Unless the context requires otherwise, references in this Annual Report to the "Company," "Solaris," "we," "us" and "our" refer to (i)Solaris Oilfield Infrastructure, LLC ("Solaris LLC ") and its consolidated subsidiaries prior to the completion of our initial public offering and (ii)Solaris Oilfield Infrastructure, Inc. ("Solaris Inc. ") and its consolidated subsidiaries following the completion of our initial public offering. 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. This section of this Form 10-K generally discusses 2019 and 2018 items and year-to-year comparisons between 2019 and 2018. Discussions of 2017 items and year-to-year comparisons between 2018 and 2017 that are not included in this Form 10-K can be found in "Part II, Item 7. "Management's Discussion and Analysis of Financial Conditions and Results of Operations" of our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2018 . 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" and "Risk Factors" included elsewhere in this Annual Report, 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. OverviewSolaris LLC was formed inJuly 2014 .Solaris Inc. was incorporated as aDelaware corporation inFebruary 2017 for the purpose of completing an initial public offering of equity inMay 2017 (the "IPO" or the "Offering") and related transactions. OnMay 11, 2017 , in connection with the IPO,Solaris Inc. became a holding company whose sole material asset consists of units inSolaris LLC ("Solaris LLC Units").Solaris Inc. became the managing member ofSolaris LLC and is responsible for all operational, management and administrative decisions relating toSolaris LLC's business and consolidates the financial results ofSolaris LLC and its subsidiaries. 42 Table of Contents Executive Summary We design, manufacture and rent specialized equipment which combined with field technician support, logistics services and our software solutions, enables us to provide a service offering that helps oil and natural gas operators and their suppliers drive efficiencies and reduce costs during the completion phase of well development. The majority of our revenue is currently derived from rental and services related to our patented mobile proppant and chemical management systems that unload, store and deliver proppant used in hydraulic fracturing of oil and natural gas wells, as well as coordinating the delivery of proppant and chemicals to the well site. Our systems are deployed in most of the active oil and natural gas basins inthe United States . In 2018 and 2019, we introduced new equipment and service enhancements, which we believe will help us maintain and expand our total revenue opportunity inthe United States completions space. We introduced our mobile chemical management system to the market in late 2018 and we began commercializing the offering in 2019. Design enhancements introduced in 2018 include our AutoHopper™ technology, which we are deploying across our fleet to automate the delivery of proppant into the blender, and the latest version of our Solaris Lens® software, available on our systems and allows customers to view the entire last mile proppant supply chain in real time. Recent Trends and Outlook Demand for our products and services is predominantly influenced by the level of oil and natural gas well drilling and completion activity, which, in turn, is determined by the current and anticipated profitability of developing oil and natural gas reserves. The Baker Hughes US Land rig count decreased 9% to 920 average rigs in 2019 from 1,013 average rigs in 2018. This compares to a 1% decline to an average of 110 fully utilized mobile proppant systems rented during 2019 compared to 2018. The lower decline rate in demand for our systems during 2019 relative to the drilling rig count was due to investments made to grow our service fleet during 2018. During 2019 we reduced investment in fleet growth in response to the slowing activity. Going forward, absent significant changes in markets share, we would expect our activity to follow the general trends of the US land drilling and completion activity.
Initial 2020 capital budgets announced by oil and gas operators indicate spending on US drilling and completion activity could be down 10-15% in 2020 relative to 2019.
Our service fleet currently consists of 166 mobile proppant management systems and 14 mobile chemical management systems, which is a new service offering for the Company. We do not expect to build any additional proppant systems for the remainder of 2020. How We Generate Revenue
We generate the majority of our revenue through the rental of our systems and related services, including transportation of proppant to the well site, transportation of our systems field supervision and support, as well as coordinating the delivery of proppant and chemicals to the well site. The system rental 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 our systems and service on a well site, indemnification, damages, confidentiality, intellectual property protection and payment terms and provisions. The rentals and 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. We typically charge our customers for the rental of our systems and related services on a monthly basis.
In early 2018, we began generating revenue for our transloading services at our independent, transload facility inOklahoma (the "Kingfisher Facility"). We generally charge our customers a throughput fee for rail-to-truck transloading and high-efficiency sand silo storage and transloading services at the Kingfisher Facility. 43 Table of Contents Finally, we generate revenue through our Railtronix® inventory management software. We generally charge our customers a throughput fee to monitor proppant that is loaded into a railcar, stored at a transload facility or loaded into a truck at either a transload facility or mine. Costs of Conducting Our Business
The principal costs associated with operating our business are:
· Cost of system rental (excluding depreciation and amortization);
· Cost of system services (excluding depreciation and amortization);
· Cost of transloading operations and services (excluding depreciation and
amortization);
· Cost of software inventory management services (excluding depreciation and
amortization);
· Depreciation and amortization associated primarily with the costs to build our
systems and the costs to develop rail and storage assets;
· Selling, general and administrative expenses; and
· Other operating expenses.
Our cost of system rental (excluding depreciation and amortization) consists primarily of the costs of maintaining our equipment, developing and maintaining ourSolaris Lens software, as well as insurance and property taxes related to our equipment. Our cost of system services (excluding depreciation and amortization) consists primarily of direct labor costs, and related travel and lodging expenses, and system transportation costs. A large portion of our cost of system services (excluding depreciation and amortization) are variable based on the number of systems deployed with customers.
Our cost of transloading services (excluding depreciation and amortization) consists primarily of direct labor costs, fuel, utilities and maintenance.
Our cost of software inventory management services (excluding depreciation and amortization) consists primarily of direct labor and software subscriptions.
Our depreciation and amortization expense primarily consists of the depreciation expense related to our systems and related manufacturing machinery and equipment as well as rail and transloading equipment. The costs to build our systems, including any upgrades, are capitalized and depreciated over a life ranging from three to 15 years. The costs to build our rail and transloading storage assets are capitalized and depreciated over a life of 15 to 30 years. Our selling, general and administrative expenses are comprised of the salaries and related benefits for several functional areas of our organization, including sales and commercial research and development accounting and corporate administrative, as well as office rent, marketing expenses and third-party professional service providers. How We Evaluate Our Operations We use a variety of qualitative, operational and financial metrics to assess our performance. Among other measures, management considers revenue, revenue days, fully utilized system count, tons transloaded, EBITDA and Adjusted EBITDA.
We analyze our revenue by comparing actual monthly revenue to our internal projections for a given period and to prior periods to assess our performance. We also assess our revenue in relation to the number of systems we have
44 Table of Contents
deployed to customers and the amount of proppant and chemicals transloaded at our Kingfisher Facility from period to period.
Fully Utilized System Count
The fully utilized system count is calculated as the combined number of days that a system generates revenue in a given period divided by the number of days in that period. We view the fully utilized system count as the best measure to track utilization and changes in rental activity on a period-over-period basis as the majority of our systems are rented on a monthly basis.
Tons Transloaded
We view tons transloaded as an important indicator of our performance. We calculate the number of tons transloaded as the combined number of proppant tons and chemicals that are transloaded at our Kingfisher Facility in a period. We assess the number of tons transloaded from period to period in relation to prior periods and contracted minimum volumes.
EBITDA and Adjusted EBITDA
We view EBITDA and Adjusted EBITDA as important indicators of performance. We define EBITDA as net income, plus (i) depreciation and amortization expense, (ii) interest expense and (iii) income tax expense, including franchise taxes. We define Adjusted EBITDA as EBITDA plus (i) stock-based compensation expense and (ii) certain non-cash items and extraordinary, unusual or non-recurring gains, losses or expenses. Note Regarding Non-GAAP Financial Measures EBITDA and Adjusted EBITDA are not financial measures presented in accordance with accounting principles generally accepted inthe United States ("GAAP"). We believe that the presentation of these non-GAAP financial measures will provide useful information to investors in assessing our financial condition and results of operations. Net income (loss) is the GAAP measure most directly comparable to EBITDA and Adjusted EBITDA. Our non-GAAP financial measures should not be considered as alternatives to the most directly comparable GAAP financial measure. Each of these non-GAAP financial measures has important limitations as analytical tools because they exclude some but not all items that affect the most directly comparable GAAP financial measures. You should not consider EBITDA or Adjusted EBITDA in isolation or as substitutes for an analysis of our results as reported under GAAP. Because EBITDA and Adjusted EBITDA may be defined differently by other companies in our industry, our definitions of these non-GAAP financial measures may not be comparable to similarly titled measures of other companies, thereby diminishing their utility. Factors Impacting Comparability of Our Financial Results
Our future results of operations may not be comparable to the historical results
of operations of our accounting predecessor,
Corporate Reorganization
The historical consolidated financial statements included in this report are based on the financial statements of our accounting predecessor,Solaris LLC , prior to our corporate reorganization consummated in connection with the IPO. As a result, the historical consolidated financial data may not give you an accurate indication of what our actual results would have been if the corporate reorganization had been completed at the beginning of the periods presented or of what our future results of operations are likely to be. In connection with the IPO and the transactions related thereto,Solaris Inc. became a holding company whose sole material asset consists of Solaris LLC Units.Solaris Inc. is the managing member ofSolaris LLC and is responsible for all operational, management and administrative decisions relating toSolaris LLC's business and consolidates the financial results ofSolaris LLC and its subsidiaries. 45 Table of Contents In addition, in connection with the IPO,Solaris Inc. entered into a tax receivable agreement (the "Tax Receivable Agreement") with the members ofSolaris LLC immediately prior to the IPO (collectively, the "Original Investors ") (each such person and any permitted transferee, a "TRA Holder," and together, the "TRA Holders") onMay 17, 2017 . This agreement generally provides for the payment bySolaris Inc. to each TRA Holder of 85% of the net cash savings, if any, inUnited States federal, state and local income tax and franchise tax thatSolaris Inc. actually realizes (computed using simplifying assumptions to address the impact of state and local taxes) or is deemed to realize in certain circumstances in periods after the IPO as a result of (i) certain increases in tax basis that occur as a result ofSolaris Inc. acquisition (or deemed acquisition forUnited States 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 inSolaris LLC's Second Amended and Restated Limited Liability Company Agreement (the "Solaris LLC Agreement")) and (ii) imputed interest deemed to be paid bySolaris Inc. as a result of, and additional tax basis arising from, any paymentsSolaris Inc. makes under the Tax Receivable Agreement. Solaris will retain the benefit of the remaining 15% of these cash savings. We anticipate that we will account for the effects of these increases in tax basis and associated payments under the Tax Receivable Agreement arising from any future redemptions of Solaris LLC Units from ourOriginal Investors as follows:
· we will record an increase in deferred tax assets for the estimated income tax
effects of the increases in tax basis based on enacted federal and state tax
rates at the date of the redemption;
· to the extent we estimate that we will not realize the full benefit represented
by the deferred tax asset, based on an analysis that will consider, among other
things, our expectation of future earnings, we will reduce the deferred tax
asset with a valuation allowance;
· we will record 85% of the estimated realizable tax benefit as an increase to
our payables associated with the future payments due under the Tax Receivable
Agreement and the remaining 15% of the estimated realizable tax benefit as an
increase to additional paid-in capital; and
· we will reduce the payable for payments made under the Tax Receivable
Agreement.
All of the effects of changes in any of our estimates after the date of the exchange will be included in net income for the period in which those changes occur. Similarly, the effect of subsequent changes in the enacted tax rates will be included in net income for the period in which the change occurs.
Fleet Growth
We have experienced significant growth over the past six years. Since commencing operations inApril 2014 , we have grown our fleet from two systems to 166 mobile proppant management systems and 14 mobile chemical management systems in our fleet as ofDecember 31, 2019 and increased the number of major oil and natural gas basins in which our systems are deployed.
Income Taxes
Solaris Inc. is a corporation and, as a result, is subject toUnited States federal, state and local income taxes. AlthoughSolaris LLC is subject to franchise tax in theState of Texas (at less than 1% of modified pre-tax earnings) it passes through its taxable income to its owners, includingSolaris Inc. , forUnited States federal and other state and local income tax purposes and thus is not generally subject toUnited States federal income tax or other state or local income taxes. Accordingly, the financial data attributable toSolaris LLC prior to the IPO contains no provision forUnited States federal income tax or income taxes in any state or locality other than franchise tax in theState of Texas . 46 Table of Contents Results of Operations
Year Ended
Year Ended December 31, 2019 2018 Change (in thousands) Revenue System rental$ 142,022 $ 143,646 $ (1,624) System services 63,871 43,010 20,861 Transloading services 34,105 8,083 26,022 Inventory software services 1,689 2,457 (768) Total revenue 241,687 197,196 44,491 Operating costs and expenses: Cost of system rental (excluding$22,389 and$14,920 of depreciation and amortization for the years endedDecember 31, 2019 and 2018, respectively, shown separately) 9,707 7,230 2,477 Cost of system services (excluding$1,548 and$1,274 of depreciation and amortization for the years endedDecember 31, 2019 and 2018, respectively, shown separately) 74,749
50,633 24,116
Cost of transloading services (excluding
2,601 2,242 359 Cost of inventory software services (excluding$772 and$794 of depreciation and amortization for the years endedDecember 31, 2019 and 2018, respectively, shown separately) 604 797 (193) Depreciation and amortization 26,925 18,422 8,503 Selling, general and administrative (excluding$573 and$480 of depreciation and amortization for the years endedDecember 31, 2019 and 2018, respectively, shown separately) 18,586 16,758 1,828 Other operating expenses 585 1,827 (1,242) Total operating costs and expenses 133,757 97,909 35,848 Operating income 107,930 99,287 8,643 Interest expense, net (634) (374) (260) Total other expense (634) (374) (260) Income before income tax expense 107,296 98,913 8,383 Provision for income taxes (16,936) (12,961) (3,975) Net income 90,360
85,952 4,408 Less: net (income) loss related to non-controlling interests
(38,353) (43,521) 5,168 Net income attributable to Solaris$ 52,007 $ 42,431 $ 9,576 Revenue
System Rental Revenue. Our system rental revenue decreased
System Services Revenue. Our system services revenue increased$20.9 million , or 49%, to$63.9 million for the year endedDecember 31, 2019 compared to$43.0 million for the year endedDecember 31, 2018 . System services revenue increased primarily due to an increase in services provided to coordinate proppant delivered into our systems. Transloading Services Revenue. Our transloading services revenue increased$26.0 million , or 321%, to$34.1 million for the year endedDecember 31, 2019 compared to$8.1 million for the year endedDecember 31, 2018 . The increase was primarily due to the recognition of$27.1 million of deferred revenue, partially offset by a decrease in the number of tons transloaded at our Kingfisher Facility. Deferred revenue consisted of a$26.0 partial termination payment 47 Table of Contents received inDecember 2018 in accordance with a contract modification which was accounted for prospectively and a final termination payment of$1.7 recorded as accounts receivable and recognized as revenue throughout the fourth quarter of 2019. The Company recognized the remaining$27.1 million of deferred revenue as revenue from transloading services in the year endedDecember 31, 2019 due to the full termination of the contract, resulting in no remaining deferred revenue as ofDecember 31, 2019 . The Company recognized$0.5 million of deferred revenue as Revenue from transloading services in the year endedDecember 31, 2018 . We generally charge our customers a throughput fee for providing rail-to-truck transloading and high-efficiency sand silo storage and transloading services in relation to proppant and chemicals delivered to the Kingfisher Facility.
Operating Expenses
Total operating costs and expenses for the years endedDecember 31, 2019 and 2018 were$133.8 million and$97.9 million , respectively, which represented 55% and 50% of total revenue, respectively. Total operating costs and expenses increased year-over-year primarily as a result of the deployment of additional systems to our customers in early 2019 and services thereof, coupled with the related increase in depreciation and amortization expense. The fully utilized proppant system equivalent count of 110 for the year endedDecember 31, 2019 was relatively unchanged as compared to 111 for the year endedDecember 31, 2018 . Total operating costs as a percentage of total revenue increased as a result of an increase in system services expense in relation to proppant delivery coordination services provided. Additional details regarding the changes in operating expenses are presented below. Cost of System Rental (excluding depreciation and amortization). Cost of system rental increased$2.5 million , or 35%, to$9.7 million for the year endedDecember 31, 2019 compared to$7.2 million for the year endedDecember 31, 2018 , excluding depreciation and amortization expense. Cost of system rental as a percentage of system rental revenue was 7% and 5% for the years endedDecember 31, 2019 and 2018, respectively. Cost of system rental increased primarily due to an increase in ad valorem and other fixed costs as a result of an increase in the number of systems that were added to our fleet. Repairs and maintenance costs also increased due to maintaining a larger fleet. Cost of system rental including depreciation and amortization expense increased$9.9 million , or 45%, to$32.1 million for the year endedDecember 31, 2019 compared to$22.2 million for the year endedDecember 31, 2018 . This increase was primarily attributable to the increase in in depreciation expense related to the additional systems that were manufactured and added to our fleet. Cost of System Services (excluding depreciation and amortization). Cost of system services increased$24.1 million , or 48%, to$74.7 million for the year endedDecember 31, 2019 compared to$50.6 million for the year endedDecember 31, 2018 . This increase was primarily due to an increase of$23.1 million in relation to services provided to coordinate proppant delivered to systems.
For the year ended
Cost of system services including depreciation and amortization expense increased$24.4 million , or 47%, to$76.3 million for the year endedDecember 31, 2019 compared to$51.9 million for the year endedDecember 31, 2018 . This increase was primarily attributable to the factors mentioned above. Cost of Transloading Services (excluding depreciation and amortization). Cost of transloading services increased$0.4 million , or 18% to$2.6 million for the year endedDecember 31, 2019 compared to$2.2 million for the year endedDecember 31, 2018 , primarily due to increases in insurance, fuel, utilities and maintenance related to increased transloading services activity at our Kingfisher Facility.
Cost of transloading services including depreciation and amortization expense increased
or 31%, to$4.2 million for the year endedDecember 31, 2019 compared to$3.2 million for the year endedDecember 31, 2018 , due to depreciation expense related to our transloading facility and equipment which commenced upon completion of the construction of the Kingfisher Facility in the third quarter of 2018. 48 Table of Contents Cost of Inventory Software Services (excluding depreciation and amortization). Cost of inventory software services, which decreased$0.2 million , or 25%, to$0.6 million for the year endedDecember 31, 2019 compared to$0.8 million for the year endedDecember 31, 2018 primarily includes labor and software subscription costs related to Railtronix inventory management software. Cost of inventory software services including depreciation and amortization expense decreased$0.2 million , or 13%, to$1.4 million for the year endedDecember 31, 2019 compared to$1.6 million for the year endedDecember 31, 2018 . This decrease was primarily attributable to the labor and software subscription costs. Amortization consists of customer relationships, a non-competition agreement and software acquired in the acquisition of Railtronix. Depreciation and Amortization. Depreciation and amortization increased$8.5 million , or 46%, to$26.9 million for the year endedDecember 31, 2019 compared to$18.4 million for the year endedDecember 31, 2018 . This increase was primarily attributable to additional depreciation expense related to additional systems that were manufactured and added to our fleet and our transloading facility and equipment placed in service in 2018.
Selling, General and Administrative Expenses (excluding depreciation and
amortization). Selling, general and administrative expenses increased
Other Operating Expenses. Other operating expenses decreased$1.2 million , or 67% to$0.6 million for the year endedDecember 31, 2019 compared to the$1.8 million for the year endedDecember 31, 2018 . Other operating expenses in the year endedDecember 31, 2019 primarily relate to$0.5 million loss on disposal of assets. Other operating expenses in the year endedDecember 31, 2018 were primarily related to certain performance-based cash awards totaling$1.7 million in connection with the purchase of Railtronix upon the achievement of certain financial milestones. Provision for Income Taxes. During the year endedDecember 31, 2019 , we recognized a combinedUnited States federal and state provision for income taxes of$16.9 million , an increase of$4.0 million as compared to$13.0 million we recognized during the year endedDecember 31, 2018 . This increase was attributable to higher operating income. The effective combinedUnited States federal and state income tax rates were 15.8% and 13.1% for the years endedDecember 31, 2019 and 2018, respectively. For the years endedDecember 31, 2019 and 2018, our effective tax rate differed from the statutory rate primarily due toSolaris LLC's passthrough treatment forUnited States federal income tax purposes.
Net Income
Net income increased
Reconciliation of Non-GAAP Financial Measures
We view EBITDA and Adjusted EBITDA as important indicators of performance. We define EBITDA as net income, plus (i) depreciation and amortization expense, (ii) interest expense and (iii) income tax expense, including franchise taxes. We define Adjusted EBITDA as EBITDA plus (i) stock-based compensation expense and (ii) certain non-cash items and extraordinary, unusual or non-recurring gains, losses or expenses. We believe that our presentation of EBITDA and Adjusted EBITDA will provide useful information to investors in assessing our financial condition and results of operations. Net income is the GAAP measure most directly comparable to EBITDA and Adjusted EBITDA. EBITDA and Adjusted EBITDA should not be considered alternatives to net income presented in accordance with GAAP. Because EBITDA and Adjusted EBITDA may be defined differently by other companies in our industry, our definitions of EBITDA and Adjusted EBITDA may not be comparable to similarly 49 Table of Contents
titled measures of other companies, thereby diminishing their utility. The following table presents a reconciliation of Net income to EBITDA and Adjusted EBITDA for each of the periods indicated.
Year ended December 31, 2019 2018 Change (in thousands) Net income$ 90,360 $ 85,952 $ 4,408
Depreciation and amortization 26,925 18,422
8,503 Interest expense, net 634 374 260 Income taxes (1) 16,936 12,961 3,975 EBITDA$ 134,855 $ 117,709 $ 17,146
Stock-based compensation expense (2) 4,476 2,920
1,556
Loss on disposal of assets 463 153 310 Severance 229 - 229
Transload contract termination (3) (27,138) (522) (26,616)
Non-recurring cash bonuses (4) - 1,679
(1,679) IPO bonuses (5) - 896 (896) Adjusted EBITDA$ 112,885 $ 122,835 $ (9,950)
--------------------------------------------------------------------------------
(1) Federal and state income taxes.
(2) Represents stock-based compensation expense related to restricted stock
awards of
and 2018, respectively. (3) Deferred revenue related to full termination of a sand storage and
transloading agreement; no deferred revenue balance remained as of December
31, 2019.
(4) Certain performance-based cash awards paid in connection with the purchase of
Railtronix upon the achievement of certain financial milestones.
(5) Represents stock-based compensation expense related to restricted stock
awards with one-year vesting of
2018 that were granted to certain employees and consultants in connection
with the IPO.
Year Ended
EBITDA increased$17.1 million to$134.9 million for the year endedDecember 31, 2019 compared to$117.7 million for the year endedDecember 31, 2018 . Adjusted EBITDA decreased$9.9 million to$112.9 million for the year endedDecember 31, 2019 compared to$122.8 million for the year endedDecember 31, 2018 . EBITDA and Adjusted EBITDA increased 15% and decreased 8%, respectively, for the year endedDecember 31, 2019 compared to the year endedDecember 31, 2018 . The increase in EBITDA and decrease in Adjusted EBITDA were primarily due to the changes in revenues and expenses discussed above. 50 Table of Contents Liquidity and Capital Resources
Overview
Our primary sources of liquidity to date have been capital contributions from our founding investors, cash flows from operations, borrowings under our credit agreements and proceeds from the IPO and aNovember 2017 offering. Our primary uses of capital have been capital expenditures to expand our proppant and chemical management system fleets, construct the Kingfisher Facility, acquire our manufacturing facility and certain intellectual property, acquire the assets of Railtronix, pay dividends and buyback stock. We strive to maintain financial flexibility and proactively monitor potential capital sources, including equity and debt financing, to meet our investment and target liquidity requirements and to permit us to manage the cyclicality associated with our industry. OnOctober 9, 2018 ,Solaris Inc. filed a universal shelf registration statement on Form S-3 (the "Universal Shelf") with theSEC . Under the Universal Shelf,Solaris Inc. may offer and sell up to$500 million of Class A common stock, preferred stock, debt securities or any combination of such securities during the three-year period that commenced upon the Universal Shelf becoming effective onOctober 16, 2018 . Additionally, certain stockholders of the Company (the "Selling Stockholders") may offer and sell up to an aggregate of 18,366,612 shares of Class A common stock under the Universal Shelf. Under the Universal Shelf,Solaris Inc. may periodically offer one or more types of securities in amounts, at prices and on terms announced, if and when the securities are ever offered.Solaris Inc. will not receive any proceeds, if any, from the sale of shares of Class A common stock by the Selling Stockholders. Alternatively, the Selling Stockholders from time to time may sell shares of Class A common stock pursuant to an exemption under Rule 144 of the Securities Act. We intend to finance most of our capital expenditures, contractual obligations and working capital needs with our current cash balance, cash generated from future operations and borrowings under our 2019 Credit Agreement (as defined in "-Debt Agreements"). We continuously evaluate our capital expenditures and the amount we ultimately spend will depend on a number of factors, including expected industry activity levels and company initiatives. We believe that our operating cash flow and available borrowings under our 2019 Credit Agreement will be sufficient to fund our operations for at least the next 12 months.
As of
Cash Flows
The following table summarizes our cash flows for the periods indicated:
Year Ended December 31, Change 2019 2018 2019 vs. 2018 (in thousands) Net cash provided by operating activities$ 114,871 $ 116,365 $ (1,494) Net cash used in investing activities (34,002) (160,545) 126,543 Net cash provided by (used in) financing activities (39,044) 5,816 (44,860) Net change in cash$ 41,825 $ (38,364) $ 80,189
Analysis of Cash Flow Changes for Year Ended
Operating Activities. Net cash provided by operating activities was$114.9 million for the year endedDecember 31, 2019 , compared to net cash provided by operating activities of$116.4 million for the year endedDecember 31, 2018 . The decrease of$1.5 million in operating cash flow was primarily attributable to the changes in working capital items. Investing Activities. Net cash used in investing activities was$34.0 million for the year endedDecember 31, 2019 , compared to$160.5 million for the year endedDecember 31, 2018 . The decrease in investing activities of$126.5 million is primarily due to a decrease in the manufacturing rate of new proppant systems and completion of construction of the Kingfisher Facility in the third quarter of 2018. For the year endedDecember 31, 2019 ,$34.9 million of investing 51 Table of Contents
activities were capital expenditures related to manufacturing new systems,
including work in process offset by a
Financing Activities. Net cash used in financing activities of$39.0 million for the year endedDecember 31, 2019 , was primarily related to quarterly dividends of$19.3 million ,$13.0 million to repay borrowings under the 2019 Credit Agreement (as defined in "-Debt Agreements"),$3.2 million for payments under the share repurchase program,$2.5 million for payments under insurance premium financing and$1.1 million of payments related to the vesting stock-based compensation. Net cash provided by financing activities of$5.8 million for the year endedDecember 31, 2018 was primarily related to$13.0 million in proceeds from borrowings under the 2018 Credit Agreement (as defined in "-Debt Agreements"), partially offset by$4.7 million related to cash dividend and distributions paid,$1.3 million of payments related to insurance premium financing,$1.1 million of payments related to vesting of stock-based compensation and$1.0 million of debt issuance costs in connection with the 2018 Credit Agreement. Debt Agreements
Senior Secured Credit Facility
OnApril 26, 2019 ,Solaris LLC entered into an Amended and Restated Credit Agreement (the "2019 Credit Agreement") by and amongSolaris LLC , as borrower, each of the lenders party thereto andWells Fargo Bank, National Association , as administrative agent. The 2019 Credit Agreement replaced, in its entirety, the Company's Amended and Restated Credit Agreement, dated as ofJanuary 19, 2018 , by and among the Company, as borrower, each of the lender party thereto andWoodforest National Bank , as administrative agent (the "2018 Credit Agreement"). The 2019 Credit Agreement consists of an initial$50.0 million revolving loan commitment (the "Loan") with a$25.0 million uncommitted accordion option to increase the Loan availability to$75.0 million . The term of the 2019 Credit Agreement expires onApril 26, 2022 . Our obligations under the Loan are generally secured by a pledge of substantially all of the assets ofSolaris LLC and its subsidiaries, and such obligations are guaranteed bySolaris LLC's domestic subsidiaries other than Immaterial Subsidiaries (as defined in the 2019 Credit Agreement). We have the option to prepay the loans at any time without penalty. Borrowings under the 2019 Credit Agreement bear interest at either LIBOR or an alternate base rate plus an applicable margin, and interest is payable quarterly. The applicable margin ranges from 1.75% to 2.50% for Eurodollar loans and 0.75% to 1.50% for alternate base rate loans, in each case depending on our total leverage ratio. The 2019 Credit Agreement requires that we pay a quarterly commitment fee on undrawn amounts of the Loan, ranging from 0.25% to 0.375% depending upon the total leverage ratio. The 2019 Credit Agreement requires that we maintain ratios of (a) consolidated EBITDA to interest expense of not less than 2.75 to 1.00, (b) senior indebtedness to consolidated EBITDA of not more than 2.50 to 1.00 and (c) the sum of 100% of eligible accounts, inventory and fixed assets to the total revolving exposure of not less than 1.00 to 1.00 when the total leverage ratio is greater than 2.00 to 1.00 and total revolving exposure under the Loan exceeds$3.0 million . For the purpose of these tests, certain items are subtracted from indebtedness and senior indebtedness. EBITDA, as defined in the 2019 Credit Agreement, excludes certain noncash items and any extraordinary, unusual or non-recurring gains, losses or expenses. The 2019 Credit Agreement also requires that we prepay any outstanding borrowings under the Loan in the event our total leverage ratio is greater than 1.00 to 1.00 and our consolidated cash balance exceeds$20.0 million , taking into account certain adjustments. Capital expenditures are not restricted unless borrowings under the Loan exceed$5.0 million for any 180 consecutive day period, in which case capital expenditures will be permitted up to$100.0 million plus any unused availability for capital expenditures from the immediately preceding fiscal year. 52 Table of Contents
As of
As of
Contractual Obligations The table below provides estimates of the timing of future payments that we are contractually obligated to make based on agreements in place atDecember 31, 2019 . For the Year Ending December 31, 2020 2021 2022 2023 2024 Thereafter Total (in thousands) Operating lease obligations (1)$ 1,116 $ 1,060 $ 1,091 $ 1,100 $ 1,108 $ 8,354 $ 13,829 Finance lease obligations (2) 35 33 33 33 33 11 178 Commitment fees on Revolving Loan (3) 125 125 40 - - - 290 Purchase commitments (4) 1,417 1,158 - - - - 2,575 Other commitments 274 255 37 2 568 Total$ 2,967 $ 2,631 $ 1,201 $ 1,135 $ 1,141 $ 8,365 17,440
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(1) Operating lease obligations are related to our 30-year land lease with the
other office, land and equipment leases.
(2) Finance lease obligations are related to our finance lease of a building at
our
certain office equipment with purchase options upon the end of lease terms
which are accounted for as finance leases with various expiration dates.
(3) Commitment fees on our Revolving Loan were calculated based on the unused
portion of lender commitments, at the applicable commitment fee rate of
0.25%. See Note 8. "Senior Secured Credit Facility" to our consolidated
financial statements as of
the 2019 Credit Agreement.
(4) Purchase commitments primarily relate to our agreement with our suppliers for
material and parts purchases to be used in the manufacturing of our systems.
The purchase commitments represent open purchase orders to our suppliers.
As ofDecember 31, 2019 , our liability under the Tax Receivable Agreement was$68.0 million , representing 85% of the calculated net cash savings inUnited States federal, state and local income tax or franchise tax thatSolaris Inc. anticipates realizing in future years. Income TaxesSolaris Inc. is a corporation and, as a result, is subject toUnited States federal, state and local income taxes. For the years endedDecember 31, 2019 , 2018 and 2017, we recognized a combinedUnited States federal and state provision for income taxes of$16.9 million ,$13.0 million and$33.7 million , respectively.
On
53 Table of ContentsSolaris LLC is treated as a partnership forUnited States federal income tax purposes and therefore does not pay federal income tax on its taxable income. Instead, theSolaris LLC members are liable for federal income tax on their respective shares of the Company's taxable income reported on the members'United States 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 ofDecember 31, 2019 and 2018. We are subject to a franchise tax imposed by theState 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. Expenses related toTexas franchise tax were approximately$742,000 ,$684,000 and$247,000 for the years endedDecember 31, 2019 , 2018 and 2017, respectively. 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 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. For the year endedDecember 31, 2019 , the Company has recorded an uncertain tax benefit for the treatment of certain costs incurred in connection with the IPO and a November offering. Interest and penalties related to income taxes are included in the benefit (provision) for income taxes in our consolidated statement of operations. We have not incurred any significant interest or penalties related to income taxes in any of the periods presented. Payables Related to the Tax Receivable Agreement In connection with the IPO,Solaris Inc. entered into the Tax Receivable Agreement with the TRA Holders onMay 17, 2017 . This agreement generally provides for the payment bySolaris Inc. to each TRA Holder of 85% of the net cash savings, if any, inUnited States federal, state and local income tax or franchise tax thatSolaris Inc. actually realizes (computed using simplifying assumptions to address the impact of state and local taxes) or is deemed to realize in certain circumstances in periods after the IPO as a result of (i) certain increases in tax basis that occur as a result ofSolaris Inc.'s acquisition (or deemed acquisition forUnited States 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 the "Solaris LLC Agreement") and (ii) imputed interest deemed to be paid bySolaris Inc. as a result of, and additional tax basis arising from, any paymentsSolaris Inc. makes under the Tax Receivable Agreement.Solaris Inc. will retain the benefit of the remaining 15% of these cash savings.
See Note 10. "Income Taxes" to our consolidated financial statements for additional information.
Critical Accounting Policies and Estimates
The preparation of financial statements requires the use of judgments and estimates. Our critical accounting policies are described below to provide a better understanding of how we develop our assumptions and judgments about future events and related estimates and how they can impact our financial statements. A critical accounting estimate is one that
54 Table of Contents
requires our most difficult, subjective or complex estimates and assessments and is fundamental to our results of operations.
We base our estimates on historical experience and on various other assumptions we believe to be reasonable according to the current facts and circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We believe the following are the critical accounting policies used in the preparation of our combined financial statements, as well as the significant estimates and judgments affecting the application of these policies. This discussion and analysis should be read in conjunction with our consolidated financial statements and related notes included in this report.
Revenue Recognition
In determining the appropriate amount of revenue to be recognized as we fulfill our obligations under the agreement, the following steps must be performed at contract inception: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations, including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) we satisfy each performance obligation. For contracts that contain multiple performance obligations, we allocate the transaction price to each performance obligation identified in the contract based on relative standalone prices, or estimates of such prices, and recognize the related revenue as each individual service is performed, in satisfaction of the corresponding performance obligations. Revenues from system rental consist primarily of fixed monthly fees charged to customers for the use of our patented mobile proppant management systems that unload, store and deliver proppant and chemicals at oil and natural gas well sites which is considered to be our performance obligation. Contracts with customers are typically on thirty- to sixty-day payment terms. Revenues are recognized over time as the performance obligations are satisfied under the terms of the customer contract. We determined that the performance obligation is satisfied over time as the customer simultaneously receives and consumes the benefits provided by the entity's performance of services, typically as our systems are used by the customer. We measure progress using an input method based on resources consumed or expended relative to the total resources expected to be consumed or expended. We typically charge our customers for the rental of our systems on a monthly basis under agreements requiring the rental of a minimum number of systems for a period of twelve months. The Company is typically entitled to short fall payments if such minimum contractual obligations are not maintained by our customers. Minimum contractual obligations have been maintained and thus the Company has not recognized revenues related to shortfalls on such take or pay contractual obligations to date. Revenues from system services consist primarily of the fees charged to customers for services including mobilization and transportation of our systems, field supervision and support and services coordinating proppant delivery to systems, each of which are considered to be separate performance obligations. Contracts with customers are typically on thirty- to sixty-day payment terms. When the Company provides system services including field supervision and support, we determined that the performance obligation is satisfied over time as the customer simultaneously receives and consumes the benefits provided by the entity's performance of the services, typically based on fixed weekly or monthly contractual rates for field supervision and support and when the Company provides services coordinating proppant delivery. We measure progress using an input method based on resources consumed or expended relative to the total resources expected to be consumed or expended. When the Company provides mobilization and transportation of our systems on behalf of our customers, we determined that the performance obligation is satisfied at a point in time when the system has reached its intended destination. Revenues from transloading services consist primarily of the fees charged to customers for transloading proppant at our transloading facility, which is considered to be our performance obligation. Transloading services operations commenced inJanuary 2018 . We primarily provide rail-to-truck transloading and high-efficiency sand silo storage and transloading services at the facility. Contracts with customers are typically on thirty- to sixty-day payment terms. Revenues are typically recognized over time as the customer simultaneously receives and consumes the benefits provided by the entity's performance of the transloading service based on a throughput fee per ton rate for proppant delivered to and transloaded at the facility. We measure progress based on the proppant delivered and transloaded at the facility. Under our agreements at the facility, quarterly minimum throughput volumes are required and the Company is 55 Table of Contents entitled to short fall payments if such minimum quarterly contractual obligations are not maintained. These shortfalls are based on fixed minimum volumes at a fixed rate and are recognized over time as throughput volumes transloaded are below minimum throughput volumes required. The Company recorded$1.3 million of shortfall revenue during the year endedDecember 31, 2019 . Revenues from inventory software services consist primarily of the fees charged to customers for the use of our Railtronix inventory management software, which is considered to be our performance obligation. Revenues are recognized over time as the customer simultaneously receives and consumes the benefits provided by the entity's performance based on a throughput fee to monitor proppant that is loaded into a railcar, stored at a transload facility or loaded into a truck.
Deferred Revenue
Deferred revenue consisted of a$26.0 million partial termination payment received inDecember 2018 in accordance with a contract modification which was accounted for prospectively and a final termination of$1.7 million recorded as accounts receivable inNovember 2019 and recognized as revenue throughout the fourth quarter of 2019. The termination payments represented the distinct unsatisfied portion of a contract to provide transloading services and were considered part of the transaction price and were allocated to the remaining performance obligations under the contract, which was fully settled as ofDecember 31, 2019 . The Company recognized$27.1 million of deferred revenue as Revenue from transloading services in the year endedDecember 31, 2019 , resulting in no remaining deferred revenue as ofDecember 31, 2019 . The Company recognized$0.5 million of deferred revenue as Revenue from transloading services in the year endedDecember 31, 2018 , resulting in$25.5 million remaining deferred revenue as ofDecember 31, 2018
Property, Plant and Equipment
Property, plant and equipment are stated at cost, or fair value for assets acquired, less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful service lives of the assets. 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.
The costs of ordinary repairs and maintenance are charged to expense as incurred, while significant enhancements, including upgrades or overhauls, are capitalized. These enhancements include upgrades to various components of the system and to equipment at our manufacturing facility that will either extend the life or improve the utility and efficiency of the systems, plant and equipment. These enhancements include:
· The patented
track inventory levels in, and delivery rates from, each silo in a system. This
upgrade improves our customers' operational efficiencies and reduces operating
and supply chain costs by allowing the customer to better manage proppant and
chemical inventory levels both onsite and remotely.
· Our patented
is compatible with standard pressure pumping company's equipment. The
technology uses sensors and machine learning to automatically control the
amount of sand delivered from our mobile proppant management system silos to
the blender, eliminating the need for dedicated personnel historically required
to run our system.
· Our patent-pending mobile chemical management system can store and deliver up
to six different chemicals with significantly improved inventory control, in a
smaller footprint and with less personnel when compared to traditional chemical
handling methods.
· Our patent-pending non-pneumatic loading option provides additional proppant
transportation flexibility for our customers, allowing them to use belly-dump
trucks in addition to the industry standard pneumatic trucks to fill and
maintain inventory in our proppant management systems. This patent-pending
non-pneumatic loading option is compatible with our existing fleet with minimal modification. 56 Table of Contents
· Manufacturing plant improvements include upgrades to overhead cranes and the
addition of new column bays and trunnions that improve the manufacturing flow,
as well as improvements in the paint booths. These improvements increase
productivity by reducing labor hours, while improving safety.
The determination of whether an expenditure should be capitalized or expensed requires management judgment in the application of how the costs benefit future periods, relative to our capitalization policy. Costs that increase the value or materially extend the life of the asset are capitalized and depreciated over the remaining useful life of the asset. When property and equipment are sold or retired, the cost and related accumulated depreciation are removed from the accounts and any gain or loss is reflected in the consolidated statements of operations.
Allocation of Purchase Price in Business Combinations
As part of our business strategy, we regularly pursue acquisitions and business development opportunities. The purchase price in an acquisition is allocated to the assets acquired and liabilities assumed based on their fair values as of the closing date, which may occur many months after the announcement date. The excess of the purchase price over the amount allocated to the assets and liabilities, if any, is recorded as goodwill. We use all available information to estimate fair values including quoted market prices, the carrying value of acquired assets, and widely accepted valuation techniques such as discounted cash flows. Our most significant estimates in our allocation typically relate to the value assigned to property, plant and equipment, intangible assets and goodwill. The judgments made in determining the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives, could materially impact our results of operations.
Impairment of Long-Lived and Other Intangible Assets
Long-lived assets, which include property, plant and equipment and identified intangible assets, comprise a significant amount of our total assets. We make judgments and estimates in conjunction with the carrying value of these assets, including amounts to be capitalized, depreciation and amortization methods, estimated useful lives and impairment. The carrying values of these assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. An impairment loss is recorded in the period in which it is determined that the carrying amount is not recoverable based on estimated future undiscounted cash flows. We estimate the fair value of these intangible and fixed assets using an income approach. This requires us to make long-term forecasts of its future revenues and costs related to the assets subject to review. These forecasts require assumptions about demand for the Company's products and services, future market conditions and technological developments. The financial and credit market volatility directly impacts our fair value measurement through our income forecast. Although we have made our best estimates of these factors based on current conditions, it is reasonably possible that changes could occur in the near term, including, but not limited to: sustained declines in worldwide rig counts below current analysts' forecasts, collapse of spot and futures prices for oil and natural gas, significant deterioration of external financing for our customers, higher risk premiums or higher cost of equity, or any other significant adverse economic news, which could adversely affect our estimates requiring a provision for impairment. There was no impairment for the years endedDecember 31, 2019 , 2018 and 2017.
Leases
The Company adoptedFinancial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 842, Leases ("ASC Topic 842") effectiveJanuary 1, 2019 . The Company applied ASC Topic 842 to all leases existing at or commencing afterJanuary 1, 2019 and elected the package of transition practical expedients for expired or existing contracts, which does not require reassessment of: (1) whether any of our contracts are or contain leases, (2) lease classification and (3) initial direct costs. The Company also elected the practical expedient to adopt the new lease requirements through a cumulative effect adjustment in the period of adoption and did not adjust comparative periods. As a result of the adoption of ASC Topic 842 onJanuary 1, 2019 , the Company recorded operating right-of-use ("ROU") assets of$8,503 , operating lease liabilities of$9,016 and a cumulative effect adjustment to retained earnings for operating leases of$532 . 57 Table of Contents We determine if an arrangement is a lease at inception. The Company made the election to not apply the recognition requirements in ASC Topic 842 to short-term leases (i.e., leases of twelve months or less). Instead, the Company recognizes the lease payments in profit or loss on a straight-line basis over the lease term. Operating leases are included in operating lease ROU assets, current portion of operating lease liabilities, and operating lease liabilities, net of current in the Company's consolidated balance sheets. Finance leases are included in property and equipment, current portion of finance lease liabilities, and finance lease liabilities, net of current in the Company's consolidated balance sheets. ROU assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. As most of the Company's leases do not provide an implicit rate, we use our incremental borrowing rate in determining the present value of lease payments based on the information available at the commencement date. Our incremental borrowing rate reflects the estimated rate of interest that we would pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. We use the implicit rate when readily determinable. The ROU asset also includes any lease payments made and excludes lease incentives received. The Company's lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
Goodwill represents the excess of the purchase price of acquisitions, or fair value of contributed assets, over the fair value of the net assets acquired and consists of synergies in combining operations and other intangible assets which do not qualify for separate recognition. We evaluate goodwill for impairment annually, as ofOctober 31 , or more often as facts and circumstances warrant. The recoverability of the carrying value is assessed based on expected future profitability and undiscounted future cash flows of the acquisitions and their contribution to our overall operations. These types of analyses contain uncertainties because they require us to make judgments and assumptions regarding future profitability, industry factors, planned strategic initiatives, discount rates and other factors. Events or circumstances which could indicate a potential impairment include (but are not limited to) a significant sustained reduction in worldwide oil and natural gas prices or drilling; a significant sustained reduction in profitability or cash flow of oil and natural gas companies or drilling contractors; a sustained reduction in the market capitalization of the Company; a significant sustained reduction in capital investment by drilling companies and oil and natural gas companies; or a significant sustained increase in worldwide inventories of oil or natural gas. There was no impairment for years endedDecember 31, 2019 , 2018 and 2017.
Stock-Based Awards
We follow the fair value recognition provisions in accordance with GAAP. Under the fair value recognition provisions, stock-based compensation cost is measured at the grant date based on the fair value of the award and is amortized to compensation expense on a straight-line basis over the awards' vesting period, which is generally the requisite service period. We have historically and consistently calculated fair value using the Black-Scholes option-pricing model. This valuation approach involves significant judgments and estimates, including estimates regarding our future operations, price variation and the appropriate risk-free rate of return. Our estimates of these variables are made for the purpose of using the valuation model to determine an expense for each reporting period and are not subsequently adjusted. We recognize expense related to the estimated vesting of our performance share units granted.
Income Taxes
We routinely evaluate the realizability of our deferred tax assets by assessing the likelihood that our deferred tax assets will be recovered based on all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, estimates of future taxable income, tax planning strategies and results of operations. Estimating future taxable income is inherently uncertain and requires judgment. In projecting future taxable income, we consider our historical results and incorporate certain assumptions, including revenue growth and operating margins, among others. As ofDecember 31, 2019 and 2018, we had$51.4 million and$58.1 million of deferred tax assets, respectively. We expect to realize future tax benefits related to the utilization of these assets. If we determine in the future that we will not be able to fully utilize all or part of these deferred tax assets, we would record a valuation allowance through earnings in 58 Table of Contents the period the determination was made, which would have an adverse effect on our results of operations and earnings in future periods. OnDecember 22, 2017 , the Tax Act was enacted into law. The provisions of the Tax Act that impact us include, but are not limited to, (1) reducingthe United States federal corporate income tax rate from 35% to 21%, (2) eliminating the corporate alternative minimum tax (AMT); (3) allowing businesses to immediately expense the cost of new investments in certain qualified depreciable assets acquired afterSeptember 27, 2017 (with a phase-down of such expensing starting in 2023), and, (4) reducing the maximum deduction for net operating loss (NOL) carryforwards generated in tax years beginning afterDecember 31, 2017 , to 80%
of a taxpayer's taxable income.
Payables Related to the Tax Receivable Agreement
As described in Note 10. "Income Taxes"
to our consolidated financial statements,Solaris Inc. is a party to the Tax Receivable Agreement under which it is contractually committed to pay the TRA Holders 85% of the calculated net cash savings inUnited States federal, state and local income tax and franchise tax thatSolaris Inc. anticipates realizing in future years from certain increases in tax basis and certain tax benefits attributable to imputed interest as a result ofSolaris Inc.'s acquisition (or deemed acquisition forUnited States federal income tax purposes) of Solaris LLC Units in connection with the IPO or pursuant to an exercise of the Redemption Right or the Call Right (each as defined in the Solaris LLC Agreement). The projection of future taxable income involves significant judgment. Actual taxable income may differ from our estimates, which could significantly impact the liability relating to 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 savingsSolaris Inc. may realize from certain increases in tax basis and certain tax benefits attributable to imputed interest as a result ofSolaris Inc.'s acquisition (or deemed acquisition forUnited States federal income tax purposes) of Solaris LLC Units in connection with the IPO or pursuant to an exercise of the Redemption Right or the Call Right (each as defined in the Solaris LLC Agreement). 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 consolidated statement of operations. Recent Accounting Pronouncements See Note 2. "Summary of Significant Accounting Policies - Recently Accounting Pronouncements" to our consolidated financial statements as ofDecember 31, 2019 and 2018, for a discussion of recent accounting pronouncements. Under the JOBS Act, we meet the definition of an "emerging growth company," which allows us to have an extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act, however we elected to opt out of such exemption (this election is irrevocable). Off Balance Sheet Arrangements
We have no material off balance sheet arrangements. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such financing arrangements.
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