May 17, 2021.

The Credit Agreement contains representations, warranties and covenants that are customary for similar credit arrangements, including, among other things, covenants relating to (i) financial reporting and notification, (ii) payment of obligations, (iii) compliance with applicable laws, (iv) notification of certain events and (v) solvency.

The Amended Credit Facility contains certain covenants, restrictions and events of default including, but not limited to, a change of control restriction and limitations on our ability to (i) incur indebtedness, (ii) issue preferred equity, (iii) pay dividends or make other distributions, (iv) prepay, redeem or repurchase certain debt, (v) make loans and investments, (vi) sell assets, (vii) acquire assets, (viii) incur liens, (ix) enter into transactions with affiliates, (x) consolidate or merge and (xi) enter into hedging transactions. Our Company’s obligations under the Amended Credit Facility are secured by substantially all of our assets.

The Amended Credit Facility initially requires that we maintain, at all times, a ratio of net funded indebtedness to consolidated EBITDA of not more than 2.50 to 1.00, provided that net funded indebtedness is subject to a cash adjustment with respect to any unrestricted cash and cash equivalents of the Borrower and its subsidiaries in an amount equal to the lesser of $10.0 million or 50% of unrestricted cash and cash equivalents of the Company and its subsidiaries. The Amended Credit Facility also requires that we maintain, at all times, a ratio of consolidated EBITDA to fixed charges of not less than 1.25 to 1.00. We were in compliance with all such ratios as of September 30, 2017. Additionally, our capacity to make capital expenditures is capped at $80.0 million for each fiscal year plus, for fiscal years beginning on January 1, 2019, any unused availability for capital expenditures from the immediately preceding fiscal year; provided, however, that we are permitted to make any capital expenditures in an amount equal to the proceeds of equity contributions made to us used to fund such capital expenditures.

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As of September 30, 2017, we had no borrowings under the Revolving Credit Facility outstanding with $20.0 million revolving commitments available.

9.    Equity

Stock-based compensation

In 2016 and 2017, there were no additional membership units issued by Solaris LLC under the Plan.

Effective May 17, 2017, both the Board of Directors of Solaris (the “Board”) and the holder of all Solaris’ then-outstanding equity interests adopted the LTIP for the benefit of employees, directors and consultants of the Company and its affiliates. The LTIP provides for the grant of all or any of the following types of equity-based awards: (1) incentive stock options qualified as such under U.S. federal income tax laws; (2) stock options that do not qualify as incentive stock options; (3) stock appreciation rights; (4) restricted stock awards; (5) restricted stock units; (6) bonus stock; (7) performance awards; (8) dividend equivalents; (9) other stock-based awards; (10) cash awards; and (11) substitute awards. Subject to adjustment in accordance with the terms of the LTIP, 5,118,080 shares of Solaris’ Class A Common Stock have been reserved for issuance pursuant to awards under the LTIP. Class A Common Stock withheld to satisfy exercise prices or tax withholding obligations will be available for delivery pursuant to other awards. The LTIP will be administered by the Board, the Compensation Committee of the Board or an alternative committee appointed by the Board.

In connection with the Offering, the options granted under the Plan were converted into options under the LTIP. A total of 591,261 options to purchase Class A Common Stock of the Company were issued to employees, directors and consultants at an exercise price of $2.87 per share and a grant date fair value of $12.04 per share and had the same fair value as immediately prior to the conversion. The vesting terms from the options under the LTIP were accelerated from the previous vesting terms under the Plan such that, twenty-five percent (25%) of the options were considered vested upon the conversion, an additional 25% of the options vested on July 24, 2017 and the remaining options will vest on November 13, 2017.

The fair value of each option award is estimated on the date of grant using the Black-Scholes option-pricing model. Expected volatility is based on implied volatilities from historical trading of publicly traded companies which are in the same industry sector. The simplified method is used to derive an expected term. The expected term represents an estimate of the time options are expected to remain outstanding. The risk-free rate for periods within the contractual life of the option is based on the U.S. treasury yield curve in effect at the time of grant. Compensation cost, as measured at the grant date fair value of the award, is recognized as an expense over the employee’s requisite service period for service based awards (generally the vesting period of the award of four years). For the three months ended September 30, 2017 and 2016, the Company recognized $110 and $36 of stock-based compensation expense on options, respectively. For the nine months ended September 30, 2017 and 2016, the Company recognized $268 and $108 of stock-based compensation expense on options, respectively.

In connection with the Offering, a total of 648,676 shares of restricted stock were granted to certain employees, directors and consultants under the LTIP. 203,222 shares of the restricted stock were issued with a one-year vesting period and 445,454 shares of the restricted stock were issued with a three-year vesting period.

On July 18, 2017, 156,250 shares of restricted stock were granted to two employees under the LTIP. The 156,250 shares of restricted stock were issued with a vesting period of the later of one-year or the completion of rail and silo construction in connection with the first phase of development of the core infrastructure for the Kingfisher Facility and fully satisfy the related customer contract described in Note 12.

On August 23, 2017, 423,737 shares of restricted stock were granted to certain employees, directors and consultants under the LTIP with a three-year vesting period.

For the three and nine months ended September 30, 2017, the Company recognized $1,302 and $1,829, of stock-based compensation expense on restricted stock, respectively.

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Notes receivable from unit-holders

Solaris LLC’s Limited Liability Company Agreement authorized Solaris LLC to issue Solaris LLC Units at a value of $100 per unit to Solaris LLC’s employees in exchange for a promissory note. The promissory notes are partial recourse, accrue interest at 6% per annum and mature through various dates during 2022. Principal and accrued interest are due and payable upon the earlier of employee termination or the maturity date of the note.

As of September 30, 2017, there were 8,367 Solaris LLC Units issued to non-executive officer employees and consultants under promissory notes. In 2016 and 2017, there were no additional Solaris LLC Units issued. In March 2017, certain employees paid off their applicable promissory notes of $2.7 million principal and $315 of accrued interest in cash for previously assigned 27,368 Solaris LLC Units. In connection with the Offering, certain Original Investors used portions of their pro rata distributions to pay off portions of their applicable promissory notes of $668 principal and $88 of accrued interest for previously assigned 6,680 Solaris LLC Units. On May 22, 2017, June 2, 2017 and June 5, 2017, certain employees paid off portions of their applicable promissory notes of $446 principal and $50 of accrued interest for previously assigned 4,460 Solaris LLC Units.

As of September 30, 2017 and December 31, 2016, the outstanding principal for the notes totaled $837 and $4,688 and accrued interest for the notes totaled $108 and $457, respectively. These notes are recorded in stockholders’ and members’ equity as the notes were originally received in exchange for the issuance of membership units and are netted against the value of the respective units issued.

Earnings(Loss) Per Share

Basic earnings per share of Class A Common Stock is computed by dividing net income attributable to Solaris for the period from May 17, 2017 through September 30, 2017, the period following the Reorganization Transactions and IPO, 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. 

There were no shares of Class A Common Stock or Class B Common Stock outstanding prior to May 17, 2017, therefore no earnings per share information has been presented for any period prior to that date.

The following table sets forth the calculation of earnings per share, or EPS, for the three and nine months ended September 30, 2017:

		Three Months Ended			Nine Months Ended
Basic net income per share:		September 30, 2017			September 30, 2017
Numerator
Net income attributable to Solaris		$	1,379		$	1,536
Less income attributable to participating securities (1)			(104)			(108)
Net income attributable to common stockholders		$	1,275		$	1,428
Denominator
Weighted average number of unrestricted outstanding common shares used to calculate basic net income per share			10,100			10,100
Effect of dilutive securities:
Stock options (2)			463			452
Diluted weighted-average shares of Class A Common Stock outstanding used to calculate diluted net income per share			10,563			10,552
Earnings per share of Class A Common Stock - basic		$	0.13		$	0.14
Earnings per share of Class A Common Stock - diluted		$	0.12		$	0.14

 

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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			Nine Months Ended
		September 30, 2017			September 30, 2017
Class B Common Stock			32,366			32,366
Restricted stock awards			132			12
			32,498			32,378

 

 

10. Income Taxes

Income Taxes

The Company is subject to U.S. federal, state and local income taxes. Solaris LLC is treated as a pass-through entity for U.S. federal tax purposes and in most state and local jurisdictions. As such, Solaris LLC’s members, including the Company, are liable for federal and state income taxes on their respective shares of Solaris LLC’s taxable income. Solaris LLC is liable for income taxes in those states not recognizing its pass-through status.

Our effective tax rate of 6.68% for the three-months ending September 30, 2017 and 7.91% for the nine-months ending September 30, 2017 differs from statutory rates primarily due to Solaris LLC’s pass-through treatment for U.S. federal income tax purposes.

Based on our cumulative earnings history and forecasted future sources of taxable income, we believe that we will be able to realize a substantial portion of our deferred tax assets in the future. However, based on the Company’s assessment, we have recorded a valuation allowance of $3.7 million for the component of the deferred tax assets that are less than more-likely-than not to reverse in the foreseeable future. 

 

The Company has recognized no uncertain tax positions. Although the Company has not filed a corporate tax return, the basis of tax positions applied to our tax provisions substantially comply with applicable federal and state tax regulations, and we acknowledge the respective taxing authorities may take contrary positions based on their interpretation of the law. A tax position successfully challenged by a taxing authority could result in an adjustment to our provision or benefit for income taxes in the period in which a final determination is made.

Payable to Related Parties Pursuant to the Tax Receivable Agreement

As of September 30, 2017, our liability under the Tax Receivable Agreement was $11.5 million, representing approximately 85% of the calculated tax savings based on the portion of the original basis adjustments we anticipated being able to utilize in future years.

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. We have determined it is more-likely-than-not that we will be able to utilize all of our deferred tax assets subject to the Tax Receivable Agreement; therefore, we have recorded a liability under the Tax Receivable Agreement related to the tax savings we may realize from the depreciation and amortization related to basis adjustments under Section 754 of the Internal Revenue Code of 1986, as amended, created in connection with the IPO. If we determine the utilization of these deferred tax assets is not more-likely-than-not in the future, our estimate of amounts to be paid under the Tax Receivable Agreement would be reduced. In this scenario, the reduction of the liability under the Tax Receivable Agreement would result in a benefit to our condensed consolidated statement of operations.