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TABLE OF CONTENTS
INDEX TO FINANCIAL STATEMENTS
As filed with the Securities and Exchange Commission on November 7, 2017
Registration No. 333-
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
Solaris Oilfield Infrastructure, Inc.
(Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization) |
3533 (Primary Standard Industrial Classification Code Number) |
81-5223109 (I.R.S. Employer Identification No.) |
9811 Katy Freeway, Suite 900
Houston, Texas 77024
(281) 501-3070
(Address, including zip code, and telephone number, including area code, of registrant's principal executive offices)
Kyle S. Ramachandran
9811 Katy Freeway, Suite 900
Houston, Texas 77024
(281) 501-3070
(Name, address, including zip code, and telephone number, including area code, of agent for service)
Copies to: | ||
Douglas E. McWilliams Vinson & Elkins L.L.P. 1001 Fannin Street, Suite 2500 Houston, Texas 77002 (713) 758-2222 |
Ryan J. Maierson Thomas G. Brandt Latham & Watkins LLP 811 Main Street, Suite 3700 Houston, Texas 77002 (713) 546-5400 |
Approximate date of commencement of proposed sale to the public:
As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. o
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer o | Non-accelerated filer ý (Do not check if a smaller reporting company) |
Smaller reporting company o Emerging growth company ý |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ý
CALCULATION OF REGISTRATION FEE
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Title of Each Class of Securities to be Registered |
Amount to be Registered(1) |
Proposed Maximum Offering Price per Share(2) |
Proposed Maximum Aggregate Offering Price(1)(2) |
Amount of Registration Fee |
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Class A common Stock, par value $0.01 per share |
8,050,000 | $16.35 | $131.617,500 | $16,387 | ||||
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The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.
The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED NOVEMBER 7, 2017
PROSPECTUS
7,000,000 Shares
Solaris Oilfield Infrastructure, Inc.
Class A Common Stock
We are offering 3,000,000 shares and the selling stockholders identified in the prospectus are offering 4,000,000 shares of our Class A common stock. We will not receive any proceeds from the sale of shares held by the selling stockholders.
Our Class A common stock is listed on the New York Stock Exchange under the symbol "SOI." The last reported sales price of our Class A common stock on the New York Stock Exchange on November 6, 2017 was $16.60 per share.
We are an "emerging growth company" as that term is used in the Jumpstart Our Business Startups Act of 2012, and as such, we have elected to take advantage of certain reduced public company reporting requirements for this prospectus and future filings. See "Risk Factors" and "SummaryOur Emerging Growth Company Status."
Investing in our Class A common stock involves risks. See "Risk Factors" on page 20.
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Per Share | Total | |||||
---|---|---|---|---|---|---|---|
Price to Public |
$ | $ | |||||
Underwriting Discounts and Commissions(1) |
$ | $ | |||||
Proceeds to Solaris Oilfield Infrastructure, Inc.(2) |
$ | $ | |||||
Proceeds to the Selling Stockholders |
$ | $ |
The selling stockholders identified in this prospectus have granted the underwriters the option to purchase up to 1,050,000 additional shares of Class A common stock on the same terms and conditions set forth above within 30 days from the date of this prospectus. We will not receive any of the proceeds from the sale of shares by the selling stockholders if the underwriters exercise their option to purchase 1,050,000 additional shares of Class A common stock.
Delivery of the shares of Class A common stock will be made on or about , 2017.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
Credit Suisse | Goldman Sachs & Co. LLC |
The date of this prospectus is , 2017.
You should rely only on the information contained in this prospectus or in any free writing prospectus prepared by us or on behalf of us or to which we have referred you. Neither we, the selling stockholders nor the underwriters have authorized any other person to provide you with information different from that contained in this prospectus and any free writing prospectus. If anyone provides you with different or inconsistent information, you should not rely on it. Neither we, the selling stockholders nor the underwriters are making an offer to sell these securities in any jurisdiction where an offer or sale is not permitted. The information in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of our common stock. Our business, financial condition, results of operations and prospects may have changed since that date.
This prospectus contains forward-looking statements that are subject to a number of risks and uncertainties, many of which are beyond our control. Please read "Risk Factors" and "Cautionary Statement Regarding Forward-Looking Statements."
The market data and certain other statistical information used throughout this prospectus are based on independent industry publications, government publications and other published independent sources. The industry data sourced from Spears & Associates is from its "Hydraulic Fracturing Market 2006-2018" published in the third quarter 2017. The industry data sourced from Baker Hughes is from its "North America Rotary Rig Count" published on November 3, 2017. Some data is also based on our good faith estimates. Although we believe these third-party sources are reliable as of their respective dates, neither we nor the underwriters have independently verified the accuracy or completeness of this information. The industry in which we operate is subject to a high degree of uncertainty and risk due to a variety of factors, including those described in the section entitled "Risk Factors." These and other factors could cause results to differ materially from those expressed in these publications.
i
We own or have rights to various trademarks, service marks and trade names that we use in connection with the operation of our business. This prospectus may also contain trademarks, service marks and trade names of third parties, which are the property of their respective owners. Our use or display of third parties' trademarks, service marks, trade names or products in this prospectus is not intended to, and does not imply, a relationship with us or an endorsement or sponsorship by or of us. Solely for convenience, the trademarks, service marks and trade names referred to in this prospectus may appear without the ®, or SM symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the right of the applicable licensor to these trademarks, service marks and trade names.
ii
This summary contains basic information about us and the offering. Because it is a summary, it does not contain all the information that you should consider before investing in our Class A common stock. You should read and carefully consider this entire prospectus before making an investment decision, especially the information presented under the heading "Risk Factors," "Cautionary Statement Regarding Forward-Looking Statements," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and the accompanying notes included elsewhere in this prospectus.
Except as otherwise indicated or required by the context, all references in this prospectus 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, unless we state otherwise or the context otherwise requires. References to the "selling stockholders" refer to the selling stockholders that are offering shares of Class A common stock in this offering. Except as otherwise indicated, all information contained in this prospectus assumes that the underwriters do not exercise their option to purchase additional shares and excludes Class A common stock reserved for issuance under our long-term incentive plan, including 559,681 shares of Class A common stock issuable upon exercise of outstanding stock options.
We are an independent provider of supply chain management and logistics solutions designed to drive efficiencies and reduce costs for the oil and natural gas industry. We manufacture and provide our patented mobile proppant management systems that unload, store and deliver proppant at oil and natural gas well sites. Our systems reduce our customers' cost and time to complete wells by improving the efficiency of proppant logistics, as well as enhancing well site safety. In addition, we are currently constructing an independent, unit-train-capable transload facility in Oklahoma (the "Kingfisher Facility") in order to further integrate our supply chain management and drive additional proppant logistics efficiencies for our customers. Our customers include oil and natural gas exploration and production ("E&P") companies, such as EOG Resources, Inc., Devon Energy and Apache Corporation, as well as oilfield service companies, such as ProPetro Holding Corp. Our 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. Since commencing operations in April 2014, we have grown our fleet from two systems to 68 systems. We currently have more demand for our systems than we can satisfy with our existing fleet, and we expect to increase our fleet to between 74 to 76 systems by the end of 2017 in response to customer demand.
Our mobile proppant management system is 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, which we define as the transportation of proppant from transload terminal or regional proppant mine to the well site. Today's horizontal well completion designs require between 400 and 1,000 truckloads of proppant delivered to the well site per well which creates bottlenecks in the storage, handling and delivery of proppant. Our patented systems typically provide 2.5 million pounds of proppant storage capacity in a footprint that is considerably smaller than traditional or competing well site proppant storage equipment. Our systems have the ability to unload up to 24 pneumatic proppant trailers simultaneously. In addition, we have recently deployed our non-pneumatic loading option to provide 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 non-pneumatic loading option is compatible with our existing fleet with minimal modification. Importantly, the proppant storage silos in our systems can be filled from trucks while simultaneously delivering proppant on-demand directly to the blender for
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hydraulic fracturing operations. Accordingly, our systems can maintain high rates of proppant delivery for extended periods of time, which helps achieve a greater number of frac stages per day, driving a reduction in our customers' costs. Our systems also reduce the amount of truck demurrage, or wait time, at the well site which can result in significant cost savings for our customers.
Our proprietary inventory management system (the "PropView system") enables our customers to track inventory levels in, and delivery rates from, each silo in a system on a real-time basis. The PropView system will also be integrated into our operations at the Kingfisher Facility, which will provide our customers with increased visibility across their supply chain, both at the transload facility and the well site. The PropView system provides critical information to our customers, both directly at a well site as well as at a transload location, and can be viewed remotely in real-time through our mobile device application and website. Access to this data and the ability to integrate it into existing monitoring systems allows our customers to realize efficiencies throughout the proppant supply chain and across multiple well sites.
Our mobile proppant management system improves well site health, safety and environmental conditions ("HS&E") by reducing respirable dust, decreasing the number of well site personnel and providing enhanced lighting. We expect the well site HS&E improvements provided by our systems, combined with increased industry focus on HS&E matters, will support continued adoption of our systems.
We manufacture our systems in our facility in Early, Texas, which is proximate to some of the most prolific oil and natural gas producing regions in the country. We are currently manufacturing approximately six systems per month. We have been able to achieve this manufacturing rate through selective outsourcing of certain components of our systems. Our vertically integrated manufacturing capability allows us to better control our supply chain and incorporate improvements and additional features into our systems based on our experience and customer feedback. Additionally, we believe that controlling our manufacturing process provides us cost advantages that improve our returns on capital.
As illustrated in the following chart, we have increased our total system revenue days, defined as the combined number of days our systems earned revenues, in twelve of the last thirteen quarters, and we have increased our system revenue days by more than 2,523% from the second quarter of 2014 to the third quarter of 2017, representing a 173% compound annual growth rate. The increase in total system revenue days is attributable to both an increase in the number of systems available for rental and an increase in the rate at which our systems are utilized.
In order to further integrate our supply chain management, we are constructing the Kingfisher Facility, which we believe will be the first independent, unit-train-capable transload facility in Oklahoma. The 300-acre facility will initially include an 8,000 foot unit-train loop, 30,000 tons of high
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efficiency silo storage and an additional 18,000 feet of rail sidetrack, and it is located directly on a Class I rail line owned by the Union Pacific Railroad, in Kingfisher, Oklahoma, which is strategic to the active SCOOP/STACK formations. The unit-train loop and silo storage will enable the Kingfisher Facility to unload a unit train of 120 rail cars in approximately 24 hours and load more than 10,000 tons into trucks in a 24-hour period. While the Kingfisher Facility will initially provide proppant transloading services, it will also have the capability to provide transloading services for other drilling and completion related consumables. In connection with the development of the Kingfisher Facility, we entered into a seven year contract with minimum quarterly volume commitments with a leading exploration and production company to provide rail-to-truck and high-efficiency sand silo transload and storage services at the facility. We estimate that our current contracted minimum volumes represent approximately 50% of the operational capacity of the initial phase of the facility's construction, and we are actively seeking to contract additional capacity at the facility with other customers.
Current Market Trends and Challenges
Over the past decade, E&P companies have increasingly focused on exploiting the vast hydrocarbon reserves contained in North America's oil and natural gas reservoirs by utilizing advanced drilling and completion techniques, such as horizontal drilling and hydraulic fracturing. Though deteriorating industry conditions caused by the downturn in commodity prices in 2015 resulted in a significant decrease in U.S. demand for proppant in 2015 from 2014 record demand levels (and a further decrease in demand in 2016 from 2015 demand levels), oil prices have increased since the 12-year low recorded in February 2016. Recently, there has been an increase in proppant demand as E&P companies have shifted toward:
We believe the increase in completion activity levels and proppant demand per well, coupled with the complexities associated with the management of last mile proppant logistics, will place a strain on the industry's logistics infrastructure. Additionally, increased focus on cost control and increased HS&E regulation has created numerous operational challenges that cannot be efficiently addressed with labor intensive proppant storage equipment, such as those that utilize individual containers for on-site proppant storage and handling.
Our Solutions
Our system is a proven solution for enhancing the management of proppant along the supply chain, from last mile trucking to well site operations. In addition, the Kingfisher Facility will provide our customers with fast and reliable proppant delivery to the SCOOP/STACK and broader visibility into their proppant supply chain. The combination of our proppant management system and the Kingfisher Facility will create additional logistics savings for our customers from the mine to the well site. Our solutions provide:
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the well site provides a buffer for volatility in the proppant delivery supply chain, which can be caused by a number of factors, including congestion on roads or at transloads or mines, weather or equipment failure;
We believe these operational efficiencies reduce completion costs for our E&P customers and increase revenue and fleet utilization for our pressure pumping customers, who typically earn revenue on a per-fracturing stage basis.
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Competitive Strengths
We believe that we will be able to successfully execute our business strategies because of the following competitive strengths:
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share, (which is the last reported sales price of our Class A common stock on the New York Stock Exchange on November 6, 2017), we expect to have approximately $120.9 million in liquidity from $100.9 million of cash on hand and $20.0 million of available capacity under our credit facility. Our liquidity will provide us with the means to manufacture additional systems, complete construction of the initial phase of Kingfisher Facility, increase our service offerings and generally grow our operations.
Business Strategies
Our principal business objective is to increase shareholder value by profitably growing our business. We expect to achieve this objective through the following business strategies:
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and acid, and associated logistics. We have recently delivered our first system with our non-pneumatic well site loading option and expect to grow that offering.
Kingfisher Facility
In July 2017, we entered into a seven year contract with an exploration and production company to provide proppant transloading service at a facility to be constructed and operated by Solaris in Kingfisher, Oklahoma. The Kingfisher Facility will be located central to the active SCOOP/STACK plays and we believe it will be the first independent, unit-train capable, high speed transload facility in Oklahoma. The Kingfisher Facility will initially provide proppant transloading services, but will also have capacity to provide transloading services for other drilling and completion related consumables.
The Kingfisher Facility will be located on a 300-acre parcel of land, directly on the Union Pacific Railroad. Solaris has secured a 30-year land lease with the State of Oklahoma and has started ordering long-lead construction items, breaking ground in August 2017. The facility is designed to service multiple large volume customers with dedicated storage and unit train loop tracks, including an initial 8,000 foot unit-train loop and 18,000 feet of rail sidetrack. Initial storage will include 30,000 tons of vertical storage in six silos with individual capacity of 5,000 tons per silo. The facility will also service manifest trains and provide direct rail-to-truck transloading.
Our Initial Public Offering and Corporate Structure
Solaris Inc. was incorporated as a Delaware corporation in February 2017 for the purpose of completing an initial public offering of equity (the "IPO" or the "Offering") and related transactions. On May 11, 2017, in connection with the Offering, Solaris Inc. became a holding company whose sole material asset consists of units in Solaris LLC ("Solaris LLC Units"). Solaris Inc. 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 at a price to the public of $12.00 per share. After deducting underwriting discounts and commissions and offering expenses, Solaris received approximately $111.1 million in net proceeds. Solaris Inc. contributed all of the net proceeds from 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 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, including certain investment funds managed by Yorktown Partners LLC (collectively, "Yorktown"), certain of our officers and directors and the other members of Solaris LLC (collectively, the "Original Investors") as part of the corporate reorganization undertaken in connection with the IPO. Solaris LLC has used and intends to continue to use the remaining proceeds for general corporate purposes, including funding a portion of the remainder of its 2017 capital program, the majority of which we expect will be used to manufacture additional systems for our fleet and to advance construction of the Kingfisher Facility.
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As the sole managing member of Solaris LLC, Solaris Inc. 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 Inc. 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 Solaris Inc.'s Class A stockholders. After giving effect to this offering, Solaris Inc. will own 39.2% of Solaris LLC.
In connection with the IPO, we completed a series of reorganization transactions on May 17, 2017 (the "Reorganization Transactions"), including:
Each share of Class B common stock has no economic rights but entitles its holder to one vote on all matters to be voted on by stockholders generally. Holders of Class A common stock and Class B common stock will vote together as a single class on all matters presented to our stockholders for their vote or approval, except as otherwise required by applicable law or by our amended and restated certificate of incorporation. We do not intend to list our Class B common stock on any exchange.
Under the Solaris LLC Agreement, each Original Investor has, subject to certain limitations, the right (the "Redemption Right") to cause Solaris LLC to acquire all or a portion of its Solaris LLC Units for, at Solaris LLC's election, (x) shares of our Class A common stock at a redemption ratio of one share of Class A common stock for each Solaris LLC Unit redeemed, subject to conversion rate adjustments for stock splits, stock dividends and reclassification and other similar transactions, or (y) an equivalent amount of cash. Alternatively, upon the exercise of the Redemption Right, Solaris Inc. (instead of Solaris LLC) has the right (the "Call Right") to acquire each tendered Solaris LLC Unit directly from the exchanging Original Investor for, at Solaris Inc.'s election, (x) one share of Class A common stock or (y) an equivalent amount of cash. In addition, upon a change of control of Solaris Inc., Solaris Inc. has the right to require each holder of Solaris LLC Units (other than Solaris Inc.) to exercise its Redemption Right with respect to some or all of such unitholder's Solaris LLC Units. In connection with any redemption of Solaris LLC Units pursuant to the Redemption Right or our Call Right, the corresponding number of shares of Class B common stock will be cancelled. See "Certain Relationships and Related Party TransactionsSolaris LLC Agreement." The Original Investors have the right, under certain circumstances, to cause us to register the offer and resale of their shares of Class A common stock. See "Certain Relationships and Related Party TransactionsRegistration Rights Agreement."
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Solaris Inc.'s acquisition (or deemed acquisition for U.S. 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 has or is expected to result in adjustments to the tax basis of the tangible and intangible assets of Solaris LLC and such adjustments will be allocated to Solaris Inc. These adjustments would not have been available to Solaris Inc. absent its acquisition or deemed acquisition of Solaris LLC Units and have reduced or are expected to reduce the amount of cash tax that Solaris Inc. would otherwise be required to pay in the future.
In addition, in connection with the IPO, Solaris entered into a Tax Receivable Agreement (the "Tax Receivable Agreement") with the Original Investors and permitted transferees (each such person, a "TRA Holder," and together, the "TRA Holders"). The term of the Tax Receivable Agreement commenced upon the IPO and will continue until all tax benefits that are subject to the Tax Receivable Agreement have been utilized or expired, unless we exercise our right to terminate the Tax Receivable Agreement. It is expected that payments will continue to be made under the Tax Receivable Agreement for more than 20 to 25 years. The Tax Receivable Agreement generally provides for the payment by Solaris Inc. to each TRA Holder of 85% of the net cash savings, if any, in U.S. federal, state and local income tax and franchise tax that Solaris 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 of Solaris Inc.'s 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 Reorganization Transactions or pursuant to the exercise of the Redemption Right or the Call Right and (ii) imputed interest deemed to be paid by Solaris Inc. as a result of, and additional tax basis arising from, any payments Solaris Inc. makes under the Tax Receivable Agreement. Solaris Inc. will retain the benefit of the remaining 15% of these cash savings. For additional information regarding the Tax Receivable Agreement, see "Risk FactorsRisks Related to this Offering and Our Class A Common Stock" and see "Certain Relationships and Related Party TransactionsTax Receivable Agreement."
Because we are a holding company with no operations of our own, our ability to make payments under the Tax Receivable Agreement is dependent on the ability of Solaris LLC to make distributions to us in an amount sufficient to cover our obligations under the Tax Receivable Agreement. See "Risk FactorsRisks Related to this Offering and Our Class A Common StockWe are a holding company. Our sole material asset is our equity interest in Solaris LLC and we are accordingly dependent upon distributions from Solaris LLC to pay taxes, make payments under the Tax Receivable Agreement and cover our corporate and other overhead expenses." If we experience a change of control (as defined under the Tax Receivable Agreement, which includes certain mergers, asset sales and other forms of business combinations) or the Tax Receivable Agreement terminates early (at our election or as a result of our breach), we could be required to make a substantial, immediate lump-sum payment. Please see the pro forma financial statements and the related notes thereto appearing elsewhere in this prospectus.
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The following diagram indicates our simplified ownership structure immediately following this offering and the transactions related thereto (assuming that the underwriters' option to purchase additional shares is not exercised):
Principal Executive Offices and Internet Address
Our principal executive offices are located at 9811 Katy Freeway, Suite 900, Houston, Texas 77024, and our telephone number is (281) 501-3070. Our website is at www.solarisoilfield.com. Our periodic reports and other information filed with or furnished to the Securities and Exchange Commission ("SEC") are available, free of charge, through our website, as soon as reasonably practicable after those reports and other information are electronically filed with or furnished to the SEC. Information on our website or any other website is not incorporated by reference into this prospectus and does not constitute a part of this prospectus.
Upon completion of this offering, the Original Investors will own 28,365,823 Solaris LLC Units and 28,365,823 shares of Class B common stock, representing approximately 60.8% of the voting power
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of Solaris Inc. For more information on the ownership of our common stock by our principal stockholders, see "Principal and Selling Stockholders."
We have a valuable relationship with Yorktown Partners LLC, a private investment firm investing exclusively in the energy industry with an emphasis on North American oil and gas production and midstream and oilfield service businesses. Yorktown Partners LLC has raised 11 private equity funds with aggregate partner commitments totaling over $8 billion. Yorktown Partners LLC's investors include university endowments, foundations, families, insurance companies, and other institutional investors. The firm is headquartered in New York.
An investment in our Class A common stock involves risks that include the demand for proppants used in the hydraulic fracturing of oil and natural gas wells, the demand for transloading and other logistics services and other risks. You should carefully consider the risks described under the "Risk Factors" and the other information in this prospectus before investing in our Class A common stock.
Our Emerging Growth Company Status
As a company with less than $1.0 billion in revenue during our last fiscal year, we qualify as an "emerging growth company" as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. As an emerging growth company, we may, for up to five years, take advantage of specified exemptions from reporting and other regulatory requirements that are otherwise applicable generally to public companies. These exemptions include:
We may take advantage of these provisions until we are no longer an emerging growth company, which will occur on the earliest of (i) December 31, 2022, (ii) the last day of the fiscal year in which we have more than $1.07 billion in annual revenue, (iii) the date on which we issue more than $1.0 billion of non-convertible debt over a three-year period and (iv) the date on which we are deemed to be a "large accelerated filer," as defined in Rule 12b-2 promulgated under the Securities Exchange Act of 1934, as amended, or the Exchange Act.
We have elected to take advantage of all of the applicable JOBS Act provisions, except that we have elected to opt out of the exemption that allows emerging growth companies to extend the transition period for complying with new or revised financial accounting standards (this election is irrevocable).
Accordingly, the information that we provide you may be different than what you may receive from other public companies in which you hold equity interests.
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Class A common stock offered by us |
3,000,000 shares. | |
Class A common stock offered by the selling stockholders |
4,000,000 shares (5,050,000 shares if the underwriters' option to purchase additional shares is exercised in full), all of which represent shares to be issued upon redemption of an equivalent number of their Solaris LLC Units (together with a corresponding number of shares of our Class B common stock) prior to completion of this offering. |
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Class A common stock to be outstanding immediately after completion of this offering |
18,316,468 shares (19,366,438 shares if the underwriters' option to purchase additional shares is exercised in full). |
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Class B common stock to be outstanding immediately after completion of this offering |
28,365,823 shares (27,315,823 shares if the underwriters' option to purchase additional shares is exercised in full), or one share for each Solaris LLC Unit held by the Original Investors immediately following this offering. Class B shares are non-economic. When a Solaris LLC Unit is redeemed for a share of Class A common stock, a corresponding share of Class B common stock will be cancelled. |
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Voting power of Class A common stock after giving effect to this offering |
39.2% (or (i) 41.5% if the underwriters' option to purchase additional shares is exercised in full and (ii) 100% if all outstanding Solaris LLC Units held by the Original Investors are redeemed (along with a corresponding number of shares of our Class B common stock) for newly issued shares of Class A common stock on a one-for-one basis). |
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Voting power of Class B common stock after giving effect to this offering |
60.8% (or (i) 58.5% if the underwriters' option to purchase additional shares is exercised in full and (ii) 0% if all outstanding Solaris LLC Units held by the Original Investors are redeemed (along with a corresponding number of shares of our Class B common stock) for newly issued shares of Class A common stock on a one-for-one basis). |
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Voting rights |
Each share of our Class A common stock entitles its holder to one vote on all matters to be voted on by stockholders generally. Each share of our Class B common stock entitles its holder to one vote on all matters to be voted on by stockholders generally. Holders of our Class A common stock and Class B common stock vote together as a single class on all matters presented to our stockholders for their vote or approval, except as otherwise required by applicable law or by our certificate of incorporation. See "Description of Capital Stock." |
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Use of proceeds |
We estimate that, based on an assumed offering price of $16.60 per share, (which is the last reported sales price of our Class A common stock on the New York Stock Exchange on November 6, 2017) and after deducting underwriting discounts and commissions and estimated offering expenses payable by us, we will receive approximately $46.9 million of net proceeds from this offering. We intend to contribute all of the net proceeds we receive from this offering to Solaris LLC in exchange for a number of Solaris LLC Units equal to the number of shares of our Class A common stock issued by us in this offering. Solaris LLC will use the net proceeds of this offering received by us for general corporate purposes, including to fund our 2017 capital program, the majority of which we expect will be used to manufacture additional systems for our fleet and to advance construction of the Kingfisher Facility. We will not receive any proceeds from the sale of shares by the selling stockholders. Please see "Use of Proceeds." |
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Dividend policy |
We currently anticipate that we will retain all future earnings, if any, to finance the growth and development of our business. We do not intend to pay cash dividends in the foreseeable future. Our future dividend policy is within the discretion of our board of directors and will depend upon then-existing conditions, including our results of operations, financial condition, capital requirements, investment opportunities, statutory restrictions on our ability to pay dividends and other factors our board of directors may deem relevant. |
|
Listing symbol |
SOI. |
13
Redemption Rights of Original Investors |
Under the Solaris LLC Agreement, each Original Investor has, subject to certain limitations, the right, pursuant to the Redemption Right, to cause Solaris LLC to acquire all or a portion of its Solaris LLC Units for, at Solaris LLC's election, (x) shares of our Class A common stock at a redemption ratio of one share of Class A common stock for each Solaris LLC Unit redeemed, subject to conversion rate adjustments for stock splits, stock dividends and reclassification and other similar transactions, or (y) an equivalent amount of cash. Alternatively, upon the exercise of the Redemption Right, Solaris Inc. (instead of Solaris LLC) has the right, pursuant to the Call Right, to acquire each tendered Solaris LLC Unit directly from the redeeming Original Investor for, at Solaris Inc.' election, (x) one share of Class A common stock or (y) an equivalent amount of cash. In addition, upon a change of control of Solaris Inc., Solaris Inc. has the right to require each holder of Solaris LLC Units (other than Solaris Inc.) to exercise its Redemption Right with respect to some or all of such unitholder's Solaris LLC Units. In connection with any redemption of Solaris LLC Units pursuant to the Redemption Right or our Call Right, the corresponding number of shares of Class B common stock will be cancelled. See "Certain Relationships and Related Party TransactionsSolaris LLC Agreement." |
|
Tax Receivable Agreement |
Solaris Inc.'s acquisition (or deemed acquisition for U.S. 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 has or is expected to result in adjustments to the tax basis of the tangible and intangible assets of Solaris LLC and such adjustments will be allocated to Solaris Inc. These adjustments would not have been available to Solaris Inc. absent its acquisition or deemed acquisition of Solaris LLC Units and have reduced or are expected to reduce the amount of cash tax that Solaris Inc. would otherwise be required to pay in the future. |
|
|
In connection with the closing of the IPO, we entered into a Tax Receivable Agreement with the TRA Holders which generally provides for the payment by Solaris Inc. to each TRA Holder of 85% of the net cash savings, if any, in U.S. federal, state and local income tax and franchise tax that Solaris Inc. actually realizes or is deemed to realize in certain circumstances in periods after the IPO as a result of certain tax basis increases and certain tax benefits attributable to imputed interest. We will retain the benefit of the remaining 15% of these cash savings. See "Risk FactorsRisks Related to this Offering and our Class A Common Stock" and "Certain Relationships and Related Party TransactionsTax Receivable Agreement." |
14
Risk Factors |
You should carefully read and consider the information beginning on page 20 of this prospectus set forth under the heading "Risk Factors" and all other information set forth in this prospectus before deciding to invest in our Class A common stock. |
The information above does not include 3,298,156 shares of Class A common stock reserved for issuance pursuant to our long-term incentive plan, or 559,681 shares of Class A common stock issuable upon exercise of outstanding stock options.
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SUMMARY HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING DATA
Solaris Inc. was formed in February 2017 and did not have any historical financial or operating results prior to the IPO. Following the IPO, Solaris Inc. became the sole managing member for Solaris LLC. As a result, Solaris Inc. 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 Inc., which reduces net income (loss) attributable to Solaris Inc.'s Class A stockholders. For periods prior to the completion of the IPO, the accompanying consolidated financial statements include the historical financial position and results of operations of Solaris LLC, our predecessor.
The summary historical consolidated financial data as of and for the years ended December 31, 2016 and 2015 was derived from the audited historical consolidated financial statements included elsewhere in this prospectus. The summary historical consolidated interim financial data as of and for the nine months ended September 30, 2017 and 2016 are derived from the unaudited interim condensed consolidated financial statements appearing elsewhere in this prospectus. The unaudited condensed consolidated financial statements have been prepared on the same basis as our audited financial statements and, in our opinion, include all adjustments, consisting of normal recurring adjustments, that are considered necessary for a fair presentation of the financial position, results of operations and cash flows for such periods. Historical results are not necessarily indicative of future results.
The following table summarizes our historical consolidated financial and operating data and should be read together with "Use of Proceeds," "Selected Historical Consolidated Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Corporate Reorganization", our consolidated financial statements and related notes included elsewhere in this prospectus and our unaudited pro forma financial statements and related notes elsewhere in this prospectus.
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Nine Months ended September 30, |
Year ended December 31, |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2017 | 2016 | 2016 | 2015 | |||||||||
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(in thousands, except per share and operating data) |
||||||||||||
Statement of Operations Data: |
|||||||||||||
Revenue |
|||||||||||||
Proppant management system rental |
$ | 34,560 | $ | 8,679 | $ | 14,594 | $ | 8,296 | |||||
Proppant management system services |
7,631 | 2,189 | 3,563 | 3,167 | |||||||||
Proppant management system sale |
| | | 2,742 | |||||||||
| | | | | | | | | | | | | |
Total revenue |
42,191 | 10,868 | 18,157 | 14,205 | |||||||||
Operating costs and expenses |
|||||||||||||
Cost of proppant management system rental (excluding $3,748 and $2,418, and $3,352 and $2,000 of depreciation and amortization for the nine months ended September 30, 2017 and 2016, respectively, and the years ended December 31, 2016 and 2015, respectively, shown separately) |
1,588 | 1,181 | 1,431 | 994 | |||||||||
Cost of proppant management system services (excluding $283 and $111, and $160 and $119 of depreciation and amortization for the nine months ended September 30, 2017 and 2016, respectively, and the years ended December 31, 2016 and 2015, respectively, shown separately) |
8,640 | 3,301 | 4,916 | 3,847 | |||||||||
Cost of proppant management system sale |
| | | 1,948 | |||||||||
Depreciation and amortization |
4,276 | 2,739 | 3,792 | 2,395 | |||||||||
Salaries, benefits and payroll taxes(1) |
5,687 | 1,992 | 3,061 | 3,571 |
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|
Nine Months ended September 30, |
Year ended December 31, |
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---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2017 | 2016 | 2016 | 2015 | |||||||||
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(in thousands, except per share and operating data) |
||||||||||||
Selling, general and administrative (excluding $245 and $210, and $280 and $276 of depreciation and amortization for the nine months ended September 30, 2017 and 2016, respectively, and the years ended December 31, 2016 and 2015, respectively, shown separately) |
3,653 | 1,842 | 2,096 | 2,663 | |||||||||
Other operating expenses |
3,770 | | | | |||||||||
| | | | | | | | | | | | | |
Total operating costs and expenses |
27,614 | 11,055 | 15,296 | 15,418 | |||||||||
| | | | | | | | | | | | | |
Operating income (loss) |
14,577 | (187 | ) | 2,861 | (1,213 | ) | |||||||
Other income (expense): |
|||||||||||||
Interest expense, net |
(71 | ) | (14 | ) | (23 | ) | (22 | ) | |||||
Other income (expense) |
(119 | ) | 7 | 8 | (71 | ) | |||||||
| | | | | | | | | | | | | |
Total other income (expense) |
(190 | ) | (7 | ) | (15 | ) | (93 | ) | |||||
| | | | | | | | | | | | | |
Income (loss) before income tax expense |
14,387 | (194 | ) | 2,846 | (1,306 | ) | |||||||
| | | | | | | | | | | | | |
Provision for income taxes |
(1,137 | ) | (26 | ) | | | |||||||
Income tax expense |
| | 43 | 67 | |||||||||
| | | | | | | | | | | | | |
Net income (loss) |
$ | 13,250 | $ | (220 | ) | $ | 2,803 | $ | (1,373 | ) | |||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Less: net (income) loss related to Solaris LLC |
(3,665 | ) | 220 | (2,803 | ) | 1,373 | |||||||
Less: net income related to non-controlling interests |
(8,049 | ) | | | | ||||||||
| | | | | | | | | | | | | |
Net income attributable to Solaris Inc. |
$ | 1,536 | $ | | $ | | $ | | |||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Earnings per share of Class A common stockbasic(2) |
$ | 0.14 | $ | | $ | | $ | | |||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Earnings per share of Class A common stockdiluted(2) |
$ | 0.14 | $ | | $ | | $ | | |||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Basic weighted-average shares of Class A common stock outstanding(2) |
10,100 | | | | |||||||||
Diluted weighted-average shares of Class A common stock outstanding(2) |
10,552 | | | | |||||||||
Pro forma information(3): |
|||||||||||||
Pro forma net income (loss)(4) |
$ | 16,589 | $ | (1,780 | ) | ||||||||
Pro forma non-controlling interest (income) loss(5) |
$ | (13,932 | ) | (1,480 | ) | ||||||||
| | | | | | | | | | | | | |
Pro forma net income attributable to common stockholders(4) |
$ | 2,657 | $ | (300 | ) | ||||||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Pro forma net income (loss) per share attributable to common stockholders(6) |
|||||||||||||
Basic |
$ | 0.24 | $ | (0.03 | ) | ||||||||
Diluted |
$ | 0.23 | $ | (0.03 | ) | ||||||||
Pro forma weighted-average number of shares(6) |
|||||||||||||
Basic |
10,451 | 10,100 | |||||||||||
Diluted |
10,919 | 10,100 | |||||||||||
Balance Sheet Data (at period end): |
|||||||||||||
Property, plant and equipment, net |
$ | 100,006 | $ | 54,350 | $ | 46,846 | |||||||
Total assets |
217,189 | 77,236 | 70,553 | ||||||||||
Long-term debt (including current portion) |
| 3,041 | 529 | ||||||||||
Total liabilities |
21,790 | 5,890 | 3,085 | ||||||||||
Total stockholders' and members' equity |
195,399 | 71,346 | 67,468 | ||||||||||
Cash Flow Statement Data: |
|||||||||||||
Net cash provided by operating activities |
$ | 12,999 | $ | 768 | $ | 4,521 | $ | 2,156 | |||||
Net cash used in investing activities |
(49,049 | ) | (5,951 | ) | (10,935 | ) | (27,859 | ) | |||||
Net cash provided by financing activities |
86,478 | (161 | ) | 3,059 | 7,878 | ||||||||
Other Data: |
|||||||||||||
Adjusted EBITDA(7) |
$ | 24,704 | $ | 2,667 | $ | 6,788 | $ | 1,659 |
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|
Nine Months ended September 30, |
Year ended December 31, |
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---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2017 | 2016 | 2016 | 2015 | |||||||||
|
(in thousands, except per share and operating data) |
||||||||||||
Revenue days(8) |
10,566 | 3,610 | 5,745 | 2,579 |
Equity-based compensation expense |
$ | 2,097 | $ | 108 | $ | 127 | $ | 64 |
Non-GAAP Financial Measures
EBITDA and Adjusted EBITDA are not measures of net income as determined by GAAP. We define EBITDA as our net income (loss) 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 charges and unusual or non-recurring charges.
EBITDA and Adjusted EBITDA are used as a supplemental financial measures by management and by external users of our financial statements, such as investors and commercial banks, to assess:
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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 titled measures of other companies, thereby diminishing its utility. The following table presents a reconciliation of Net income (loss) to EBITDA and Adjusted EBITDA for each of the periods indicated.
|
Nine Months ended September 30, |
Year ended December 31, |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2017 | 2016 | 2016 | 2015 | |||||||||
|
(in thousands) |
||||||||||||
Net income (loss) |
$ | 13,250 | (220 | ) | $ | 2,803 | $ | (1,373 | ) | ||||
Depreciation and amortization |
4,276 | 2,739 | 3,792 | 2,395 | |||||||||
Interest expense, net |
71 | 14 | 23 | 22 | |||||||||
Income taxes(1) |
1,137 | 26 | 43 | 67 | |||||||||
| | | | | | | | | | | | | |
EBITDA |
$ | 18,734 | 2,559 | $ | 6,661 | $ | 1,111 | ||||||
Sand mining and terminal business development costs(2) |
| | | 446 | |||||||||
Non-recurring organizational costs(3) |
348 | | | | |||||||||
Non-recurring supplier settlement(4) |
| | | 38 | |||||||||
IPO bonuses(5) |
4,046 | | | | |||||||||
Stock-based compensation expense(6) |
1,172 | 108 | 127 | 64 | |||||||||
Loss on disposal of assets |
451 | | | | |||||||||
Change in payable related to parties pursuant to tax receivable agreements |
(83 | ) | | | | ||||||||
Other(7) |
36 | | | | |||||||||
| | | | | | | | | | | | | |
Adjusted EBITDA |
$ | 24,704 | $ | 2,667 | $ | 6,788 | $ | 1,659 | |||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
19
Investing in our Class A common stock involves risks. You should carefully consider the information in this prospectus, including the matters addressed under "Cautionary Statement Regarding Forward-Looking Statements" and the following risks before making an investment decision. The trading price of our Class A common stock could decline due to any of these risks, and you may lose all or part of your investment.
Our business depends on domestic capital spending by the oil and natural gas industry, and reductions in capital spending could have a material adverse effect on our liquidity, results of operations and financial condition.
Our business is directly affected by capital spending to explore for, develop and produce oil and natural gas in the United States. The significant decline in oil and natural gas prices that began in late 2014 caused a reduction in the exploration, development and production activities of most of our customers. In response, we reduced the prices we charge for our systems. If prices remain low, certain of our customers could become unable to pay their vendors and service providers, including us, as a result of the decline in commodity prices. Reduced discovery rates of new oil and natural gas reserves in our areas of operation as a result of decreased capital spending may also have a negative long-term impact on our business, even in an environment of stronger oil and natural gas prices. Any of these conditions or events could adversely affect our operating results. If the recent recovery does not continue or our customers fail to further increase their capital spending, it could have a material adverse effect on our liquidity, results of operations and financial condition.
Industry conditions are influenced by numerous factors over which we have no control, including:
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The volatility of oil and natural gas prices may adversely affect the demand for our systems and services and negatively impact our results of operations.
The demand for our systems and services is primarily determined by current and anticipated oil and natural gas prices and the related levels of capital spending and drilling activity in the areas in which we have operations. Volatility or weakness in oil prices or natural gas prices (or the perception that oil prices or natural gas prices will decrease) affects the spending patterns of our customers and may result in the drilling of fewer new wells. As a result, demand for proppants may decrease, which could, in turn, lead to lower demand for our systems and services and may cause lower prices and lower utilization of our assets. We have, and may in the future, experience significant fluctuations in operating results as a result of the reactions of our customers to changes in oil and natural gas prices. For example, prolonged low commodity prices experienced by the oil and natural gas industry beginning in late 2014 and uncertainty about future prices even when prices increased, combined with adverse changes in the capital and credit markets, caused many E&P companies to significantly reduce their capital budgets and drilling activity. This resulted in a significant decline in demand for oilfield services and adversely impacted the prices oilfield services companies could charge for their services.
Prices for oil and natural gas historically have been extremely volatile and are expected to continue to be volatile. During the past three years, the posted West Texas Intermediate ("WTI") price for oil has ranged from a low of $26.21 per barrel ("Bbl") in February 2016 to a high of $107.26 per Bbl in June 2014. During 2016 and 2017, WTI prices ranged from $26.21 to $57.33 per Bbl. If the prices of oil and natural gas continue to be volatile, reverse their recent increases or decline, our operations, financial condition, cash flows and level of expenditures may be materially and adversely affected.
We face significant competition that may impede our ability to gain market share or cause us to lose market share.
The market for proppant management and logistic services is becoming increasingly competitive. We face competition from proppant producers, pressure pumping companies, transloaders and proppant transporters who also offer solutions for unloading, storing and delivering proppant at well sites and also from competitors who, like us, are exclusively focused on developing more efficient last mile logistics management solutions. Some of these solutions utilize containers for on-site proppant storage, handling delivery and others use silo-based storage as we do. Some of our competitors have
21
greater financial and other resources than we do and may develop technology superior to ours or more cost-effective than ours. Competition in our industry is thus based on price, consistency and quality of products, distribution capability, customer service, reliability of supply, breadth of product offering and technical support. If our competitors are able to respond to industry conditions or trends more rapidly or effectively or resort to price competition, we may be unable to gain or maintain our market share or may lose market share, which could have an adverse effect on our business, results of operations and financial condition.
Technological advancements in well service technologies, including those that reduce the amount of proppant required for hydraulic fracturing operations, could have a material adverse effect on our business, financial condition and results of operations.
Our industry is characterized by rapid and significant technological advancements and introductions of new products and services using new technologies. As competitors and others use or develop new technologies or technologies comparable to ours in the future, we may lose market share or be placed at a competitive disadvantage. Further, we may face competitive pressure to implement or acquire certain new technologies at a substantial cost. Some of our competitors may have greater financial, technical and personnel resources than we do, which may allow them to gain technological advantages or implement new technologies before we can. Additionally, we may be unable to implement new technologies or services at all, on a timely basis or at an acceptable cost. New technology or changes in our customers' well completion designs could also reduce the demand for proppant or the amount of proppant required for hydraulic fracturing activities, thereby reducing or eliminating the need for our systems and services. Limits on our ability to effectively use, implement or adapt to new technologies may have a material adverse effect on our business, financial condition and results of operations.
We may be adversely affected by uncertainty in the global financial markets and the deterioration of the financial condition of our customers.
Our future results may be impacted by the uncertainty caused by an economic downturn, volatility or deterioration in the debt and equity capital markets, inflation, deflation or other adverse economic conditions that may negatively affect us or parties with whom we do business resulting in a reduction in our customers' spending and their non-payment or inability to perform obligations owed to us, such as the failure of customers to honor their commitments or the failure of major suppliers to complete orders. Additionally, during times when the natural gas or crude oil markets weaken, our customers are more likely to experience financial difficulties, including being unable to access debt or equity financing, which could result in a reduction in our customers' spending for our systems and services. In addition, in the course of our business we hold accounts receivable from our customers. In the event of the financial distress or bankruptcy of a customer, we could lose all or a portion of such outstanding accounts receivable associated with that customer. Further, if a customer was to enter into bankruptcy, it could also result in the cancellation of all or a portion of our service contracts with such customer at significant expense or loss of expected revenues to us.
Reliance upon a few large customers may adversely affect our revenue and operating results.
Our top three customers collectively represented approximately 58.1% and 53.2% of our consolidated revenue for the years ended December 31, 2016 and 2015, respectively. It is likely that we will continue to derive a significant portion of our revenue from a relatively small number of customers in the future. If a major customer fails to pay us, revenue would be impacted and our operating results and financial condition could be materially harmed. Additionally, we typically do not enter into long-term contractual agreements with our customers and if we were to lose any material customer, we may not be able to redeploy our equipment at similar utilization or pricing levels or within a short
22
period of time and such loss could have a material adverse effect on our business until the equipment is redeployed at similar utilization or pricing levels.
We are exposed to the credit risk of our customers, and any material nonpayment or nonperformance by our customers could adversely affect our financial results.
We are subject to the risk of loss resulting from nonpayment or nonperformance by our customers, many of whose operations are concentrated solely in the domestic E&P industry which, as described above, is subject to volatility and, therefore, credit risk. Our credit procedures and policies may not be adequate to fully reduce customer credit risk. For example, for the nine months ended September 30, 2017 and the year ended December 31, 2016, we had approximately $0 and $0.1 million of bad debts, respectively, on which we do not expect to collect due to the bankruptcy of a customer. If we are unable to adequately assess the creditworthiness of existing or future customers or unanticipated deterioration in their creditworthiness, any resulting increase in nonpayment or nonperformance by them and our inability to re-market or otherwise use our equipment could have a material adverse effect on our business, financial condition, prospects or results of operations.
The Kingfisher Facility currently only has one contracted customer on which we will initially rely for all of the facility's revenues. We may not be able to replace, extend, or add additional customer contracts or contracted volumes on favorable terms, or at all, which could adversely affect our financial results.
The Kingfisher Facility currently only has one customer contract, which will become effective upon our completed construction of the Kingfisher Facility. We will initially rely on one customer for all of the facility's revenues, and our ability to replace, extend, or add additional customer contracts or increase contracted volumes on favorable terms, or at all, is subject to a number of factors, many of which are beyond our control. Any failure to obtain additional customers at the Kingfisher Facility or the loss of all or a portion of the revenues attributable to our existing customer as a result of competition, creditworthiness, inability to negotiate extensions or replacement of contracts or otherwise, could have a material adverse effect on our business, financial condition, prospects or results of operations. Significant delay or inability to complete construction of the Kingfisher Facility could result in delay of payments from our one contracted customer until such time construction is completed, if at all.
If we are unable to fully protect our intellectual property rights, we may suffer a loss in our competitive advantage or market share.
Our commercial success depends on our patented and proprietary information and technologies, know-how and other intellectual property. Because of the technical nature of our business, we rely on a combination of patent, copyright, trademark and trade secret laws, and restrictions on disclosure to protect our intellectual property. In particular, as of September 30, 2017, we had one patent issued with respect to our mobile proppant management system design and one patent issued with respect to the lifting and lowering mechanism utilized by our systems to erect and lower their silos. We customarily enter into confidentiality or license agreements with our employees, consultants and corporate partners and control access to and distribution of our design information, documentation and other patented and proprietary information. In addition, in the future we may acquire additional patents or patent portfolios, which could require significant cash expenditures. However, third parties may knowingly or unknowingly infringe our patent or other proprietary rights, third parties may challenge patents or proprietary rights held by us, and pending and future trademark and patent applications may not be approved. Failure to protect, monitor and control the use of our existing intellectual property rights could cause us to lose our competitive advantage and incur significant expenses. It is possible that our competitors or others could independently develop the same or similar technologies or otherwise obtain access to our unpatented technologies. In such case, our trade secrets would not prevent third parties
23
from competing with us. Consequently, our results of operations may be adversely affected. Furthermore, third parties or our employees may infringe or misappropriate our patented or proprietary technologies or other intellectual property rights, which could also harm our business and results of operations. Policing unauthorized use of intellectual property rights can be difficult and expensive, and adequate remedies may not be available.
We may be adversely affected by disputes regarding intellectual property rights of third parties.
Third parties from time to time may initiate litigation against us by asserting that the conduct of our business infringes, misappropriates or otherwise violates intellectual property rights. We may not prevail in any such legal proceedings related to such claims, and our systems may be found to infringe, impair, misappropriate, dilute or otherwise violate the intellectual property rights of others. If we are sued for infringement and lose, we could be required to pay substantial damages and/or be enjoined from using or selling the infringing products or technology. Any legal proceeding concerning intellectual property could be protracted and costly regardless of the merits of any claim and is inherently unpredictable and could have a material adverse effect on our financial condition, regardless of its outcome.
If we were to discover that our technologies or products infringe valid intellectual property rights of third parties, we may need to obtain licenses from these parties or substantially re-engineer our products in order to avoid infringement. We may not be able to obtain the necessary licenses on acceptable terms, or at all, or be able to re-engineer our products successfully. If our inability to obtain required licenses for our technologies or products prevents us from selling our products, that could adversely impact our financial condition and results of operations.
Additionally, we currently license certain third party intellectual property in connection with our business, and the loss of any such license could adversely impact our financial condition and results of operations.
Delays, changes or increases in plans or costs with respect to the development of the Kingfisher Facility could delay or prevent anticipated project completion and may result in reduced earnings.
Construction and expansion of the Kingfisher Facility is subject to various regulatory, environmental, political, legal, economic and other development risks, including the ability to obtain necessary approvals on a timely basis or at all. Any delay in project construction, including difficulties in engaging qualified contractors necessary to the construction, shortages of equipment, material or skilled labor, increases in the prices of materials, natural disasters and catastrophes, such as hurricanes, explosions, fires, floods, industrial accidents and terrorism, unscheduled delays in the delivery of ordered materials and work stoppages and labor disputes may prevent a planned project from going into service when anticipated, which could cause a delay in the receipt of revenues from the Kingfisher Facility. A significant construction delay, whatever the cause, may result in reduced earnings and an inability to complete construction of the Kingfisher Facility as initially planned, or at all. These events could have a material adverse effect on our financial condition and results of operations.
Our operations are subject to inherent risks, some of which are beyond our control. These risks may be self-insured, or may not be fully covered under our insurance policies.
Our assets may be affected by natural or man-made disasters and other external events that may disrupt our manufacturing operations. These hazards can also cause personal injury and loss of life, severe damage to and destruction of property and equipment, pollution or environmental damage, and suspension or cancellation of operations. In addition, our operations are subject to, and exposed to, employee/employer liabilities and risks such as wrongful termination, discrimination, labor organizing, retaliation claims and general human resource related matters.
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The occurrence of a significant event or adverse claim in excess of the insurance coverage that we maintain or that is not covered by insurance could have a material adverse effect on our liquidity, results of operations and financial condition. Claims for loss of oil and natural gas production and damage to formations can occur in our industry. Litigation arising from a catastrophic occurrence at a location where our systems are deployed or services are provided may result in our being named as a defendant in lawsuits asserting large claims.
We do not have insurance against all foreseeable risks, either because insurance is not available or because of the high premium costs. The occurrence of an event not fully insured against or the failure of an insurer to meet its insurance obligations could result in substantial losses. In addition, we may not be able to maintain adequate insurance in the future at rates we consider reasonable. Insurance may not be available to cover any or all of the risks to which we are subject, or, even if available, it may be inadequate, or insurance premiums or other costs could rise significantly in the future so as to make such insurance prohibitively expensive.
Our assets require capital for maintenance, upgrades and refurbishment and may require significant capital expenditures for new equipment.
Our systems and facilities require capital investment in maintenance, upgrades and refurbishment to maintain their competitiveness. The costs of components and labor have increased in the past and may increase in the future with increases in demand, which will require us to incur additional costs to upgrade our facilities or any systems we may manufacture in the future. Any maintenance, upgrade or refurbishment project for our assets could increase our indebtedness or reduce cash available for other opportunities. Furthermore, such projects may require proportionally greater capital investments as a percentage of total asset value, which may make such projects difficult to finance on acceptable terms. To the extent we are unable to fund such projects, we may have less equipment available for service or our equipment may not be attractive to potential or current customers. Additionally, competition or advances in technology within our industry may require us to update or replace existing facilities or systems or build or acquire new ones. Such demands on our capital or reductions in demand for our systems and services and the increase in cost of labor necessary for such maintenance and improvement, in each case, could have a material adverse effect on our business, liquidity position, financial condition, prospects and results of operations and may increase our costs.
We rely on a limited number of third party manufacturers to supplement our internal production capacity during periods of peak demand, and delays in deliveries of any outsourced components or increases in the cost of such outsourced components could harm our business, results of operations and financial condition.
We have established relationships with a limited number of manufacturers that fabricate certain components of our systems during periods of peak demand to supplement our internal production capacity. Should any of these third-party manufacturers be unable to provide or otherwise fail to deliver such components in a timely manner and in the quantities required, any resulting delays in the provision of such components could have a material adverse effect on our business, results of operations and financial condition. Additionally, increasing costs of manufacturing such outsourced components may negatively impact demand for our systems or the profitability of our business operations.
We currently rely on a limited number of suppliers for certain equipment to build our systems, and our reliance on a limited number of suppliers for such equipment exposes us to risks including price and timing of delivery.
We currently rely on a limited number of suppliers for certain equipment to build our systems. If demand for our systems or the components necessary to build such systems increases or our suppliers for our equipment face financial distress or bankruptcy, our suppliers may not be able to provide such
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equipment on schedule or at the current price. In particular, steel is the principal raw material used in the manufacture of our systems, and the price of steel has historically fluctuated on a cyclical basis and has often depended on a variety of factors over which we have no control. Additionally, we depend on one supplier for the motors that we use in our systems, which are a critical component. If our suppliers are unable to provide the raw materials and components needed to build our systems on schedule or at the current price, we could be required to seek other suppliers for the raw materials and components needed to build and operate our systems, which may adversely affect our revenues or increase our costs.
Our business depends on our customers having access to an adequate supply of proppant to meet their needs.
Although there have been historical shortages of proppant during various periods, including between 2011 and 2014, increased proppant mining, among other trends, has resulted in production of proppant that we believe exceeds current demand. Because our business depends upon the availability of proppant to our customers, any future proppant shortages could decrease the demand for our systems and services and have a material adverse effect on our operations, prospects and financial condition.
Fluctuations in transportation costs or the availability or reliability of transportation to supply our proppant management systems and transloading services could impair the ability of our customers to take delivery of proppant and thereby adversely impact our business.
Disruption of proppant transportation services due to shortages of rail cars, pneumatic trucks, weather-related problems, flooding, drought, accidents, mechanical difficulties, strikes, lockouts, bottlenecks or other events could temporarily impair the ability of our customers to take delivery of proppant at the well site or our ability to provide transloading services. Accordingly, if there are disruptions of the services utilized by our customers (whether these services are provided by us or a third party), and they are unable to find alternative transportation providers to transport proppants to the well site, our business could be adversely affected.
A number of our customers operate in urban areas, which could increase the costs of deploying our systems and/or decrease the demand for our systems.
A number of our current and potential customers operate in urban areas, which could disproportionately expose them to operational and regulatory risk in that area. For example, operations within the city limits of various municipalities in northeastern Colorado may involve additional expenses, including expenses relating to mitigation of noise, odor and light that may be emitted in the deployment of our systems, expenses related to the appearance of our systems and limitations regarding when and how our customers can operate our systems. In addition, we and our customers may experience a higher rate of litigation or increased insurance and other costs related to the deployment of our systems in such highly populated areas.
We may have difficulty managing growth of our business, which could adversely affect our financial condition and results of operations.
As a recently formed company, growth of our business could place a significant strain on our financial, technical, operational and management resources. As we expand the scope of our activities and our geographic coverage through organic growth, there will be additional demands on our financial, technical, operational and management resources. The failure to continue to upgrade our technical, administrative, operating and financial control systems or the occurrences of unexpected expansion difficulties, including the failure to recruit and retain experienced managers, engineers and other professionals in the oilfield services industry, could have a material adverse effect on our
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business, financial condition, results of operations and our ability to successfully or timely execute our business plan.
Federal, state and local legislative and regulatory initiatives relating to hydraulic fracturing as well as governmental reviews of such activities may serve to limit future oil and natural gas exploration and production activities and could have a material adverse effect on our results of operations and business.
We do not conduct hydraulic fracturing but as our primary line of business, we do rent our systems and unload, store and deliver the proppants used in such systems, as well as provide transloading and other logistics services for our customers, who rely on hydraulic fracturing to stimulate production of natural gas and/or oil from dense subsurface rock formations. Hydraulic fracturing is an important and common practice that is typically regulated by state oil and gas commissions or similar agencies.
However, several federal agencies have asserted regulatory authority or pursued investigations over certain aspects of the hydraulic fracturing process. For example, in February 2014, the U.S. Environmental Protection Agency ("EPA") asserted regulatory authority pursuant to the U.S. Safe Drinking Water Act's ("SDWA") Underground Injection Control ("UIC") program over hydraulic fracturing activities involving the use of diesel and issued guidance covering such activities. Also, beginning in 2012, the EPA issued a series of regulations under the federal Clean Air Act ("CAA") that include New Source Performance Standards ("NSPS"), known as Subpart OOOO, for completions of hydraulically fractured natural gas wells and certain other plants and equipment and, in June 2016, published a final rule establishing new emissions standards, known as Subpart OOOOa, for methane and volatile organic compounds ("VOCs") from certain new, modified and reconstructed equipment and processes in the oil and natural gas source category. However, in April 2017, the EPA announced that it would review this June 2016 methane rule and on July 16, 2017, the EPA issued a proposed rule that would stay subpart OOOOa for two years, but this proposed rule is not yet final and may be subject to legal challenges. Legal uncertainty exists with respect to the future implementation of the methane rule. The federal Bureau of Land Management ("BLM") published a final rule in March 2015 that established new or more stringent standards relating to hydraulic fracturing on federal and American Indian lands, which rule was struck down by a federal judge in June 2016. That decision was subsequently appealed to the U.S. Circuit Court of Appeals for the Tenth Circuit but in March and May 2017 it was the subject of BLM filings in the appeal seeking that the court hold the case in abeyance pending rescission of the rule. In July 2017, the BLM published a proposed rule to rescind the 2015 rule, and, on September 21, 2017, the Tenth Circuit vacated the district court's decision and dismissed the lawsuit challenging the 2015 final rule given the BLM's proposed rulemaking. As a result of these developments, future implantation of the BLM rule is uncertain at this time. Also, in December 2016, the EPA released its final report on the potential impacts of hydraulic fracturing on drinking water resources, concluding that "water cycle" activities associated with hydraulic fracturing may impact drinking water resources under certain circumstances.
From time to time, legislation has been introduced in Congress to provide for federal regulation of hydraulic fracturing and to require disclosure of the chemicals used in the hydraulic fracturing process but, to date, such legislation has not been adopted. Also, some states and local governments have adopted, and other governmental entities have, from time to time, considered adopting, regulations that could impose more stringent permitting, disclosure and well-construction requirements on hydraulic fracturing operations, including states where we or our customers operate.
Moreover, our customers typically dispose of flowback and produced water or certain other oilfield fluids gathered from oil and natural gas producing operations in underground disposal wells. This disposal process has been linked to increased induced seismicity events in certain areas of the country, particularly in Oklahoma, Texas, Colorado, Kansas, New Mexico and Arkansas. These and other states have begun to consider or adopt laws and regulations that may restrict or otherwise prohibit oilfield fluid disposal in certain areas or underground disposal wells, and state agencies implementing these
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requirements may issue orders directing certain wells where seismic incidents have occurred to restrict or suspend disposal well operations or impose standards related to disposal well construction and monitoring. Any one or more of these developments may result in our customers having to limit disposal well volumes, disposal rates or locations, or require our customers or third party disposal well operators that are used by our customers to cease disposal well activities, which developments could adversely affect our customers' business and result in a corresponding decrease in the need for our systems and services, which could have a material adverse effect on our business, financial condition, and results of operations.
Increased regulation and attention given to the hydraulic fracturing process and associated processes could lead to greater opposition to, and litigation concerning, oil and natural gas production activities using hydraulic fracturing techniques. Additional legislation or regulation could also lead to operational delays for our customers or increased operating costs in the production of oil and natural gas, including from developing shale plays, or could make it more difficult for our customers to perform hydraulic fracturing. The adoption of any federal, state or local laws or the implementation of regulations regarding hydraulic fracturing could potentially cause a decrease in the completion of new oil and natural gas wells and an associated decrease in demand for our systems and services and increased compliance costs and time, which could have a material adverse effect on our liquidity, results of operations, and financial condition.
Finally, water is an essential component of shale oil and natural gas production during both the drilling and hydraulic fracturing processes. Our customers' access to water to be used in these processes may be adversely affected due to reasons such as periods of extended drought, private, third party competition for water in localized areas or the implementation of local or state governmental programs to monitor or restrict the beneficial use of water subject to their jurisdiction for hydraulic fracturing to assure adequate local water supplies. Our customers' inability to locate or contractually acquire and sustain the receipt of sufficient amounts of water could adversely impact their exploration and production operations and have a corresponding adverse effect on our business, results of operations and financial condition.
Changes in transportation regulations may increase our costs and negatively impact our results of operations.
We are subject to various transportation regulations including as a motor carrier by the U.S. Department of Transportation and by various federal, state and tribal agencies, whose regulations include certain permit requirements of highway and safety authorities. These regulatory authorities exercise broad powers over our trucking operations, generally governing such matters as the authorization to engage in motor carrier operations, safety, equipment testing, driver requirements and specifications and insurance requirements. The trucking industry is subject to possible regulatory and legislative changes that may impact our operations, such as changes in fuel emissions limits, hours of service regulations that govern the amount of time a driver may drive or work in any specific period and limits on vehicle weight and size. As the federal government continues to develop and propose regulations relating to fuel quality, engine efficiency and greenhouse gas emissions, we may experience an increase in costs related to truck purchases and maintenance, impairment of equipment productivity, a decrease in the residual value of vehicles, unpredictable fluctuations in fuel prices and an increase in operating expenses. Increased truck traffic may contribute to deteriorating road conditions in some areas where our operations are performed. Our operations, including routing and weight restrictions, could be affected by road construction, road repairs, detours and state and local regulations and ordinances restricting access to certain roads. Proposals to increase federal, state or local taxes, including taxes on motor fuels, are also made from time to time, and any such increase would increase our operating costs. Also, state and local regulation of permitted routes and times on specific roadways could adversely affect our operations. We cannot predict whether, or in what form, any legislative or regulatory changes or municipal ordinances applicable to our logistics operations will be enacted and to
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what extent any such legislation or regulations could increase our costs or otherwise adversely affect our business or operations.
We are subject to environmental and occupational health and safety laws and regulations that may expose us to significant costs and liabilities.
Our operations and the operations of our customers are subject to numerous federal, regional, state and local laws and regulations relating to worker health and safety, protection of natural resources and the environment, and waste management, including the transportation and disposal of wastes and other materials. Numerous governmental entities, including the EPA and analogous state agencies have the power to enforce compliance with these laws and regulations and the permits issued under them, often requiring difficult and costly actions. These laws and regulations may impose numerous obligations on our operations and the operations of our customers, including the acquisition of permits to conduct regulated activities, the imposition of restrictions on the types, quantities and concentrations of various substances that can be released into the environment or injected in formations in connection with oil and natural gas drilling and production activities, the incurrence of capital expenditures to mitigate or prevent releases of materials from our equipment, facilities or from customer locations where we are deploying our systems and providing our services, the imposition of substantial liabilities for pollution resulting from our operations, and the application of specific health and safety criteria addressing worker protection. Any failure on our part or the part of our customers to comply with these laws and regulations could result in prohibitions or restrictions on operations, assessment of sanctions including administrative, civil and criminal penalties, issuance of corrective action orders requiring the performance of investigatory, remedial or curative activities or enjoining performance of some or all of our operations in a particular area. In particular, under certain circumstances, environmental agencies may delay or refuse to grant required approvals or cancel or amend existing permits or leases that may relate to our customers' operations, in which event such operations may be interrupted or suspended for varying lengths of time, causing a reduced demand for our systems and services, an associated loss of revenue to us and adversely affecting our results of operations in support of those customers.
Our business activities present risks of incurring significant environmental costs and liabilities, including costs and liabilities resulting from our handling of regulated materials, such as oilfield and other wastes, because of air emissions and wastewater discharges related to our operations, and due to historical oilfield industry operations and waste disposal practices. In addition, private parties, including the owners of properties upon which we deploy our systems or provide our services and facilities where our wastes are taken for reclamation or disposal, also may have the right to pursue legal actions to enforce compliance as well as to seek damages for non-compliance with environmental laws and regulations or for personal injury or property or natural resource damages. Some environmental laws and regulations may impose strict liability, which means that in some situations we could be exposed to liability as a result of our conduct that was lawful at the time it occurred or the conduct of, or conditions caused by, prior operators or other third parties. Remedial costs and other damages arising as a result of environmental laws and costs associated with changes in environmental laws and regulations could be substantial and could have a material adverse effect on our liquidity, results of operations and financial condition.
Laws and regulations protecting the environment generally have become more stringent in recent years and are expected to continue to do so, which could lead to material increases in costs for future environmental compliance and remediation. Changes in existing laws or regulations, or the adoption of new laws or regulations, could delay or curtail exploratory or developmental drilling for oil and natural gas and could have a corresponding adverse effect on us by reducing the demand for our systems and services. We may not be able to recover some or any of our costs of compliance with these laws and regulations from insurance.
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Silica-related legislation, health issues and litigation could have a material adverse effect on our business, reputation or results of operations.
We are subject to laws and regulations relating to human exposure to crystalline silica. In March 2016, OSHA amended its legal requirements, publishing a final rule that established a more stringent permissible exposure limit for exposure to respirable crystalline silica and provided other provisions to protect employees, such as requirements for exposure assessment, methods for controlling exposure, respiratory protection, medical surveillance, hazard communication, and recordkeeping. This final rule became effective in June 2016 and compliance deadlines with respect to hydraulic fracturing will apply on June 23, 2018. However, several industry groups have filed suit in the D.C. Circuit to halt implementation of the rule. Historically, our environmental compliance costs with respect to existing crystalline silica requirements have not had a material adverse effect on our results of operations; however, federal and state regulatory authorities, including OSHA, may continue to propose changes in their regulations regarding workplace exposure to crystalline silica, such as permissible exposure limits and required controls and personal protective equipment and we can provide no assurance that we will be able to comply with any future laws and regulations relating to exposure to crystalline silica that are adopted, or that the costs of complying with such future laws and regulations would not have a material adverse effect on our operating results by requiring us to modify or cease our operations.
In addition, the inhalation of respirable crystalline silica is associated with the lung disease silicosis. There is recent evidence of an association between crystalline silica exposure or silicosis and lung cancer and a possible association with other diseases, including immune system disorders such as scleroderma. These health risks have been, and may continue to be, a significant issue confronting the hydraulic fracturing industry. Concerns over silicosis and other potential adverse health effects, as well as concerns regarding potential liability from the use of hydraulic fracture sand, may have the effect of discouraging our customers' use of hydraulic fracture sand. The actual or perceived health risks of handling hydraulic fracture sand could materially and adversely affect hydraulic fracturing service providers, including us, through reduced use of hydraulic fracture sand, the threat of product liability or employee lawsuits, increased scrutiny by federal, state and local regulatory authorities of us and our customers or reduced financing sources available to the hydraulic fracturing industry.
Anti-indemnity provisions enacted by many states may restrict or prohibit a party's indemnification of us.
We typically enter into agreements with our customers governing the use and operation of our systems and services, which usually include certain indemnification provisions for losses resulting from operations. Such agreements may require each party to indemnify the other against certain claims regardless of the negligence or other fault of the indemnified party; however, many states place limitations on contractual indemnity agreements, particularly agreements that indemnify a party against the consequences of its own negligence. Furthermore, certain states, including Louisiana, New Mexico, Texas and Wyoming have enacted statutes generally referred to as "oilfield anti-indemnity acts" expressly prohibiting certain indemnity agreements contained in or related to oilfield services agreements. Such anti-indemnity acts may restrict or void a party's indemnification of us, which could have a material adverse effect on our business, financial condition, prospects and results of operations.
Fuel conservation measures could reduce demand for oil and natural gas which would in turn reduce the demand for our systems and services.
Fuel conservation measures, alternative fuel requirements and increasing consumer demand for alternatives to oil and natural gas could reduce demand for oil and natural gas. The impact of the changing demand for oil and natural gas may have a material adverse effect on our business, financial condition, prospects, results of operations and cash flows. Additionally, the increased competitiveness of alternative energy sources (such as wind, solar geothermal, tidal, and biofuels) could reduce demand
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for hydrocarbons and therefore for our systems and services, which would lead to a reduction in our revenues.
Unsatisfactory safety performance may negatively affect our customer relationships and, to the extent we fail to retain existing customers or attract new customers, adversely impact our revenues.
Our ability to retain existing customers and attract new business is dependent on many factors, including our ability to demonstrate that we can reliably and safely operate our business in a manner that is consistent with applicable laws, rules and permits, which legal requirements are subject to change. Existing and potential customers consider the safety record of their third-party service providers to be of high importance in their decision to engage such providers. If one or more accidents were to occur in connection with the use of our systems or performance of our services, the affected customer may seek to terminate or cancel its use of our services and may be less likely to continue to use our systems, which could cause us to lose substantial revenues. Furthermore, our ability to attract new customers may be impaired if they elect not to engage us because they view our safety record as unacceptable. In addition, it is possible that we will experience multiple or particularly severe accidents in the future, causing our safety record to deteriorate. This may be more likely as we continue to grow, if we experience high employee turnover or labor shortage, or hire inexperienced personnel to bolster our staffing needs.
Climate change legislation and regulations restricting or regulating emissions of greenhouse gases could result in increased operating and capital costs for our customers and reduced demand for our systems and services.
Climate change continues to attract considerable public and scientific attention. As a result, numerous proposals have been made and are likely to continue to be made at the international, national, regional and state levels of government to monitor and limit emissions of greenhouse gases ("GHGs"). While no comprehensive climate change legislation has been implemented at the federal level, the EPA and states or groupings of states have pursued legal initiatives in recent years that seek to reduce GHG emissions through efforts that include consideration of cap-and-trade programs, carbon taxes, GHG reporting and tracking programs and regulations that directly limit GHG emissions from certain sources. In particular, the EPA has adopted rules under authority of the CAA that, among other things, establish certain permit reviews for GHG emissions from certain large stationary sources, which reviews could require securing permits at covered facilities emitting GHGs and meeting defined technological standards for those GHG emissions. The EPA has also adopted rules requiring the monitoring and annual reporting of GHG emissions from certain petroleum and natural gas system sources in the United States, including, among others, onshore production.
Federal agencies also have begun directly regulating emissions of methane, a GHG, from oil and natural gas operations. In June 2016, the EPA published a final rule establishing NSPS Subpart OOOOa, that requires certain new, modified or reconstructed facilities in the oil and natural gas sector to reduce these methane gas and VOC emissions. However, in April 2017, the EPA announced that it would review this 2016 methane rule and would initiate reconsideration proceedings to potentially revise or rescind portions of the rule. Subsequently, effective June 2, 2017, the EPA issued a 90-day stay of certain requirements under the methane rule, but this stay was vacated by a three-judge panel of the U.S. Court of Appeals for the D.C. Circuit on July 3, 2017 and on August 10, 2017, the D.C. Circuit rejected petitions for an en banc review of its July 3, 2017 ruling. In the interim, on July 16, 2017, the EPA issued a proposed rule that would stay subpart OOOOa for two years, but this proposed rule is not yet final and may be subject to legal challenges. Legal uncertainty exists with respect to the future implementation of the methane rule. Additionally, in December 2015, the United States joined the international community at the 21st Conference of the Parties of the United Nations Framework Convention on Climate Change in Paris, France that prepared an agreement requiring member countries to review and "represent a progression" in their intended nationally determined
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contributions, which set GHG emission reduction goals every five years beginning in 2020. This "Paris agreement" was signed by the United States in April 2016 and entered into force in November 2016; however, this agreement does not create any binding obligations for nations to limit their GHG emissions. On June 1, 2017, President Trump announced that the United States plans to withdraw from the Paris Agreement and to seek negotiations either to re-enter the Paris Agreement on different terms or to establish a new framework agreement. The Paris Agreement provides for a four-year exit date of November 2020. The United States' adherence to the exit process and/or the terms on which the United States may re-enter the Paris Agreement or a separately negotiated agreement are unclear at this time.
The adoption and implementation of any international, federal or state legislation or regulations that require reporting of GHGs or otherwise restrict emissions of GHGs could result in increased compliance costs or additional operating restrictions, and could have a material adverse effect on our business, financial condition, demand for our systems and services, results of operations, and cash flows.
Finally, increasing concentrations of GHG in the Earth's atmosphere may produce climate changes that have significant physical effects, such as increased frequency and severity of storms, droughts, floods and other climatic events. If any such climate changes were to occur, they could have an adverse effect on our financial condition and results of operations and the financial condition and operations of our customers.
Any future indebtedness could adversely affect our financial condition.
Although we currently have no indebtedness outstanding under our Amended Credit Facility (as defined in "Management's Discussion and Analysis of Financial Condition and Results of OperationDebt Agreements"), our Amended Credit Facility has a borrowing capacity of up to $20.0 million.
In addition, subject to the limits contained in our Amended Credit Facility, we may incur additional debt from time to time. Any borrowings we may incur in the future would have several important consequences for our future operations, including that:
If we incur indebtedness in the future, we may have significant principal payments due at specified future dates under the documents governing such indebtedness. Our ability to meet such principal obligations will be dependent upon future performance, which in turn will be subject to general economic conditions, industry cycles and financial, business and other factors affecting our operations, many of which are beyond our control. Our business may not continue to generate sufficient cash flow from operations to repay any incurred indebtedness. If we are unable to generate sufficient cash flow from operations, we may be required to sell assets, to refinance all or a portion of such indebtedness or to obtain additional financing.
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Our Amended Credit Facility subjects us to various financial and other restrictive covenants. These restrictions may limit our operational or financial flexibility and could subject us to potential defaults under our Amended Credit Facility.
Our Amended Credit Facility subjects us to significant financial and other restrictive covenants, including, but not limited to, restrictions on incurring additional debt and certain distributions. Our ability to comply with these financial condition tests can be affected by events beyond our control and we may not be able to do so.
Our Amended Credit Facility contains certain financial covenants, including a certain leverage ratio and a certain minimum fixed charge coverage ratio we must maintain. Please see "Management's Discussion and Analysis of Financial Condition and Results of OperationDebt Agreements."
If we are unable to remain in compliance with the financial covenants of our Amended Credit Facility, then amounts outstanding thereunder may be accelerated and become due immediately. Any such acceleration could have a material adverse effect on our financial condition and results of operations.
Increases in interest rates could adversely impact the price of our shares, our ability to issue equity or incur debt for acquisitions or other purposes.
Interest rates on future borrowings, credit facilities and debt offerings could be higher than current levels, causing our financing costs to increase accordingly. Changes in interest rates, either positive or negative, may affect the yield requirements of investors who invest in our shares, and a rising interest rate environment could have an adverse impact on the price of our shares, our ability to issue equity or incur debt for acquisitions or other purposes.
Our business is difficult to evaluate because we have a limited operating history.
We were formed in February 2017 and have limited historical financial and operating results. For purposes of this prospectus, our accounting predecessor is Solaris LLC, which was formed in July 2014. For periods prior to the IPO, our historical financial information and operational data described in this prospectus is that of Solaris LLC and its consolidated subsidiaries. As a result, there is only limited historical financial and operating information available upon which to base your evaluation of our performance.
We rely on a few key employees whose absence or loss could adversely affect our business.
Many key responsibilities within our business have been assigned to a small number of employees. The loss of their services could adversely affect our business. In particular, the loss of the services of one or more members of our executive team, including our chief executive officer or chief financial officer, could disrupt our operations. We do not have any written employment agreement with our executives at this time. Further, we do not maintain "key person" life insurance policies on any of our employees. As a result, we are not insured against any losses resulting from the death of our key employees.
If we are unable to access the services of a sufficient number of skilled and qualified workers, our capacity and profitability could be diminished and our growth potential could be impaired.
The manufacture and delivery of our products and performance of our services requires skilled and qualified workers with specialized skills and experience who can perform physically demanding work. As a result of the volatility of the oilfield services industry and the demanding nature of the work, workers may choose to pursue employment in fields that offer a more desirable work environment at wage rates that are competitive. Our ability to be productive and profitable will depend
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upon our ability to have access to the services of skilled workers. In addition, our ability to expand our operations depends in part on our ability to increase the size of our skilled labor force. The demand for skilled workers is high, and the supply is limited. As a result, competition for experienced personnel is intense, and a significant increase in the wages paid by competing employers could result in a reduction of our skilled labor force, increases in the rates that we must pay, or both. If either of these events were to occur, our capacity and profitability could be diminished and our growth potential could be impaired.
We may be subject to risks in connection with acquisitions.
We have completed and may, in the future, pursue asset acquisitions or acquisitions of businesses. The process of upgrading acquired assets to our specifications and integrating acquired assets or businesses may involve unforeseen costs and delays or other operational, technical and financial difficulties and may require a significant amount time and resources. Our failure to incorporate acquired assets or businesses into our existing operations successfully or to minimize any unforeseen operational difficulties could have a material adverse effect on our financial condition and results of operations. Such events could also mean an acquisition that we expected to be accretive is not accretive and, in extreme cases, the asset is idle.
Our industry overall has experienced a high rate of employee turnover. Any difficulty we experience replacing or adding personnel could have a material adverse effect on our liquidity, results of operations and financial condition.
We are dependent upon the available labor pool of skilled employees and may not be able to find enough skilled labor to meet our needs, which could have a negative effect on our growth. We are also subject to the Fair Labor Standards Act, which governs such matters as minimum wage, overtime and other working conditions. Our systems and services require skilled workers who can perform physically demanding work. As a result of our industry volatility, including the recent and pronounced decline in drilling activity, as well as the demanding nature of the work, many workers in our industry have left to pursue employment in different fields. Though our historical turnover rates have been significantly lower than those of our competitors, if we are unable to retain or meet growing demand for skilled technical personnel, our operating results and our ability to execute our growth strategies may be adversely affected.
We may be subject to claims for personal injury and property damage, which could materially adversely affect our financial condition, prospects and results of operations.
Our systems and services are subject to inherent risks that can cause personal injury or loss of life, damage to or destruction of property, equipment or the environment or the suspension of our operations. Litigation arising from operations where our systems are deployed or services are provided, may cause us to be named as a defendant in lawsuits asserting potentially large claims including claims for exemplary damages. We maintain what we believe is customary and reasonable insurance to protect our business against these potential losses, but such insurance may not be adequate to cover our liabilities, and we are not fully insured against all risks.
In addition, our customer assumes responsibility for, including control and removal of, all other pollution or contamination which may occur during operations, including that which may result from seepage or any other uncontrolled flow of drilling and completion fluids. We may have liability in such cases if we are negligent or commit willful acts. Our customers generally agree to indemnify us against claims arising from their employees' personal injury or death to the extent that, in the case of our well site services, their employees are injured or their properties are damaged by such services, unless resulting from our gross negligence or willful misconduct. Our customers also generally agree to indemnify us for loss or destruction of customer-owned property or equipment. In turn, we agree to
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indemnify our customers for loss or destruction of property or equipment we own and for liabilities arising from personal injury to or death of any of our employees, unless resulting from gross negligence or willful misconduct of the customer. However, we might not succeed in enforcing such contractual allocation or might incur an unforeseen liability falling outside the scope of such allocation. As a result, we may incur substantial losses which could materially and adversely affect our financial condition and results of operation.
Seasonal weather conditions and natural disasters could severely disrupt normal operations and harm our business.
Our operations are located in different regions of the United States, some of which are prone to periods of heavy snow, ice or rain and others of which may be prone to certain natural disasters such as tornadoes. The occurrence of any such severe weather conditions or natural disasters could cause our E&P customers to suspend operations, thereby reducing the demand for our systems and services and our ability to generate revenues. The exploration activities of our customers may also be affected during such periods of adverse weather conditions. Additionally, extended drought conditions in our operating regions could impact our ability or our customers' ability to source sufficient water or increase the cost for such water. As a result, a natural disaster or inclement weather conditions could severely disrupt the normal operation of our business and adversely impact our financial condition and results of operations.
We may be subject to interruptions or failures in our information technology systems.
We rely on sophisticated information technology systems and infrastructure to support our business, including process control technology. Any of these systems may be susceptible to outages due to fire, floods, power loss, telecommunications failures, usage errors by employees, computer viruses, cyber-attacks or other security breaches, or similar events. The failure of any of our information technology systems may cause disruptions in our operations, which could adversely affect our sales and profitability.
We are subject to cyber security risks. A cyber incident could occur and result in information theft, data corruption, operational disruption and/or financial loss.
The oil and natural gas industry has become increasingly dependent on digital technologies to conduct certain processing activities. For example, we depend on digital technologies to deliver our systems and perform many of our services and to process and record financial and operating data. At the same time, cyber incidents, including deliberate attacks, have increased. The U.S. government has issued public warnings that indicate that energy assets might be specific targets of cyber security threats. Our technologies, systems and networks, and those of our vendors, suppliers and other business partners, may become the target of cyberattacks or information security breaches that could result in the unauthorized release, gathering, monitoring, misuse, loss or destruction of proprietary and other information, or other disruption of business operations. In addition, certain cyber incidents, such as surveillance, may remain undetected for an extended period. Our systems for protecting against cyber security risks may not be sufficient. As cyber incidents continue to evolve, we will likely be required to expend additional resources to continue to modify or enhance our protective measures or to investigate and remediate any vulnerability to cyber incidents.
A terrorist attack or armed conflict could harm our business.
The occurrence or threat of terrorist attacks in the United States or other countries, anti-terrorist efforts and other armed conflicts involving the United States or other countries, including continued hostilities in the Middle East, may adversely affect the United States and global economies and could prevent us from meeting our financial and other obligations. If any of these events occur, the resulting
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political instability and societal disruption could reduce overall demand for oil and natural gas, potentially putting downward pressure on demand for our systems and services and causing a reduction in our revenues. Oil and natural gas related facilities could be direct targets of terrorist attacks, and our operations could be adversely impacted if infrastructure integral to our customers' operations is destroyed or damaged. Costs for insurance and other security may increase as a result of these threats, and some insurance coverage may become more difficult to obtain, if available at all.
We engage in transactions with related parties and such transactions present possible conflicts of interest that could have an adverse effect on us.
We have entered into a significant number of transactions with related parties. The details of certain of these transactions are set forth in the section "Certain Relationships and Related Party Transactions." Related party transactions create the possibility of conflicts of interest with regard to our management or directors. Such a conflict could cause an individual in our management or on our board of directors to seek to advance his or her economic interests above ours. Further, the appearance of conflicts of interest created by related party transactions could impair the confidence of our investors. Our board of directors regularly reviews these transactions. Notwithstanding this, it is possible that a conflict of interest could have a material adverse effect on our liquidity, results of operations and financial condition.
Our historical financial statements may not be indicative of future performance.
Due to our limited operating history, comparisons of our current and future operating results with prior periods are difficult. As a result, our limited historical financial performance may make it difficult for stockholders to evaluate our business and results of operations to date and to assess our future prospects and viability.
We may record losses or impairment charges related to idle assets or assets that we sell.
Prolonged periods of low utilization, changes in technology or the sale of assets below their carrying value may cause us to experience losses. These events could result in the recognition of impairment charges that negatively impact our financial results. Significant impairment charges as a result of a decline in market conditions or otherwise could have a material adverse effect on our results of operations in future periods.
Risks Related to this Offering and Our Class A Common Stock
We are a holding company. Our sole material asset is our equity interest in Solaris LLC and we are accordingly dependent upon distributions from Solaris LLC to pay taxes, make payments under the Tax Receivable Agreement and cover our corporate and other overhead expenses.
We are a holding company and have no material assets other than our equity interest in Solaris LLC. Please see "SummaryOur Initial Public Offering and Corporate Structure." We have no independent means of generating revenue. To the extent Solaris LLC has available cash, we intend to cause Solaris LLC to make (i) generally pro rata distributions to its unitholders, including us, in an amount at least sufficient to allow us to pay our taxes and to make payments under the Tax Receivable Agreement and any subsequent tax receivable agreements that we may enter into in connection with future acquisitions and (ii) non-pro rata payments to us to reimburse us for our corporate and other overhead expenses. To the extent that we need funds and Solaris LLC or its subsidiaries are restricted from making such distributions or payments under applicable law or regulation or under the terms of any future financing arrangements, or are otherwise unable to provide such funds, our liquidity and financial condition could be materially adversely affected.
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Moreover, because we have no independent means of generating revenue, our ability to make payments under the Tax Receivable Agreement is dependent on the ability of Solaris LLC to make distributions to us in an amount sufficient to cover our obligations under the Tax Receivable Agreement. This ability, in turn, may depend on the ability of Solaris LLC's subsidiaries to make distributions to it. The ability of Solaris LLC, its subsidiaries and other entities in which it directly or indirectly holds an equity interest to make such distributions is subject to, among other things, (i) the applicable provisions of Delaware law (or other applicable jurisdiction) that may limit the amount of funds available for distribution and (ii) restrictions in relevant debt instruments issued by Solaris LLC or its subsidiaries and/other entities in which it directly or indirectly holds an equity interest. To the extent that we are unable to make payments under the Tax Receivable Agreement for any reason, such payments will be deferred and will accrue interest until paid.
The requirements of being a public company, including compliance with the reporting requirements of the Exchange Act, and the requirements of the Sarbanes-Oxley Act of 2002, may strain our resources, increase our costs and distract management, and we may be unable to comply with these requirements in a timely or cost-effective manner.
As a public company, we need to comply with new laws, regulations and requirements, certain corporate governance provisions of the Sarbanes-Oxley Act of 2002, related regulations of the SEC and the requirements of the NYSE, with which we were not required to comply as a private company. Complying with these statutes, regulations and requirements will occupy a significant amount of time of our board of directors and management and will significantly increase our costs and expenses. We will need to:
Furthermore, while we generally must comply with Section 404 of the Sarbanes Oxley Act of 2002 for our fiscal year ending December 31, 2018, we are not required to have our independent registered public accounting firm attest to the effectiveness of our internal controls until our first annual report subsequent to our ceasing to be an "emerging growth company" within the meaning of Section 2(a)(19) of the Securities Act. Accordingly, we may not be required to have our independent registered public accounting firm attest to the effectiveness of our internal controls until as late as our annual report for the fiscal year ending December 31, 2022. Once it is required to do so, our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our controls are documented, designed, operated or reviewed. Compliance with these requirements may strain our resources, increase our costs and distract management, and we may be unable to comply with these requirements in a timely or cost-effective manner.
In addition, we expect that being a public company subject to these rules and regulations may make it more difficult and more expensive for us to obtain director and officer liability insurance and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified individuals to serve on our board of directors or as executive officers. We are currently evaluating these rules, and we cannot predict or estimate the amount of additional costs we may incur or the timing of such costs.
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If we fail to develop or maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud. As a result, current and potential stockholders could lose confidence in our financial reporting, which would harm our business and the trading price of our Class A common stock.
Effective internal controls are necessary for us to provide reliable financial reports, prevent fraud and operate successfully as a public company. If we cannot provide reliable financial reports or prevent fraud, our reputation and operating results would be harmed. We cannot be certain that our efforts to develop and maintain our internal controls will be successful, that we will be able to maintain adequate controls over our financial processes and reporting in the future or that we will be able to comply with our obligations under Section 404 of the Sarbanes-Oxley Act of 2002. Any failure to develop or maintain effective internal controls, or difficulties encountered in implementing or improving our internal controls, could harm our operating results or cause us to fail to meet our reporting obligations. Ineffective internal controls could also cause investors to lose confidence in our reported financial information, which would likely have a negative effect on the trading price of our Class A common stock.
The price of our common stock may fluctuate significantly, and you could lose all or part of your investment.
After this offering, there will be only 17,100,000 publicly traded shares of Class A common stock held by our public Class A common stockholders (or 18,150,000 shares if the underwriters' option to purchase additional shares of Class A common stock is exercised). Although our Class A common stock is listed on the New York Stock Exchange, we do not know whether an active trading market will continue to develop or how liquid that market might be. You may not be able to resell your Class A common stock at or above the public offering price. Additionally, the lack of liquidity may result in wide bid-ask spreads, contribute to significant fluctuations in the market price of the Class A common stock and limit the number of investors who are able to buy the Class A common stock.
Our principal stockholders collectively hold a substantial majority of the voting power of our common stock.
Holders of Class A common stock and Class B common stock vote together as a single class on all matters presented to our stockholders for their vote or approval, except as otherwise required by applicable law or our certificate of incorporation. Upon completion of this offering (assuming no exercise of the underwriters' option to purchase additional shares), the Original Investors will own 100.0% of our Class B common stock and a 60.8% interest in Solaris LLC (representing 60.8% of our combined economic interest and voting power) of which, (i) Yorktown will own approximately 45.7% of our Class B common stock and an approximate 27.7% interest in Solaris LLC (representing approximately 27.7% of our combined economic interest and voting power) and (ii) William A. Zartler, the Chairman of our board of directors, will beneficially own approximately 21.7% of our Class B common stock and an approximate 13.2% interest in Solaris LLC (representing approximately 13.2% of our capital stock).
Although the Original Investors are entitled to act separately in their own respective interests with respect to their ownership in us, if the Original Investors choose to act in concert, they will together have the ability to elect all of the members of our board of directors, and thereby to control our management and affairs. In addition, they will be able to determine the outcome of all matters requiring stockholder approval, including mergers and other material transactions, and will be able to cause or prevent a change in the composition of our board of directors or a change in control of our company that could deprive our stockholders of an opportunity to receive a premium for their Class A common stock as part of a sale of our company. The existence of significant stockholders may also have the effect of deterring hostile takeovers, delaying or preventing changes in control or changes in management, or limiting the ability of our other stockholders to approve transactions that they may deem to be in the best interests of our company.
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So long as the Original Investors continue to control a significant amount of our common stock, each will continue to be able to strongly influence all matters requiring stockholder approval, regardless of whether or not other stockholders believe that a potential transaction is in their own best interests. In any of these matters, the interests of the Original Investors may differ or conflict with the interests of our other stockholders. In addition, certain of our Original Investors, including Yorktown, and their respective affiliates may, from time to time, acquire interests in businesses that directly or indirectly compete with our business, as well as businesses that are significant existing or potential customers. Such Original Investors and their respective affiliates may acquire or seek to acquire assets that we seek to acquire and, as a result, those acquisition opportunities may not be available to us or may be more expensive for us to pursue. Moreover, this concentration of stock ownership may also adversely affect the trading price of our Class A common stock to the extent investors perceive a disadvantage in owning stock of a company with a controlling stockholder.
Certain of our directors have significant duties with, and spend significant time serving, entities that may compete with us in seeking acquisitions and business opportunities and, accordingly, may have conflicts of interest in allocating time or pursuing business opportunities.
Certain of our directors hold positions of responsibility with other entities (including affiliated entities) that are in the oil and natural gas industry. These directors may become aware of business opportunities that may be appropriate for presentation to us as well as to the other entities with which they are or may become affiliated. Due to these existing and potential future affiliations, they may present potential business opportunities to other entities prior to presenting them to us, which could cause additional conflicts of interest. They may also decide that certain opportunities are more appropriate for other entities with which they are affiliated, and as a result, they may elect not to present those opportunities to us. These conflicts may not be resolved in our favor. For additional discussion of our directors' business affiliations and the potential conflicts of interest of which our stockholders should be aware, see "Certain Relationships and Related Party Transactions."
Certain Designated Parties are not limited in their ability to compete with us, and the corporate opportunity provisions in our amended and restated certificate of incorporation could enable such Designated Parties and their respective affiliates to benefit from corporate opportunities that might otherwise be available to us.
Our governing documents provide that Yorktown, Wells Fargo Central Pacific Holdings, Inc. and our directors who are not also our officers, including William A. Zartler, the Chairman of our board of directors, who upon completion of this offering (assuming no exercise of the underwriters' option to purchase additional shares), will beneficially own approximately 71.0% of our Class B common stock, representing approximately 43.2% of our capital stock, and their respective portfolio investments and affiliates (collectively, the "Designated Parties") are not restricted from owning assets or engaging in businesses that compete directly or indirectly with us.
In particular, subject to the limitations of applicable law, our amended and restated certificate of incorporation, among other things:
The Designated Parties may become aware, from time to time, of certain business opportunities (such as acquisition opportunities) and may direct such opportunities to other businesses in which they have invested, in which case we may not become aware of or otherwise have the ability to pursue such
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opportunity. Furthermore, such businesses may choose to compete with us for these opportunities, possibly causing these opportunities to not be available to us or causing them to be more expensive for us to pursue. In addition, the Designated Parties may dispose of oil and natural gas service assets in the future, without any obligation to offer us the opportunity to purchase any of those assets. As a result, our renouncing our interest and expectancy in any business opportunity that may be from time to time presented to the Designated Parties could adversely impact our business or prospects if attractive business opportunities are procured by such parties for their own benefit rather than for ours. Please read "Description of Capital StockCorporate Opportunity."
Our amended and restated certificate of incorporation and amended and restated bylaws, as well as Delaware law, contain provisions that could discourage acquisition bids or merger proposals, which may adversely affect the market price of our Class A common stock and could deprive our investors of the opportunity to receive a premium for their shares.
Our amended and restated certificate of incorporation authorizes our board of directors to issue preferred stock without stockholder approval in one or more series, designate the number of shares constituting any series, and fix the rights, preferences, privileges and restrictions thereof, including dividend rights, voting rights, rights and terms of redemption, redemption price or prices and liquidation preferences of such series. If our board of directors elects to issue preferred stock, it could be more difficult for a third party to acquire us. In addition, some provisions of our amended and restated certificate of incorporation and amended and restated bylaws could make it more difficult for a third party to acquire control of us, even if the change of control would be beneficial to our stockholders. These provisions include:
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In addition, certain change of control events have the effect of accelerating the payment due under the Tax Receivable Agreement, which could be substantial and accordingly serve as a disincentive to a potential acquirer of our company. Please see "In certain cases, payments under the Tax Receivable Agreement may be accelerated and/or significantly exceed the actual benefits, if any, we realize in respect of the tax attributes subject to the Tax Receivable Agreement."
Our amended and restated certificate of incorporation designates the Court of Chancery of the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders' ability to obtain a favorable judicial forum for disputes with us or our directors, officers, employees or agents.
Our amended and restated certificate of incorporation provides that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware will, to the fullest extent permitted by applicable law, be the sole and exclusive forum for (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers, employees or agents to us or our stockholders, (iii) any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law (the "DGCL"), our amended and restated certificate of incorporation or our bylaws, or (iv) any action asserting a claim against us that is governed by the internal affairs doctrine, in each such case subject to such Court of Chancery having personal jurisdiction over the indispensable parties named as defendants therein. Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock will be deemed to have notice of, and consented to, the provisions of our amended and restated certificate of incorporation described in the preceding sentence. This choice of forum provision may limit a stockholder's ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, employees or agents, which may discourage such lawsuits against us and such persons. Alternatively, if a court were to find these provisions of our amended and restated certificate of incorporation inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business, financial condition or results of operations.
We do not intend to pay cash dividends on our Class A common stock. Consequently, your only opportunity to achieve a return on your investment is if the price of our Class A common stock appreciates.
We do not plan to declare cash dividends on shares of our Class A common stock in the foreseeable future. Consequently, your only opportunity to achieve a return on your investment in us will be if you sell your Class A common stock at a price greater than you paid for it. There is no guarantee that the price of our Class A common stock that will prevail in the market will ever exceed the price that you pay in this offering.
Future sales of our Class A common stock in the public market, or the perception that such sales may occur, could reduce our stock price, and any additional capital raised by us through the sale of equity or convertible securities may dilute your ownership in us.
We may sell additional shares of our Class A common stock in subsequent offerings. In addition, subject to certain limitations and exceptions, the Original Investors may redeem their Solaris LLC Units (together with a corresponding number of shares of Class B common stock) for shares of Class A common stock (on a one-for-one basis, subject to conversion rate adjustments for stock splits, stock dividends and reclassification and other similar transactions) and then sell those shares of Class A common stock. After the completion of this offering, we will have 18,316,468 outstanding shares of Class A common stock and 28,365,823 outstanding shares of Class B common stock. This number includes 3,000,000 shares of Class A common stock that we are selling and 4,000,000 shares that the
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selling stockholders are selling in this offering but does not include the 1,050,000 shares of Class A common stock that the selling stockholders may sell in this offering if the underwriters' option to purchase additional shares of Class A common stock is fully exercised, which may be resold immediately in the public market. Following the completion of this offering, the Original Investors will own 28,365,823 shares of Class B common stock, representing approximately 60.8% (or 58.5% if the underwriters' option to purchase additional shares of Class A common stock is exercised in full) of our total outstanding common stock. Certain of the Original Investors are party to a registration rights agreement with us that requires us to effect the registration of their shares in certain circumstances. See "Shares Eligible for Future Sale" and "Certain Relationships and Related Party TransactionsRegistration Rights Agreement."
We previously filed a registration statement with the SEC on Form S-8 providing for the registration of 5,629,888 shares of our Class A common stock issued or reserved for issuance under our long term incentive plan. Subject to the satisfaction of vesting conditions, shares registered under the registration statement on Form S-8 may be made available for resale immediately in the public market without restriction.
We cannot predict the size of future issuances of our Class A common stock or securities convertible into Class A common stock or the effect, if any, that future issuances and sales of shares of our Class A common stock will have on the market price of our Class A common stock. Sales of substantial amounts of our Class A common stock (including shares issued in connection with an acquisition), or the perception that such sales could occur, may adversely affect prevailing market prices of our Class A common stock.
The underwriters of this offering may waive or release parties to the lock-up agreements entered into in connection with this offering, which could adversely affect the price of our Class A common stock.
We, all of our directors and executive officers, the selling stockholders and certain of the Original Investors have entered or will enter into lock-up agreements pursuant to which we and they will be subject to certain restrictions with respect to the sale or other disposition of our Class A common stock for a period of 90 days following the date of this prospectus. The underwriters, at any time and without notice, may release all or any portion of the Class A common stock subject to the foregoing lock-up agreements. See "Underwriting" for more information on these agreements. If the restrictions under the lock-up agreements are waived, then the Class A common stock, subject to compliance with the Securities Act or exceptions therefrom, will be available for sale into the public markets, which could cause the market price of our Class A common stock to decline and impair our ability to raise capital. Sales of a substantial number of shares upon expiration of the lock-up and market stand-off agreements, the perception that such sales may occur, or early release of these agreements, could cause our market price to fall or make it more difficult for you to sell your Class A common stock at a time and price that you deem appropriate.
Solaris Inc. will be required to make payments under the Tax Receivable Agreement for certain tax benefits that it may claim, and the amounts of such payments could be significant.
In connection with the closing of the IPO, Solaris Inc. entered into a Tax Receivable Agreement with the TRA Holders. This agreement generally provides for the payment by Solaris Inc. to each TRA Holder of 85% of the net cash savings, if any, in U.S. federal, state and local income tax and franchise tax that Solaris 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 certain increases in tax basis and certain benefits attributable to imputed interest. Solaris Inc. will retain the benefit of the remaining 15% of these cash savings.
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The term of the Tax Receivable Agreement will continue until all tax benefits that are subject to the Tax Receivable Agreement have been utilized or expired, unless we exercise our right to terminate the Tax Receivable Agreement (or the Tax Receivable Agreement is terminated due to other circumstances, including our breach of a material obligation thereunder or certain mergers, asset sales, other forms of business combination or other changes of control), and we make the termination payment specified in the Tax Receivable Agreement. In addition, payments we make under the Tax Receivable Agreement will be increased by any interest accrued from the due date (without extensions) of the corresponding tax return.
The payment obligations under the Tax Receivable Agreement are Solaris Inc.'s obligations and not obligations of Solaris LLC, and we expect that the payments we will be required to make under the Tax Receivable Agreement will be substantial. Estimating the amount and timing of payments that may become due under the Tax Receivable Agreement is by its nature imprecise. For purposes of the Tax Receivable Agreement, cash savings in tax generally are calculated by comparing our actual tax liability (determined by using the actual applicable U.S. federal income tax rate and an assumed combined state and local income and franchise tax rate) to the amount we would have been required to pay had we not been able to utilize any of the tax benefits subject to the Tax Receivable Agreement. The actual increase in tax basis, as well as the amount and timing of any payments under the Tax Receivable Agreement, will vary depending upon a number of factors, including the timing of any redemption of Solaris LLC Units, the price of our Class A common stock at the time of each redemption, the extent to which such redemptions are taxable transactions, the amount and timing of the taxable income we generate in the future, the U.S. federal income tax rates then applicable, and the portion of our payments under the Tax Receivable Agreement that constitute imputed interest or give rise to depreciable or amortizable tax basis.
The payments under the Tax Receivable Agreement are not conditioned upon a holder of rights under the Tax Receivable Agreement having a continued ownership interest in us. For additional information regarding the Tax Receivable Agreement, see "Certain Relationships and Related Party TransactionsTax Receivable Agreement."
In certain cases, payments under the Tax Receivable Agreement may be accelerated and/or significantly exceed the actual benefits, if any, we realize in respect of the tax attributes subject to the Tax Receivable Agreement.
If we experience a change of control (as defined under the Tax Receivable Agreement, which includes certain mergers, asset sales and other forms of business combinations) or the Tax Receivable Agreement terminates early (at our election or as a result of our breach), we would be required to make a substantial, immediate lump-sum payment. This payment would equal the present value of hypothetical future payments that could be required to be paid under the Tax Receivable Agreement (determined by applying a discount rate of one-year London Interbank Offered Rate ("LIBOR") plus 100 basis points). The calculation of hypothetical future payments will be based upon certain assumptions and deemed events set forth in the Tax Receivable Agreement, including (i) we have sufficient taxable income to fully utilize the tax benefits covered by the Tax Receivable Agreement (including having sufficient taxable income to currently utilize any accumulated net operating loss carryforwards) and (ii) any Solaris LLC Units (other than those held by Solaris Inc.) outstanding on the termination date are deemed to be redeemed on the termination date. Any early termination payment may be made significantly in advance of, and may materially exceed, the actual realization, if any, of the future tax benefits to which the termination payment relates.
If we experience a change of control (as defined under the Tax Receivable Agreement) or the Tax Receivable Agreement otherwise terminates early, our obligations under the Tax Receivable Agreement could have a substantial negative impact on our liquidity and could have the effect of delaying, deferring or preventing certain mergers, asset sales or other forms of business combinations or changes of control. For example, if the Tax Receivable Agreement were terminated immediately after this
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offering, the estimated termination payments would, in the aggregate, be approximately $177.1 million (calculated using a discount rate equal to one-year LIBOR plus 100 basis points, applied against an undiscounted liability of $222.8 million, based upon the last reported closing sale price of our Class A common stock on November 1, 2017). The foregoing number is merely an estimate and the actual payment could differ materially. There can be no assurance that we will be able to finance our obligations under the Tax Receivable Agreement.
Please read "Certain Relationships and Related Party TransactionsTax Receivable Agreement."
In the event that our payment obligations under the Tax Receivable Agreement are accelerated upon certain mergers, other forms of business combinations or other changes of control, the consideration payable to holders of our Class A common stock could be substantially reduced.
If we experience a change of control (as defined under the Tax Receivable Agreement, which includes certain mergers, asset sales and other forms of business combinations) Solaris Inc. would be obligated to make a substantial, immediate lump-sum payment, and such payment may be significantly in advance of, and may materially exceed, the actual realization, if any, of the future tax benefits to which the payment relates. As a result of this payment obligation, holders of our Class A common stock could receive substantially less consideration in connection with a change of control transaction than they would receive in the absence of such obligation. Further, our payment obligations under the Tax Receivable Agreement will not be conditioned upon the TRA Holders' having a continued interest in us or Solaris LLC. Accordingly, the TRA Holders' interests may conflict with those of the holders of our Class A common stock. Please read "Risk FactorsRisks Related to this Offering and Our Class A Common StockIn certain cases, payments under the Tax Receivable Agreement may be accelerated and/or significantly exceed the actual benefits we realize, if any, in respect of the tax attributes subject to the Tax Receivable Agreement" and "Certain Relationships and Related Party TransactionsTax Receivable Agreement."
We will not be reimbursed for any payments made under the Tax Receivable Agreement in the event that any tax benefits are subsequently disallowed.
Payments under the Tax Receivable Agreement will be based on the tax reporting positions that we will determine. The TRA Holders will not reimburse us for any payments previously made under the Tax Receivable Agreement if any tax benefits that have given rise to payments under the Tax Receivable Agreement are subsequently disallowed, except that excess payments made to any TRA Holder will be netted against payments that would otherwise be made to such TRA Holder, if any, after our determination of such excess. As a result, in such circumstances, we could make payments that are greater than our actual cash tax savings, if any, and may not be able to recoup those payments, which could adversely affect our liquidity.
Sales or redemptions of 50% or more of the Solaris LLC Common Units during any twelve-month period will result in a termination of Solaris LLC for federal income tax purposes.
Solaris LLC will be considered to have constructively terminated for U.S. federal income tax purposes if there is a sale or redemption of 50% or more of the capital and profits of the company within a twelve-month period. A constructive termination of Solaris LLC could result in a significant deferral of depreciation deductions allocable to us in computing our taxable income.
We may issue preferred stock whose terms could adversely affect the voting power or value of our Class A common stock.
Our amended and restated certificate of incorporation authorizes us to issue, without the approval of our stockholders, one or more classes or series of preferred stock having such designations,
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preferences, limitations and relative rights, including preferences over our Class A common stock respecting dividends and distributions, as our board of directors may determine. The terms of one or more classes or series of preferred stock could adversely impact the voting power or value of our Class A common stock. For example, we might grant holders of preferred stock the right to elect some number of our directors in all events or on the happening of specified events or the right to veto specified transactions. Similarly, the repurchase or redemption rights or liquidation preferences we might assign to holders of preferred stock could affect the residual value of the Class A common stock.
For as long as we are an emerging growth company, we will not be required to comply with certain reporting requirements, including those relating to accounting standards and disclosure about our executive compensation, that apply to other public companies.
We are classified as an "emerging growth company" under the JOBS Act. For as long as we are an emerging growth company, which may be up to five full fiscal years, unlike other public companies, we will not be required to, among other things: (i) provide an auditor's attestation report on management's assessment of the effectiveness of our system of internal control over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002; (ii) comply with any new requirements if adopted by the PCAOB requiring mandatory audit firm rotation or a supplement to the auditor's report in which the auditor would be required to provide additional information about the audit and the financial statements of the issuer; (iii) provide certain disclosures regarding executive compensation required of larger public companies; or (iv) hold nonbinding advisory votes on executive compensation. We may remain an emerging growth company until December 31, 2022, although we will lose that status sooner if we have more than $1.07 billion of revenues in a fiscal year, have more than $700.0 million in market value of our Class A common stock held by non-affiliates, or issue more than $1.0 billion of non-convertible debt over a three-year period.
To the extent that we rely on any of the exemptions available to emerging growth companies, you will receive less information about our executive compensation and internal control over financial reporting than issuers that are not emerging growth companies. If some investors find our Class A common stock to be less attractive as a result, there may be a less active trading market for our Class A common stock and our stock price may be more volatile.
If securities or industry analysts adversely change their recommendations regarding our Class A common stock or if our operating results do not meet their expectations, our stock price could decline.
The trading market for our Class A common stock will be influenced by the research and reports that industry or securities analysts publish about us or our business. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline. Moreover, if one or more of the analysts who cover our company downgrades our Class A common stock or if our operating results do not meet their expectations, our stock price could decline.
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. Statements that are predictive in nature, that depend upon or refer to future events or conditions or that include the words "believe," "expect," "anticipate," "intend," "estimate" and other expressions that are predictions of or indicate future events and trends and that do not relate to historical matters identify forward-looking statements. Our forward-looking statements include statements about our business strategy, our industry, our future profitability, our expected capital expenditures and the impact of such expenditures on our performance, the costs of being a publicly traded corporation and our capital programs.
A forward-looking statement may include a statement of the assumptions or bases underlying the forward-looking statement. We believe that we have chosen these assumptions or bases in good faith and that they are reasonable. You are cautioned not to place undue reliance on any forward-looking statements. You should also understand that it is not possible to predict or identify all such factors and should not consider the following list to be a complete statement of all potential risks and uncertainties. Factors that could cause our actual results to differ materially from the results contemplated by such forward-looking statements include:
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You should not place undue reliance on our forward-looking statements. Although forward-looking statements reflect our good faith beliefs at the time they are made, forward-looking statements involve known and unknown risks, uncertainties and other factors, including the factors described under "Risk Factors," which may cause our actual results, performance or achievements to differ materially from anticipated future results, performance or achievements expressed or implied by such forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events, changed circumstances or otherwise, unless required by law.
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We estimate that, based on an assumed offering price of $16.60 per share (which is the last reported sales price of our Class A common stock on the New York Stock Exchange on November 6, 2017), and after deducting underwriting discounts and commissions and estimated offering expenses payable by us, we will receive approximately $46.9 million of net proceeds from this offering. We intend to contribute all of the net proceeds we receive from this offering to Solaris LLC in exchange for a number of Solaris LLC Units equal to the number of shares of our Class A common stock issued by us in this offering. Solaris LLC will use the net proceeds of this offering received by us for general corporate purposes, including to fund our 2017 capital program, the majority of which we expect will be used to manufacture additional systems for our fleet and to advance construction of the Kingfisher Facility.
We will not receive any proceeds from the sale of shares by the selling stockholders.
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MARKET PRICE OF OUR CLASS A COMMON STOCK
Our Class A common stock began trading on the NYSE under the symbol "SOI" on May 12, 2017. Prior to that, there was no public market for our Class A common stock. The table below sets forth, for the periods indicated, the high and low sales prices per share of our Class A common stock since May 12, 2017.
|
Sales Price | ||||||
---|---|---|---|---|---|---|---|
|
High | Low | |||||
2017: |
|||||||
Second Quarter(1) |
$ | 12.47 | $ | 9.90 | |||
Third Quarter |
17.72 | 11.04 | |||||
Fourth Quarter (through November 6, 2017) |
17.71 | 14.03 |
On November 6, 2017, the closing price of our Class A common stock on the NYSE was $16.60 per share. As of November 6, 2017, we had approximately one holder of record of our Class A common stock. This number excludes owners for whom Class A common stock may be held in "street" name.
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We do not anticipate declaring or paying any cash dividends to holders of our Class A common stock in the foreseeable future. We currently intend to retain future earnings, if any, to finance the growth of our business. Our future dividend policy is within the discretion of our board of directors and will depend upon then-existing conditions, including our results of operations, financial condition, capital requirements, investment opportunities, statutory restrictions on our ability to pay dividends and other factors our board of directors may deem relevant. In addition, our Amended Credit Facility restricts our ability to pay cash dividends to holders of our Class A common stock.
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The following table sets forth our cash and cash equivalents and capitalization as of September 30, 2017:
You should read the following table in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," our consolidated financial statements and related notes and our unaudited pro forma financial statements and related notes appearing elsewhere in this prospectus.
|
As of September 30, 2017 | ||||||
---|---|---|---|---|---|---|---|
|
Actual | As Adjusted | |||||
|
(in thousands, except share counts and par value) (unaudited) |
||||||
Cash and cash equivalents |
$ | 53,996 | $ | 100,941 | |||
| | | | | | | |
Long-term debt, including current maturities |
|||||||
Capital leases |
219 | 219 | |||||
| | | | | | | |
Total Debt |
$ | 219 | $ | 219 | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
Stockholders' equity |
|||||||
Class A common stock, $0.01 par value; 600,000,000 shares authorized, 10,904,926(1) shares issued and outstanding (Actual); 17,904,926(1) shares issued and outstanding (As Adjusted) |
101 | 171 | |||||
Class B common stock, zero par value, 180,000,000 shares authorized, 32,365,823 shares issued and outstanding (Actual); 28,365,823 shares issued and outstanding (As Adjusted) |
| | |||||
Preferred stock, $0.01 per share; 50,000,000 shares authorized, no shares issued or outstanding (Actual), no shares issued and outstanding (As Adjusted) |
| ||||||
Additional paid-in capital |
60,657 | 121,834 | |||||
Accumulated earnings |
1,536 | 1,536 | |||||
| | | | | | | |
Total stockholders' equity attributable to Solaris |
$ | 62,294 | $ | 123,541 | |||
Noncontrolling interest |
133,105 | 118,802 | |||||
| | | | | | | |
Total capitalization |
$ | 195,618 | $ | 242,562 | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
The information presented above assumes no exercise of the underwriters' option to purchase additional shares of Class A common stock. The table does not reflect shares of Class A common stock reserved for issuance under our long-term incentive plan.
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SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING DATA
Solaris Inc. was formed in February 2017 and did not have any historical financial or operating results prior to the IPO. Following the IPO, Solaris Inc. became the sole managing member for Solaris LLC. As a result, Solaris Inc. 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 Inc., which reduces net income (loss) attributable to Solaris Inc.'s Class A stockholders. For periods prior to the completion of the IPO, the accompanying consolidated financial statements include the historical financial position and results of operations of Solaris LLC, our predecessor.
The selected historical consolidated financial data as of and for the years ended December 31, 2016 and 2015 was derived from the audited historical consolidated financial statements included elsewhere in this prospectus. The selected historical consolidated interim financial data as of and for the nine months ended September 30, 2017 and 2016 are derived from the unaudited interim condensed consolidated financial statements appearing elsewhere in this prospectus. The unaudited condensed consolidated financial statements have been prepared on the same basis as our audited financial statements and, in our opinion, include all adjustments, consisting of normal recurring adjustments, that are considered necessary for a fair presentation of the financial position, results of operations and cash flows for such periods. Historical results are not necessarily indicative of future results.
The following table summarizes our historical consolidated financial and operating data and should be read together with "Use of Proceeds," "Selected Historical Consolidated Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Corporate Reorganization", our consolidated financial statements and related notes included elsewhere in this prospectus and our unaudited pro forma financial statements and related notes elsewhere in this prospectus.
|
Nine Months ended September 30, |
Year ended December 31, |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2017 | 2016 | 2016 | 2015 | |||||||||
|
(in thousands, except per share and operating data) |
||||||||||||
Statement of Operations Data: |
|||||||||||||
Revenue |
|||||||||||||
Proppant management system rental |
$ | 34,560 | $ | 8,679 | $ | 14,594 | $ | 8,296 | |||||
Proppant management system services |
7,631 | 2,189 | 3,563 | 3,167 | |||||||||
Proppant management system sale |
| | | 2,742 | |||||||||
| | | | | | | | | | | | | |
Total revenue |
42,191 | 10,868 | 18,157 | 14,205 | |||||||||
Operating costs and expenses |
|||||||||||||
Cost of proppant management system rental (excluding $3,748 and $2,418, and $3,352 and $2,000 of depreciation and amortization for the nine months ended September 30, 2017 and 2016, respectively, and the years ended December 31, 2016 and 2015, respectively, shown separately) |
1,588 | 1,181 | 1,431 | 994 | |||||||||
Cost of proppant management system services (excluding $283 and $111, and $160 and $119 of depreciation and amortization for the nine months ended September 30, 2017 and 2016, respectively, and the years ended December 31, 2016 and 2015, respectively, shown separately) |
8,640 | 3,301 | 4,916 | 3,847 | |||||||||
Cost of proppant management system sale |
| | | 1,948 | |||||||||
Depreciation and amortization |
4,276 | 2,739 | 3,792 | 2,395 | |||||||||
Salaries, benefits and payroll taxes(1) |
5,687 | 1,992 | 3,061 | 3,571 |
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|
Nine Months ended September 30, |
Year ended December 31, |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2017 | 2016 | 2016 | 2015 | |||||||||
|
(in thousands, except per share and operating data) |
||||||||||||
Selling, general and administrative (excluding $245 and $210, and $280 and $276 of depreciation and amortization for the nine months ended September 30, 2017 and 2016, respectively, and the years ended December 31, 2016 and 2015, respectively, shown separately) |
3,653 | 1,842 | 2,096 | 2,663 | |||||||||
Other operating expenses |
3,770 | | | | |||||||||
| | | | | | | | | | | | | |
Total operating costs and expenses |
27,614 | 11,055 | 15,296 | 15,418 | |||||||||
| | | | | | | | | | | | | |
Operating income (loss) |
14,577 | (187 | ) | 2,861 | (1,213 | ) | |||||||
Other income (expense): |
|||||||||||||
Interest expense, net |
(71 | ) | (14 | ) | (23 | ) | (22 | ) | |||||
Other income (expense) |
(119 | ) | 7 | 8 | (71 | ) | |||||||
| | | | | | | | | | | | | |
Total other income (expense) |
(190 | ) | (7 | ) | (15 | ) | (93 | ) | |||||
| | | | | | | | | | | | | |
Income (loss) before income tax expense |
14,387 | (194 | ) | 2,846 | (1,306 | ) | |||||||
| | | | | | | | | | | | | |
Provision for income taxes |
(1,137 | ) | (26 | ) | | | |||||||
Income tax expense |
| | 43 | 67 | |||||||||
| | | | | | | | | | | | | |
Net income (loss) |
$ | 13,250 | $ | (220 | ) | $ | 2,803 | $ | (1,373 | ) | |||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Less: net (income) loss related to Solaris LLC |
(3,665 | ) | 220 | (2,803 | ) | 1,373 | |||||||
Less: net income related to non-controlling interests |
(8,049 | ) | | | | ||||||||
| | | | | | | | | | | | | |
Net income attributable to Solaris Inc. |
$ | 1,536 | $ | | $ | | $ | | |||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Earnings per share of Class A common stockbasic(2) |
$ | 0.14 | $ | | $ | | $ | | |||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Earnings per share of Class A common stockdiluted(2) |
$ | 0.14 | $ | | $ | | $ | | |||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Basic weighted-average shares of Class A common stock outstanding(2) |
10,552 | | | | |||||||||
Diluted weighted-average shares of Class A common stock outstanding(2) |
10,540 | | | | |||||||||
Pro forma information(3): |
|||||||||||||
Pro forma net income (loss)(4) |
$ | 16,589 | $ | (1,780 | ) | ||||||||
Pro forma non-controlling interest (income) loss(5) |
$ | (13,932 | ) | (1,480 | ) | ||||||||
| | | | | | | | | | | | | |
Pro forma net income attributable to common stockholders(4) |
$ | 2,657 | $ | (300 | ) | ||||||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Pro forma net income (loss) per share attributable to common stockholders(6) |
|||||||||||||
Basic |
$ | 0.24 | $ | (0.03 | ) | ||||||||
Diluted |
$ | 0.23 | $ | (0.03 | ) | ||||||||
Pro forma weighted-average number of shares(6) |
|||||||||||||
Basic |
10,451 | 10,100 | |||||||||||
Diluted |
10,919 | 10,100 | |||||||||||
Balance Sheet Data (at period end): |
|||||||||||||
Property, plant and equipment, net |
$ | 100,006 | $ | 54,350 | $ | 46,846 | |||||||
Total assets |
217,189 | 77,236 | 70,553 | ||||||||||
Long-term debt (including current portion) |
| 3,041 | 529 | ||||||||||
Total liabilities |
21,790 | 5,890 | 3,085 | ||||||||||
Total stockholders' and members' equity |
195,399 | 71,346 | 67,468 | ||||||||||
Cash Flow Statement Data: |
|||||||||||||
Net cash provided by operating activities |
$ | 12,999 | $ | 768 | $ | 4,521 | $ | 2,156 | |||||
Net cash used in investing activities |
(49,049 | ) | (5,951 | ) | (10,935 | ) | (27,859 | ) | |||||
Net cash provided by financing activities |
86,478 | (161 | ) | 3,059 | 7,878 | ||||||||
Other Data: |
|||||||||||||
Adjusted EBITDA(7) |
$ | 24,704 | $ | 2,667 | $ | 6,788 | $ | 1,659 |
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|
Nine Months ended September 30, |
Year ended December 31, |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2017 | 2016 | 2016 | 2015 | |||||||||
|
(in thousands, except per share and operating data) |
||||||||||||
Revenue days(8) |
10,566 | 3,610 | 5,745 | 2,579 |
Equity-based compensation expense |
$ | 2,097 | $ | 108 | $ | 127 | $ | 64 |
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with "Selected Historical Consolidated Financial Data" and our audited and unaudited consolidated financial statements and related notes appearing elsewhere in this prospectus. 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 in these forward-looking statements as a result of a variety of risks and uncertainties, including those described in this prospectus under "Cautionary Statement Regarding Forward-Looking Statements" and "Risk Factors." We assume no obligation to update any of these forward-looking statements except as otherwise required by law.
Solaris LLC was formed in July 2014. Solaris Inc. was formed in February 2017. In connection with the IPO in May 2017, Solaris Inc. became a holding company whose sole material asset consists of units in Solaris LLC. Solaris became the managing member of Solaris LLC and is responsible for all operational, management and administrative decisions relating to Solaris LLC's business and consolidates the financial results of Solaris LLC and its subsidiaries.
We manufacture and provide our patented mobile proppant management systems that unload, store and deliver proppant at oil and natural gas well sites. Our systems reduce our customers' cost and time to complete wells by improving the efficiency of proppant logistics, as well as enhancing well site safety. In addition, we are currently constructing an independent, unit-train-capable transload facility in Oklahoma in order to further integrate our supply chain management and drive additional proppant logistics efficiencies for our customers. Our customers include oil and natural gas E&P companies, such as EOG Resources, Inc., Devon Energy and Apache Corporation, as well as oilfield service companies, such as ProPetro Holding Corp. Our 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. Since commencing operations in April 2014, we have grown our fleet from two systems to 68 systems.
Our mobile proppant management system is 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, which we define as the transportation of proppant from transload terminal or regional proppant mine to the well site. Today's horizontal well completion designs require between 400 and 1,000 truckloads of proppant delivered to the well site per well which creates bottlenecks in the storage, handling and delivery of proppant. Our patented systems typically provide 2.5 million pounds of proppant storage capacity in a footprint that is considerably smaller than traditional or competing well site proppant storage equipment. Our systems have the ability to unload up to 24 pneumatic proppant trailers simultaneously. In addition, we have recently deployed our non-pneumatic loading option to provide 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 non-pneumatic loading option is compatible with our existing fleet with minimal modification. Importantly, the proppant storage silos in our systems can be filled from trucks while simultaneously delivering proppant on-demand directly to the blender for hydraulic fracturing operations. Accordingly, our systems can maintain high rates of proppant delivery for extended periods of time, which helps achieve a greater number of frac stages per day, driving a reduction in our customers' costs. Our systems also reduce the amount of truck demurrage, or wait time, at the well site which can result in significant cost savings for our customers.
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In July 2017, we entered into a seven year contract with an exploration and production company to provide proppant transloading service at a facility to be constructed and operated by Solaris in Kingfisher, Oklahoma. The Kingfisher Facility will be located central to the active SCOOP/STACK plays and we believe it will be the first independent, unit-train capable, high speed transload facility in Oklahoma. The Kingfisher Facility will initially provide proppant transloading services, but will also have capacity to provide transloading services for other drilling and completion related consumables.
The Kingfisher Facility will be located on a 300-acre parcel of land, directly on the Union Pacific Railroad. Solaris has secured a 30-year land lease with the State of Oklahoma and has started ordering long-lead construction items, breaking ground in August 2017. The facility is designed to service multiple large volume customers with dedicated storage and unit train loop tracks, including an initial 8,000 foot unit-train loop and 18,000 feet of rail sidetrack. Initial storage will include 30,000 tons of vertical storage in six silos with individual capacity of 5,000 tons per silo. The facility will also service manifest trains and provide direct rail-to-truck transloading.
Demand for our systems and services is predominantly influenced by the level of drilling and completion by E&P companies, which, in turn, depends largely on the current and anticipated profitability of developing oil and natural gas reserves. More specifically, demand for our systems and services is driven by demand for proppant, which, in turn, is primarily driven by advancements in oil and natural gas drilling and well completion technology and techniques, such as horizontal drilling and hydraulic fracturing, which have made the extraction of oil and natural gas increasingly cost-effective in formations that historically would have been uneconomic to develop.
While overall drilling and completion activities have declined in North America from their highs in late 2014 as a result of the downturn in hydrocarbon prices, the industry has witnessed an increase in such activity in the third and fourth quarters of 2016 and throughout 2017 as hydrocarbon prices have recovered. Recently, there has been an increase in proppant demand as E&P companies have shifted toward:
We believe that the demand for proppant will increase over the medium and long term as commodity prices rise from their recent lows, which will lead producers to resume completion of their inventory of drilled but uncompleted wells and undertake new drilling activities. Further, recent agreements by the Organization of the Petroleum Exporting Countries ("OPEC") and non-OPEC members to reduce their oil production quotas have also provided upward momentum for WTI prices, which have increased to $57.33 per Bbl as of November 6, 2017, up from a low of $26.21 per Bbl in February 2016.
While we do not currently anticipate any shortages in the supply of the proppant used in hydraulic fracturing operations, supplies of high-quality raw frac sand, the most prevalent proppant used, are limited to select areas, predominantly in western Wisconsin and limited areas of Minnesota and Illinois. Accordingly, transportation costs often represent a significant portion of our customer's overall product cost, and transferring large quantities of proppant to the well site presents a number of challenges, including the cost and management of last mile logistics. Additionally, increased focus on cost control and increased HS&E regulation has created numerous operational challenges that cannot be addressed
56
with labor intensive proppant storage equipment, such as those that utilize individual containers for on-site proppant storage and handling.
These supply and demand trends have contributed to our significant growth since our formation in 2014. We have increased our total system revenue days, defined as the combined number of days our systems earned revenues, in eleven of the last twelve quarters beginning in the fourth quarter of 2014. Since commencing operations in April 2014, we have also grown our fleet from two systems to 68 systems. The increase in total system revenue days is attributable to an increase in the number of systems available for rental and an increase in the number of systems deployed to customers. Our total system revenue days increased to 4,564 in the three months ended September 30, 2017 from 1,512 in the three months ended September 30, 2016, an increase of approximately 202%. Our total system revenue days increased to 10,566 in the nine months ended September 30, 2017 from 3,610 in the nine months ended September 30, 2016, an increase of approximately 193%.
The number of systems in our fleet increased to an average of 49.8 during the three months ended September 30, 2017 from an average of 24.0 during the three months ended September 30, 2016, an increase of approximately 108%. The average number of systems deployed to customers increased to 49.6 in the three months ended September 30, 2017 from 16.4 in the three months ended September 30, 2016, an increase of approximately 202%. In addition, our utilization rate increased from 68% in the three months ended September 30, 2016 to 100% in the three months ended September 30, 2017, an increase of 45%.
The number of systems in our fleet increased to an average of 39.9 during the nine months ended September 30, 2017 from an average of 23.0 during the nine months ended September 30, 2016, an increase of approximately 73%. The average number of systems deployed to customers increased to 38.7 in the nine months ended September 30, 2017 from 13.2 in the nine months ended September 30, 2016, an increase of approximately 193%. In addition, our utilization rate increased from 57% in the nine months ended September 30, 2016 to 97% in the nine months ended September 30, 2017, an increase of 70%.
For the purposes of the above paragraph, the following terms are defined as:
We currently have more demand for our systems than we can satisfy with our current fleet, and we expect to increase our fleet to between 74 to 76 systems by the end of 2017 in response to customer demand.
We currently generate revenue primarily through the rental of our systems and related services, including transportation of our 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 our systems and service on a well site, indemnification, damages, confidentiality, intellectual property protection and payment terms and provisions. The services are generally priced
57
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 rent our systems on a monthly basis. In addition from time-to-time, we have evaluated and completed individual system sales on a case-by-case basis.
Costs of Conducting Our Business
The principal costs associated with operating our business are:
Our cost of proppant management system rental (excluding depreciation and amortization) consists primarily of the costs of maintaining our equipment, as well as insurance and property taxes related to our equipment.
Our cost of proppant management 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 proppant management system services (excluding depreciation and amortization) are variable based on the number of systems deployed with customers.
Our depreciation and amortization expense primarily consists of the depreciation expense related to our systems and related manufacturing machinery and equipment. The costs to build our systems, including any upgrades, are capitalized and depreciated over a life ranging from two to fifteen years.
Our salaries, benefits and payroll taxes are comprised of the salaries and related benefits for several functional areas of our organization, including sales and commercial, research and development, manufacturing administrative, accounting and corporate administrative.
Our selling, general and administrative expenses are comprised primarily of 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, EBITDA and Adjusted EBITDA.
Revenue
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 proppant management systems we have deployed to customers from period to period.
Revenue Days
We view revenue days as an important indicator of our performance. We calculate revenue days as the combined number of days our systems earn revenue in a period. We assess our revenue days from
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period to period in relation to the number of proppant management systems we have available in our fleet.
EBITDA and Adjusted EBITDA
We view EBITDA and Adjusted EBITDA as important indicators of performance. We define EBITDA as net income (loss), 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 charges and unusual or non-recurring charges. Please read "SummarySummary Historical Consolidated Financial DataNon-GAAP Financial Measures" for more information and a reconciliation of EBITDA and Adjusted EBITDA to net income (loss), the most directly comparable financial measure calculated and presented in accordance with GAAP.
Note Regarding Non-GAAP Financial Measures
EBITDA and Adjusted EBITDA are not financial measures presented in accordance with 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. Please read "SummarySummary Historical Consolidated Financial DataNon-GAAP Financial Measures."
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, Solaris LLC, for the periods presented, primarily for the reasons described below.
Corporate Reorganization
The historical consolidated financial statements included in this prospectus 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 of Solaris LLC and is responsible for all operational, management and administrative decisions relating to Solaris LLC's business and consolidates the financial results of Solaris LLC and its subsidiaries.
In addition, in connection with the IPO, Solaris entered into the Tax Receivable Agreement with the TRA Holders. This agreement generally provides for the payment by Solaris Inc. to a TRA Holder of 85% of the net cash savings, if any, in U.S. federal, state and local income tax or franchise tax that we actually realize (or are deemed to realize in certain circumstances) in periods after the IPO as a
59
result of (i) certain increases in tax basis that occur as a result of Solaris Inc.'s 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 Reorganization Transactions or pursuant to the exercise of the Redemption Right or the Call Right and (ii) imputed interest deemed to be paid by Solaris Inc. as a result of, and additional tax basis arising from, any payments Solaris Inc. makes under the Tax Receivable Agreement. Solaris Inc. will retain the benefit of the remaining 15% of these cash savings. See "Certain Relationships and Related Party TransactionsTax Receivable Agreement.
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 the Reorganization Transactions and any future redemptions (including pursuant to any subsequent redemption of Solaris LLC Units from our Original Investors) or exchanges as follows:
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. For more information on the Tax Receivable Agreement, including a discussion of the range of aggregated payments to be made, the timing of such payments, and how we intend to fund such payments, see "Certain Relationships and Related Party TransactionsTax Receivable Agreement" and the pro forma consolidated financial statements and the related notes thereto appearing elsewhere in this prospectus.
Fleet Growth
We have experienced significant growth over the past two years. Since commencing operations in April 2014, we have grown our fleet from two systems to 68 systems and the number of major oil and gas basins in which our systems are deployed has increased from two as of April 2014 to five as of November 3, 2017. Since the first quarter of 2014, we have increased our total system revenue days, defined as the combined number of days our systems earned revenues, in eleven of the last twelve quarters. We have increased our system revenue days by more than 2,523% from the second quarter of 2014 to the third quarter of 2017, representing a 173% compound annual growth rate. The increase in total system revenue days is attributable to both an increase in the number of systems available for rental and an increase in the rate at which our systems are utilized. We expect to increase our fleet to between 74 to 76 systems by the end of 2017 in response to customer demand.
Public Company Expenses
Upon completion of the IPO, we incur direct, incremental general and administrative ("G&A") expenses as a result of being a publicly traded company, including, but not limited to, costs associated with hiring new personnel, implementation of compensation programs that are competitive with our public company peer group, annual and quarterly reports to stockholders, tax return preparation, independent auditor fees, investor relations activities, registrar and transfer agent fees, incremental
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director and officer liability insurance costs and incremental director compensation. These direct, incremental G&A expenses are not included in our results of operations prior to the IPO.
Income Taxes
Solaris Inc. is a corporation and as a result, is subject to U.S. federal, state and local income taxes. Although Solaris LLC is subject to franchise tax in the State of Texas (at less than 1% of modified pre-tax earnings) it passes through its taxable income to its owners, including Solaris Inc., for U.S. federal and other state and local income tax purposes and thus is not subject to U.S. federal income taxes or other state or local income taxes. Accordingly, the financial data attributable to Solaris LLC contains no provision for U.S. federal income taxes or income taxes in any state or locality other than franchise tax in the State of Texas. We estimate that Solaris Inc. will be subject to U.S. federal, state and local taxes at a blended statutory rate of 36.9% of pre-tax earnings and would have incurred pro forma income tax benefit (expense) for the nine months ended September 30, 2017 and the year ended December 31, 2016 of approximately $(0.8) million and $0.1 million, respectively.
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Nine Months Ended September 30, 2017 Compared to Nine Months Ended September 30, 2016
|
Nine Months Ended September 30, |
|
||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2017 | 2016 | Change | |||||||
|
(in thousands) |
|||||||||
Revenue |
||||||||||
Proppant management system rental |
$ | 34,560 | $ | 8,679 | $ | 25,881 | ||||
Proppant management system services |
7,631 | 2,189 | 5,442 | |||||||
| | | | | | | | | | |
Total revenue |
42,191 | 10,868 | 31,323 | |||||||
Operating costs and expenses: |
||||||||||
Cost of proppant management system rental (excluding $3,748 and $2,418 of depreciation and amortization for the nine months ended September 30, 2017 and 2016, respectively, shown separately |
1,588 | 1,181 | 407 | |||||||
Cost of proppant management system services (excluding $283 and $111 of depreciation and amortization for the nine months ended September 30, 2017 and 2016, respectively, shown separately |
8,640 | 3,301 | 5,339 | |||||||
Depreciation and amortization |
4,276 | 2,739 | 1,537 | |||||||
Salaries, benefits and payroll taxes |
5,687 | 1,992 | 3,695 | |||||||
Selling, general and administrative (excluding $245 and $210 of depreciation and amortization for the nine months ended September 30, 2017 and 2016, respectively, shown separately |
3,653 | 1,842 | 1,811 | |||||||
Other operating expenses |
3,770 | | 3,770 | |||||||
| | | | | | | | | | |
Total operating costs and expenses |
27,614 | 11,055 | 16,559 | |||||||
| | | | | | | | | | |
Operating income(loss) |
14,577 | (187 | ) | 14,764 | ||||||
Interest expense, net |
(71 | ) | (14 | ) | (57 | ) | ||||
Other income (expense) |
(119 | ) | 7 | (126 | ) | |||||
| | | | | | | | | | |
Total other income (expense) |
(190 | ) | (7 | ) | (183 | ) | ||||
| | | | | | | | | | |
Income (loss) before income tax expense |
14,387 | (194 | ) | 14,581 | ||||||
Benefit (provision) for income taxes |
(1,137 | ) | (26 | ) | (1,111 | ) | ||||
| | | | | | | | | | |
Net income (loss) |
13,250 | (220 | ) | 13,470 | ||||||
Less: net (income) loss related to Solaris LLC |
(3,665 | ) | 220 | (3,885 | ) | |||||
Less: net income related to non-controlling interests |
(8,049 | ) | | (8,049 | ) | |||||
| | | | | | | | | | |
Net income attributable to Solaris |
$ | 1,536 | $ | | $ | 1,536 | ||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Revenue
Proppant Management System Rental Revenue. Our proppant management system rental revenue increased $25.9 million, or 298%, to $34.6 million for the nine months ended September 30, 2017 compared to $8.7 million for the nine months ended September 30, 2016. This increase was primarily due to a 193% increase in the number of revenue days from 3,610 days in the nine months ended September 30, 2016 to 10,566 days in the nine months ended September 30, 2017, coupled with an increase in rental rates charged to customers due to increasing demand for our systems.
Proppant Management System Services Revenue. Our proppant management system services revenue increased $5.4 million, or 245%, to $7.6 million for the nine months ended September 30, 2017 compared to $2.2 million for the nine months ended September 30, 2016. Proppant management system services revenue related to field technicians and transportation has increased as a result of the
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increasing number of systems we have deployed. Once systems are deployed, the Company provides services to maintain such systems on-site for customers and to coordinate the transportation of systems between customer sites.
Operating Expenses
Total operating costs and expenses for the nine months ended September 30, 2017 and 2016 were $27.6 million and $11.1 million, respectively, which represented 65% and 102% of total revenue, respectively. Other operating expenses are primarily related to non-recurring charges, including those related to the Reorganization Transactions. Excluding other operating expenses, total operating costs and expenses for the nine months ended September 30, 2017 and 2016 were $23.8 million and $11.1 million, respectively, which represented 57% and 102% of total revenue, respectively. Total operating expenses increased year-over-year primarily as a result of an increase in the cost of proppant management system services which includes direct labor and related maintenance and transportation costs. Cost of proppant management system services increased as a result of an increase in the number of field technicians and amount of system transportation required to support the increase in our total systems deployed to customers. The average number of systems deployed to customers have increased to 38.7 in the nine months ended September 30, 2017 from 13.2 in the nine months ended September 30, 2016. Depreciation and amortization expense also increased, primarily due to the addition of new systems that were manufactured and added to our fleet in 2016 and throughout 2017. Salaries, benefits and payroll taxes and selling, general and administrative expenses, increased related to increases in indirect personnel and general business expenses resulting from increased manufacturing and rental operations. Additional details regarding the changes in operating expenses are presented below.
Cost of Proppant Management System Rental. Cost of proppant management system rental increased $0.4 million, or 33%, to $1.6 million for the nine months ended September 30, 2017 compared to $1.2 million for the nine months ended September 30, 2016, excluding depreciation and amortization expense. Cost of proppant management system rental as a percentage of proppant management system rental revenue was 5% and 14% for the nine months ended September 30, 2017 and 2016, respectively. These costs as a percentage of related rental revenue decreased due to lower repairs and maintenance costs relative to the increase in systems that were deployed to customers.
Cost of proppant management system rental including depreciation and amortization expense increased $1.7 million, or 47%, to $5.3 million for the nine months ended September 30, 2017 compared to $3.6 million for the nine months ended September 30, 2016. This increase was primarily attributable to an increase in depreciation expense related to additional systems that were manufactured and added to our fleet.
Cost of Proppant Management System Services. Cost of proppant management system services increased $5.3 million, or 161%, to $8.6 million for the nine months ended September 30, 2017 compared to $3.3 million for the nine months ended September 30, 2016. This increase was primarily due to an increase in labor and related costs of $2.4 million, or 143%, and travel and lodging costs of $0.7 million, or 170%, both of which were driven by an increase in the number of field technicians required to support the increased revenue days during the nine months ended September 30, 2017, coupled with an increase in third-party trucking services of $1.6 million, or 180%, to transport incremental systems deployed to customers.
For the nine months ended September 30, 2017, the cost of proppant management system services as a percentage of proppant management system services revenue decreased to 113% compared to 151% for the nine months ended September 30, 2016. Cost of proppant system services as a percentage of proppant management system services revenue decreased for the nine months ended September 30, 2017 as a result of increased operating efficiencies in regards to the service costs necessary to support our systems deployed to customers.
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Cost of proppant management system services including depreciation and amortization expense increased $5.5 million, or 162%, to $8.9 million for the nine months ended September 30, 2017 compared to $3.4 million for the nine months ended September 30, 2016. This increase was primarily attributable to the factors mentioned above, as well as an increase in depreciation expense related to additional light-duty field trucks that we purchased to support our increased activity.
Depreciation and Amortization. Depreciation and amortization increased $1.6 million, or 56%, to $4.3 million for the nine months ended September 30, 2017 compared to $2.7 million for the nine months ended September 30, 2016. This increase was primarily attributable to additional depreciation expense related to additional systems that were manufactured and added to our fleet.
Salaries, Benefits and Payroll Taxes. Salaries, benefits and payroll taxes increased $3.7 million, or 185%, to $5.7 million for the nine months ended September 30, 2017 compared to $2.0 million for the nine months ended September 30, 2016. The increase was primarily due to an increase in stock based compensation expense of $2.0 million as a result of the issuance of restricted shares in connection with, and subsequent to, the Offering. The remaining increase was due to additions in corporate and manufacturing administrative personnel in response to the increase in our manufacturing activity, demand for our systems, and industry activity.
Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $1.9 million, or 106%, to $3.7 million for the nine months ended September 30, 2017 compared to $1.8 million for the nine months ended September 30, 2016 due primarily to an increase of $1.6 million in professional fees and non-payroll employee costs.
Other Operating Expense. Other operating expenses in 2017 are primarily one-time bonuses of $3.1 million paid to certain employees in connection with the offering, loss on disposal of field equipment and vehicles of $0.5 million, certain organizational costs of $0.3 million associated with the IPO.
Net Income (loss)
Net income (loss) increased $13.5 million to $13.3 million for the nine months ended September 30, 2017 compared to a net loss of $0.2 million for the nine months ended September 30, 2016, due to the changes in revenues and expenses discussed above. Excluding other operating expenses which are primarily related to the Reorganization Transactions, Net income increased $17.2 million to $17.0 million for the nine months ended September 30, 2017 compared to a net loss of $0.2 million for the nine months ended September 30, 2016, due to the change in revenues and expenses discussed above.
Comparison of Non-GAAP Financial Measures
We view EBITDA and Adjusted EBITDA as important indicators of performance. We define EBITDA as net income (loss), 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 charges and unusual or non-recurring charges.
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 titled measures of other companies, thereby diminishing their utility. The following table presents a
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reconciliation of Net income (loss) to EBITDA and Adjusted EBITDA for each of the periods indicated.
|
Nine months ended September 30, | |
||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2017 | 2016 | Change | |||||||
|
(in thousands) |
|||||||||
Net income (loss) |
$ | 13,250 | $ | (220 | ) | $ | 13,470 | |||
Depreciation and amortization |
4,276 | 2,739 | 1,537 | |||||||
Interest expense, net |
71 | 14 | 57 | |||||||
Income taxes(1) |
1,137 | 26 | 1,111 | |||||||
| | | | | | | | | | |
EBITDA |
$ | 18,734 | $ | 2,559 | $ | 16,175 | ||||
IPO bonuses(2) |
4,046 | | 4,140 | |||||||
Stock-based compensation expense(3) |
1,172 | 108 | 970 | |||||||
Loss on disposal of assets |
451 | | 451 | |||||||
Non-recurring organizational costs(4) |
348 | | 348 | |||||||
Change in payable related to parties pursuant to tax receivable agreements |
(83 | ) | | (83 | ) | |||||
Other(5) |
36 | | 36 | |||||||
| | | | | | | | | | |
Adjusted EBITDA |
$ | 24,704 | $ | 2,667 | $ | 22,037 | ||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Nine Months Ended September 30, 2017, Compared to Nine Months Ended September 30, 2016: EBITDA and Adjusted EBITDA
EBITDA increased $16.2 million to $18.7 million for the nine months ended September 30, 2017 and Adjusted EBITDA increased $22.0 million to $24.7 million for the nine months ended September 30, 2017 compared to $2.6 million and $2.7 million, respectively, for the nine months ended September 30, 2016. EBITDA and Adjusted EBITDA increased 632% and 826%, respectively, for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016. The increases were primarily due to an increase in the number of revenue days and the number of systems deployed to customers, as well as an increase in the rental rates charged to customers due to increasing demand for our systems.
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Year Ended December 31, 2016, Compared to Year Ended December 31, 2015
|
Year ended December 31, |
|
||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2016 | 2015 | Change | |||||||
|
(in thousands) |
|||||||||
Revenue |
||||||||||
Proppant management system rental |
$ | 14,594 | $ | 8,296 | $ | 6,298 | ||||
Proppant management system services |
3,563 | 3,167 | 396 | |||||||
Proppant management system sale |
| 2,742 | (2,742 | ) | ||||||
| | | | | | | | | | |
Total revenue |
18,157 | 14,205 | 3,952 | |||||||
Operating expenses |
||||||||||
Cost of proppant management system rental (excluding $3,352 and $2,000 of depreciation and amortization for the years ended December 31, 2016 and 2015, respectively, shown separately) |
1,431 | 994 | 437 | |||||||
Cost of proppant management system services (excluding $160 and $119 of depreciation and amortization for the years ended December 31, 2016 and 2015, respectively, shown separately) |
4,916 | 3,847 | 1,069 | |||||||
Cost of proppant management system sale |
| 1,948 | (1,948 | ) | ||||||
Depreciation and amortization |
3,792 | 2,395 | 1,397 | |||||||
Salaries, benefits and payroll taxes |
3,061 | 3,571 | (510 | ) | ||||||
Selling, general and administrative (excluding $280 and $276 of depreciation and amortization for the years ended December 31, 2016 and 2015, respectively, shown separately) |
2,096 | 2,663 | (567 | ) | ||||||
| | | | | | | | | | |
Total operating expenses |
15,296 | 15,418 | (122 | ) | ||||||
| | | | | | | | | | |
Operating income(loss) |
2,861 | (1,213 | ) | 4,074 | ||||||
Other income (expense) |
||||||||||
Interest expense, net |
(23 | ) | (22 | ) | (1 | ) | ||||
Other income (expense) |
8 | (71 | ) | 79 | ||||||
| | | | | | | | | | |
Total other income (expense) |
(15 | ) | (93 | ) | 78 | |||||
| | | | | | | | | | |
Income (loss) before income tax expense |
2,846 | (1,306 | ) | 4,152 | ||||||
| | | | | | | | | | |
Income tax expense |
43 | 67 | (24 | ) | ||||||
| | | | | | | | | | |
Net income (loss) |
$ | 2,803 | $ | (1,373 | ) | $ | 4,176 | |||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Revenue
Proppant Management System Rental Revenue. Our proppant management system rental revenue increased $6.3 million, or 76%, to $14.6 million for the year ended December 31, 2016 compared to $8.3 million for the year ended December 31, 2015. This increase was primarily due to a 123% increase in the number of revenue days, or 3,166 days, that resulted in $8.0 million of increased revenue that was partially offset by a 21% decrease in our average system rental rate, or $1.7 million, due to deteriorating industry conditions in hydraulic fracturing operations during 2016 due to low commodity prices.
Proppant Management System Services Revenue. Our proppant management system services revenue increased $0.4 million, or 13%, to $3.6 million for the year ended December 31, 2016 compared to $3.2 million for the year ended December 31, 2015. Proppant management system services revenue from the provision of field technicians increased by $0.8 million, or 46%, to $2.5 million for the year ended December 31, 2016, as a result of the increase in revenue days as noted above. This was partially
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offset by a decrease in transportation service revenue of $0.3 million, or 21%, to $0.9 million for the year ended December 31, 2016 as there were fewer equipment transportation requests from customers.
Proppant Management System Sale Revenue. Our proppant management system sale revenue decreased $2.7 million, or 100%, to $0.0 million for the year ended December 31, 2016 compared to $2.7 million for the year ended December 31, 2015. This decline was attributable to the sale of a proppant management system that closed in January 2015 for $2.7 million (the "System Sale"). In late 2014, we altered our strategy to focus solely on renting rather than selling proppant management systems. We have not sold a system since the System Sale. The System Sale was recognized in 2015 due to the customer making a final payment and taking title to the system in January 2015.
Operating Expenses
Total operating expenses for the years ended December 31, 2016 and 2015 were $15.3 million and $15.4 million, which represented 84% and 109% of total revenue, respectively. Although total operating expenses remained relatively flat year-over-year, the cost of proppant management system rental, which includes maintenance costs, and the cost of proppant management system services, which includes direct labor and related costs, increased primarily due to the increase in revenue days discussed above. As mentioned above, we are solely focused on renting rather than selling proppant management systems. Because there were no proppant management system sales in 2016, we did not recognize any cost of proppant management system sale in 2016. Depreciation and amortization expense also increased, primarily due to the addition of new systems that were manufactured and added to our fleet in 2016. The aforementioned increases in operating expenses were partially offset by lower salaries, benefits and payroll taxes for indirect personnel and selling, general and administrative expenses as cost reduction measures were taken. Additional details regarding the changes in operating expenses are presented below.
Cost of Proppant Management System Rental. Cost of proppant management system rental increased $0.4 million, or 44%, to $1.4 million for the year ended December 31, 2016 compared to $1.0 million for the year ended December 31, 2015. This increase was primarily due to an increase in equipment maintenance cost of $0.4 million, or 53%, that was driven by an increase in revenue days during the year ended December 31, 2016. Cost of proppant management system rental as a percentage of proppant management system rental revenue was 10% and 12% as of December 31, 2016 and 2015, respectively.
Cost of proppant management system rental including depreciation and amortization expense increased $1.8 million, or 60%, to $4.8 million for the year ended December 31, 2016 compared to $3.0 million for the year ended December 31, 2015. This increase was primarily attributable to the factors mentioned above, as well as an increase in depreciation expense related to additional systems that were manufactured and added to our fleet.
Cost of Proppant Management System Services. Cost of proppant management system services increased $1.1 million, or 28%, to $4.9 million for the year ended December 31, 2016 compared to $3.8 million for the year ended December 31, 2015. This increase was primarily due to an increase in labor and related costs of $0.8 million, or 50%, and travel and lodging costs of $0.4 million, or 71%, both of which were driven by an increase in the number of field technicians required to support the increased revenue days during the year ended December 31, 2016. As of December 31, 2016, the cost of proppant management system services as a percentage of proppant management system services revenue increased to 138% compared to 121% as of December 31, 2015. During 2016, in response to reduced overall industry activity levels and at the request of some of our customers, we reduced the amount that we charged for proppant management system services to our proppant management system rental customers while providing similar coverage. As a result, cost of proppant management
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system services as a percentage of proppant management system services revenue increased in 2016 compared to 2015.
Cost of proppant management system services including depreciation and amortization expense increased $1.1 million, or 28%, to $5.1 million for the year ended December 31, 2016 compared to $4.0 million for the year ended December 31, 2015. This increase was primarily attributable to the factors mentioned above, as well as an increase in depreciation expense related to additional light-duty trucks that were purchased to support our increased activity.
Cost of Proppant Management System Sale. Cost of proppant management system sale decreased $1.9 million, or 100%, to $0.0 million for the year ended December 31, 2016 as there were no system sales during the year ended December 31, 2016.
Depreciation and Amortization. Depreciation and amortization increased $1.4 million, or 58%, to $3.8 million for the year ended December 31, 2016 compared to $2.4 million for the year ended December 31, 2015. This increase was primarily attributable to additional depreciation expense related to additional systems that were manufactured and added to our fleet.
Salaries, Benefits and Payroll Taxes. Salaries, benefits and payroll taxes decreased $0.5 million, or 14%, to $3.1 million for the year ended December 31, 2016 compared to $3.6 million for the year ended December 31, 2015. The decrease was primarily due to a reduction in corporate and manufacturing administrative personnel and cost reduction measures taken in response to the reduction in industry activity.
Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased $0.6 million, or 21%, to $2.1 million for the year ended December 31, 2016 compared to $2.7 million for the year ended December 31, 2015 due primarily to a $0.6 million reduction in professional fees and employee recruiting fees and a $0.2 million reduction in travel expenses, offset by an increase in research and development expense of $0.3 million.
Other Income (Expense)
Other income (expense) increased $0.1 million to $8,000 for the year ended December 31, 2016 compared to $(71,000) for the year ended December 31, 2015. The increase was primarily related to the write-off of a $0.1 million deposit to purchase new railcars during the year ended December 31, 2015.
Income Tax Expense
Income tax expense decreased $24,000, or 36%, to $43,000 for the year ended December 31, 2016 compared to $67,000 for the year ended December 31, 2015, due to lower franchise tax expense.
Net Income (loss)
Net income increased $4.2 million to $2.8 million for the year ended December 31, 2016 compared to $(1.4) million for the year ended December 31, 2015, due to the change in revenues and expenses discussed above.
Comparison of Non-GAAP Financial Measures
We view EBITDA and Adjusted EBITDA as important indicators of performance. We define EBITDA as net income (loss), 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 charges and unusual or non-recurring charges.
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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 titled measures of other companies, thereby diminishing their utility. The following table presents a reconciliation of EBITDA and Adjusted EBITDA to net loss for each of the periods indicated.
|
Year ended December 31, |
|
||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2016 | 2015 | Change | |||||||
|
(in thousands) |
|||||||||
Net income (loss) |
$ | 2,803 | $ | (1,373 | ) | $ | 4,176 | |||
Depreciation and amortization |
3,792 | 2,395 | 1,397 | |||||||
Interest expense, net |
23 | 22 | 1 | |||||||
Income taxes(1) |
43 | 67 | (24 | ) | ||||||
| | | | | | | | | | |
EBITDA |
$ | 6,661 | $ | 1,111 | $ | 5,550 | ||||
Sand mining and terminal business development costs(2) |
| 446 | (446 | ) | ||||||
Non-recurring supplier settlement(3) |
| 38 | (38 | ) | ||||||
Stock-based compensation expense(4) |
127 | 64 | 63 | |||||||
| | | | | | | | | | |
Adjusted EBITDA |
$ | 6,788 | $ | 1,659 | $ | 5,129 | ||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Year Ended December 31, 2016, Compared to Year Ended December 31, 2015: EBITDA and Adjusted EBITDA
EBITDA and Adjusted EBITDA increased $5.6 million and $5.1 million, or 500% and 309%, to $6.7 million and $6.8 million for the year ended December 31, 2016, respectively, compared to $1.1 million and $1.7 million for the year ended December 31, 2015, respectively. The increases were primarily due to an increase in the number of revenue days, which was partially offset by lower average rental rates and the impact of the System Sale during the year ended December 31, 2015.
Liquidity and Capital Resources
Overview
Our primary sources of liquidity to date have been capital contributions from our owners, cash flows from operations, borrowings under our Amended Credit Facility and proceeds from the IPO. Our primary uses of capital have been capital expenditures to support organic growth, construction of the Kingfisher Facility and the acquisition of our manufacturing facility and intellectual property. 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 business.
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As described in "Use of Proceeds," we intend to contribute all of the net proceeds we receive from this offering to Solaris LLC in exchange for Solaris LLC Units. Solaris LLC will use the net proceeds it receives for general corporate purposes, including to fund our 2017 capital program. Please see "Use of Proceeds." Following this offering, we intend to finance most of our capital expenditures, contractual obligations and working capital needs with cash generated from operations, proceeds from this offering, the IPO and borrowings under our Amended Credit Facility. We currently estimate that our capital expenditures for 2017 will range from $85.0 million to $95.0 million, the majority of which we expect will be used to manufacture additional systems for our fleet and advance construction of the Kingfisher Facility. Based upon our current contracted capacity at the Kingfisher Facility, we estimate that approximately $40.0 million of capital expenditures will be required to complete the initial phase of the facility's construction. However, to the extent that we are successful in contracting additional capacity at the Kingfisher Facility with other customers, additional capital expenditures may be required to further advance the construction of the facility. 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, proceeds from this offering and the IPO and available borrowings under our Amended Credit Facility will be sufficient to fund our operations for at least the next twelve months.
At September 30, 2017, cash and cash equivalents totaled $54.0 million.
Cash Flows
The following table summarizes our cash flows for the periods indicated:
|
Nine months ended September 30, |
Year ended December 31, |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2017 | 2016 | 2016 | 2015 | |||||||||
Net cash provided by operating activities |
$ | 12,998 | $ | 768 | $ | 4,521 | $ | 2,156 | |||||
Net cash used in investing activities |
(49,049 | ) | (5,951 | ) | (10,935 | ) | (27,859 | ) | |||||
Net cash provided by financing activities |
86,479 | (161 | ) | 3,059 | 7,878 | ||||||||
| | | | | | | | | | | | | |
Net change in cash |
$ | 50,428 | $ | (5,344 | ) | $ | (3,355 | ) | $ | (17,825 | ) | ||
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Analysis of Cash Flow Changes for Nine Months Ended September 30, 2017 Compared to Nine Months Ended September 30, 2016
Operating Activities. Net cash provided by operating activities was $13.0 million for the nine months ended September 30, 2017, compared to net cash used in operating activities of $0.8 million for the nine months ended September 30, 2016. The increase of $12.2 million in operating cash flow was primarily attributable to an increase in net income of $13.1 million due to an increase in the number of revenue days, offset by an increase of $7.2 million in inventories as a result of advanced payment deposits relating to an increase in our manufacturing activities.
Investing Activities. Net cash used in investing activities was $49.0 million for the nine months ended September 30, 2017, compared to $6.0 million for the nine months ended September 30, 2016 due to an increase in the manufacturing rate of new systems. For the nine months ended September 30, 2017, $40.5 million of investing activities were capital expenditures related to manufacturing new systems and $2.1 million of investing activities were capital expenditures related to the purchase of vehicles to support the service of our systems, and $4.8 million of investing activities were capital expenditures related to construction of our transloading facilities. For the nine months ended September 30, 2016, $5.9 million of investing activities were primarily related to capital expenditures related to manufacturing new systems.
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Financing Activities. Net cash provided by financing activities of $86.5 million for the nine months ended September 30, 2017, was primarily related to $111.1 million in net proceeds received in the IPO and $4.3 million in proceeds received from the payment of promissory notes from employees, less $5.5 million used to fully repay borrowings under the Amended Credit Facility and $25.8 million distributions to legacy members of Solaris LLC as part of the Reorganization Transactions undertaken in connection with the IPO.
Analysis of Cash Flow Changes Between the Years Ended December 31, 2016 and 2015
Operating Activities. Net cash provided by operating activities was $4.5 million for the year ended December 31, 2016, compared to $2.2 million for the year ended December 31, 2015. The increase in operating cash flow was primarily attributable to an increase in the number of revenue days, partially offset by an increase in accounts receivable as a result of higher rental revenue.
Investing Activities. Net cash used in investing activities was $10.9 million for the year ended December 31, 2016, compared to $27.9 million for the year ended December 31, 2015 due to a reduction in the manufacturing rate of new proppant management systems. During the year ended December 31, 2016, $9.5 million of capital expenditures were related to manufacturing new proppant management systems, and $1.2 million of capital expenditures were related to capital improvements in our manufacturing facility. During the year ended December 31, 2015, $27.3 million of capital expenditures were related to manufacturing new proppant management systems, and $0.6 million of capital expenditures were related to capital improvements in our manufacturing facility.
Financing Activities. Net cash provided by financing activities was $3.1 million for the year ended December 31, 2016, compared to $7.9 million for the year ended December 31, 2015. During the year ended December 31, 2016, we borrowed $2.5 million under our Credit Facility and an existing member paid off its applicable promissory note and interest for $0.9 million in cash. During the year ended December 31, 2015, our members made capital contributions of $8.2 million.
Senior Secured Credit Facility
On May 17, 2017, we entered into a First Amendment (the "First Amendment") to the Credit Agreement, dated as of December 1, 2016 (the "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 accordion 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
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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 ("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 will bear interest at 5.00% plus the otherwise applicable interest rate. The Amended Credit Facility has a scheduled maturity date of May 17, 2021.
The Amended Credit Facility 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 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.
As of September 30, 2017, we had no borrowings under the Revolving Facility outstanding with $20.0 million in revolving commitments available.
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The table below provides estimates of the timing of future payments that we are contractually obligated to make based on agreements in place at December 31, 2016.
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Payments Due by Period | |||||||||||||||
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(in thousands) | |||||||||||||||
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Less than 1 year |
1 - 3 years | 4 - 5 years | Thereafter | Total | |||||||||||
Notes Payable(1) |
$ | 169 | $ | 274 | $ | 8 | $ | | $ | 451 | ||||||
Estimated interest payments(2) |
150 | 179 | 38 | | 367 | |||||||||||
Capital lease obligations(3) |
33 | 67 | 67 | 105 | 272 | |||||||||||
Operating lease obligations(4) |
48 | 58 | 12 | | 118 | |||||||||||
Amended Credit Facility(5) |
31 | 1,750 | 719 | | 2,500 | |||||||||||
Purchase commitments(6) |
835 | | | | 835 | |||||||||||
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Total |
$ | 1,266 | $ | 2,328 | $ | 844 | $ | 105 | $ | 4,543 | ||||||
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With respect to obligations we expect Solaris Inc. to incur under the Tax Receivable Agreement (except in cases where Solaris Inc. elects to terminate the Tax Receivable Agreement early, the Tax Receivable Agreement is terminated early due to certain mergers or other changes of control or we have available cash but fail to make payments when due, in which cases Solaris Inc. would be required to make a substantial, immediate lump-sum payment), generally Solaris Inc. may elect to defer payments due under the Tax Receivable Agreement if it does not have available cash to satisfy its payment obligations under the Tax Receivable Agreement or if its contractual obligations limit its ability to make these payments. Any such deferred payments under the Tax Receivable Agreement generally will accrue interest. For further discussion regarding such an acceleration and its potential impact, please read "Risk FactorsRisks Related to this Offering and Our Class A Common StockIn certain cases, payments under the Tax Receivable Agreement may be accelerated and/or significantly exceed the actual benefits, if any, we realize in respect of the tax attributes subject to the Tax Receivable Agreement." For additional information regarding the Tax Receivable Agreement, see "Certain Relationships and Related Party TransactionsTax Receivable Agreement."
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Quantitative and Qualitative Disclosure of Market Risks
Market risk is the risk of loss arising from adverse changes in market rates and prices. Currently, our market risks relate to potential changes in the fair value of our long-term debt due to fluctuations in applicable market interest rates. Going forward our market risk exposure generally will be limited to those risks that arise in the normal course of business, as we do not engage in speculative, non-operating transactions, nor do we utilize financial instruments or derivative instruments for trading purposes.
Commodity Price Risk
The market for our services is indirectly exposed to fluctuations in the prices of crude oil and natural gas to the extent such fluctuations impact drilling and completion activity levels and thus impact the activity levels of our customers in the exploration and production and oilfield services industries. We do not currently intend to hedge our indirect exposure to commodity price risk.
Interest Rate Risk
We are subject to interest rate risk on a portion of our long-term debt under the Amended Credit Facility. We do not currently have any borrowings under our Credit Facility.
Credit Risk
The majority of our accounts receivable have payment terms of 60 days or less. As of September 30, 2017, two customers accounted for 25% and 21% of our total accounts receivable. As of December 31, 2016, one customer accounted for 23% of our total accounts receivable. We mitigate the associated credit risk by performing credit evaluations and monitoring the payment patterns of our customers.
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 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
We currently generate revenue primarily through the rental of our systems and related services, including transportation of our 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 our systems and service on a well site, indemnification, damages, confidentiality, intellectual property protection and payment terms and provisions. The services are generally priced
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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.
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. We consider accounts outstanding longer than the payment terms past due. We determine 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. However, it is reasonably possible that the estimates of the allowance for doubtful accounts will change and that losses ultimately incurred could differ materially from the amounts estimated in determining the allowance. As of September 30, 2017 we had no allowance for doubtful accounts.
Inventories
Inventories consists of materials used in the manufacturing of the proppant management systems, which include raw materials and purchased parts. Inventory purchases are recorded initially at cost and issued at weighted average cost when consumed.
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:
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to better manage proppant inventory levels both onsite and remotely. This upgrade is added to and depreciated over the remaining life of the system.
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.
Impairment of Long-Lived and Other Intangible Assets
Long-lived assets, such as property, plant and equipment and finite-lived intangible assets, are evaluated for impairment whenever events or changes in circumstances indicate that their carrying value may not be recoverable. Recoverability is assessed using undiscounted future net cash flows of assets grouped at the lowest level for which there are identifiable cash flows independent of the cash flows of other groups of assets. When alternative courses of action to recover the carrying amount of the asset group are under consideration, estimates of future undiscounted cash flows take into account possible outcomes and probabilities of their occurrence, which require us to apply judgment. If the carrying amount of the asset is not recoverable based on its estimated undiscounted cash flows expected to result from the use and eventual disposition, an impairment loss is recognized in an amount by which its carrying amount exceeds its estimated fair value. The inputs used to determine such fair value are primarily based upon internally developed cash flow models. Our cash flow models are based on a number of estimates regarding future operations that are subject to change. There was no impairment for the nine months ended September 30, 2017 and 2016 or the years ended December 31, 2016 and 2015.
Goodwill
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 of October 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. There was no impairment for the nine months ended September 30, 2017 and 2016 or the years ended December 31, 2016 and 2015.
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'
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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.
Recent Accounting Pronouncements
See Note 2, "Summary of Significant Accounting PoliciesRecently Accounting Pronouncements" to our consolidated financial statements as of September 30, 2017 and December 31, 2016 included elsewhere in this prospectus, 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).
Internal Controls and Procedures
We are not currently required to comply with the SEC's rules implementing Section 404 of the Sarbanes Oxley Act of 2002, and are therefore not required to make a formal assessment of the effectiveness of our internal control over financial reporting for that purpose. We are required to comply with the SEC's rules implementing Section 302 of the Sarbanes-Oxley Act of 2002, which requires our management to certify financial and other information in our quarterly and annual reports and provide an annual management report on the effectiveness of our internal control over financial reporting. Management will not be required to make its first assessment of our internal control over financial reporting under Section 404(a) until our annual report for the year ended December 31, 2018. Our external auditors will not be required to make an assessment of our internal control over financial reporting under Section 404(b) until our first annual report subsequent to our ceasing to be an "emerging growth company" within the meaning of Section 2(a)(19) of the Securities Act.
Further, our independent registered public accounting firm is not yet required to formally attest to the effectiveness of our internal controls over financial reporting, and will not be required to do so for as long as we are an "emerging growth company" pursuant to the provisions of the JOBS Act. See "SummaryOur Emerging Growth Company Status."
Off Balance Sheet Arrangements
We have no material off balance sheet arrangements, except for operating leases. 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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Unless otherwise indicated, the information set forth in this "Industry Overview," including all statistical data and related forecasts, is derived from Spears & Associates' "Hydraulic Fracturing Market 2006-2018" published in the third quarter 2017, and Baker Hughes' "North America Rotary Rig Count" published on November 3, 2017. We believe that the third-party sources are reliable and that the third-party information included in this prospectus is accurate and complete. While we are not aware of any misstatements regarding the industry data presented herein, estimates involve risks and uncertainties and are subject to change based on various factors, including those discussed under the heading "Risk Factors."
We manufacture and provide patented mobile proppant management systems that enhance the delivery of proppant used in the hydraulic fracturing of oil and natural gas wells. Hydraulic fracturing is the most widely used method for stimulating increased production from wells. The process consists of pumping fluids, mixed with granular proppants, into the geologic formation at pressures sufficient to create fractures in the hydrocarbon-bearing rock. Proppant-filled fractures create conductive channels through which the hydrocarbons can flow more freely from the formation into the wellbore and then to the surface. Among oilfield service subsectors, recent developments in drilling and completion techniques have had a disproportionately positive impact on demand for hydraulic fracturing and related services, including the demand for proppant solutions.
Raw frac sand, the most prevalent proppant used in hydraulic fracturing operations, is a naturally occurring mineral that is mined and processed. After processing, most frac sand is shipped in bulk from the processing facility to customers by rail, barge or truck. Rail is the predominant method of long distance sand shipment to applicable basins. Once proppant reaches the basin it serves, truck transportation is the primary method of transportation to a customer's well site.
While we do not currently anticipate any shortages in the supply of the raw frac sand used in hydraulic fracturing operations, supplies of high-quality raw frac sand are limited to select areas, predominantly in western Wisconsin and limited areas of Minnesota and Illinois. Accordingly, transportation costs often represent a significant portion of the customer's overall product cost, and transferring large quantities of proppant to the well site presents a number of challenges, including the cost and management of last mile logistics. In particular, today's horizontal well completion designs require between 400 and 1,000 truckloads of proppant delivered to the well site per well, which creates bottlenecks in the storage, handling and delivery of proppant. Additionally, increased focus on cost control and increased HS&E regulation has created numerous operational challenges that cannot be solved with labor intensive proppant storage equipment, such as those that utilize individual containers for on-site proppant storage and handling. We believe our systems enhance the management and delivery of proppant from mines or transload facilities to well sites.
Demand for proppant logistic systems and services is predominantly influenced by the level of drilling and completion by E&P companies, which, in turn, depends largely on the current and anticipated profitability of developing oil and natural gas reserves. More specifically, demand for our systems and services is driven by several factors including rig count, well count, service intensity, well design (lateral length), completion design (number of fracturing stages and proppant per lateral foot) and the timing of well completions.
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Oil and natural gas production from an individual well will generally exhibit its highest production level in the months immediately following its completion, and production will decline over time thereafter. Producers must continuously drill new wells to offset production declines and maintain overall production levels. Tight oil and shale gas wells typically experience faster production declines during their first few years of production than conventional wells. Spears projects that the number of new horizontal wells drilled in North America will increase from 9,275 in 2016 to 19,353 in 2018, a compound annual growth rate of 44%. Additionally, operators are beginning to perform secondary hydraulic fracturing of existing wells in order to maintain and increase overall production levels. We believe these efforts to offset steep production declines in unconventional oil and natural gas reservoirs will be a strong driver of future proppant and hydraulic fracturing services demand growth.
According to Spears, the U.S. proppant market, including raw frac sand, ceramic and resin-coated proppant, was approximately 57.5 million tons in 2015. Market demand in 2015 dropped by approximately 21% from 2014 record demand levels (and a further estimated decrease of 17% in 2016 from 2015) due to the downturn in commodity prices since late 2014, which led to a corresponding decline in oil and natural gas drilling and production activity. However, oil prices have increased since the 12-year low recorded in February 2016, reaching $54.01 in December 2016. In response to the improved expected financial returns generated by these increases in hydrocarbon prices, exploration & production companies have increased their capital spending on drilling and completion services in the second half of 2016, and as a result, demand for oilfield services activities has improved. According to Baker Hughes' North American Rig Count, the number of active total drilling rigs in the United States increased from a low of 404 rigs, as reported on May 27, 2016, to 898 active drilling rigs as reported on November 3, 2017. Spears estimates that from 2016 through 2018 proppant demand will grow by 75% per year, from 47.5 million tons per year to 145 million tons per year, representing an increase of approximately 97.5 million tons in annual proppant demand over that time period.
Derived from Spears & Associates' "Hydraulic Fracturing Market, 2006-2018", published Third Quarter 2017
Demand growth for proppants and, in turn, our systems is primarily driven by advancements in oil and natural gas drilling and well completion technology and techniques, including (i) increases in the percentage of rigs that are drilling horizontal wells, (ii) increases in pad drilling and simultaneous fracturing/wireline operations, (iii) increases in the length of the typical horizontal wellbore, (iv) increases in the number of fracture stages in a typical horizontal wellbore, (v) increase in the
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amount of proppant loaded per lateral foot and (vi) increases in the enforcement of existing HS&E regulations and the issuance of additional HS&E regulations. These advancements have made the extraction of oil and natural gas increasingly cost-effective in formations that historically would have been uneconomic to develop. The percentage of active drilling rigs used to drill horizontal wells, which require greater volumes of proppant than vertical wells, has increased from 42.2% in 2009 to 78.6% in 2016, and as of November 3, 2017, the percentage of rigs drilling horizontal wells is 85.1% according to the Baker Hughes Rig Count. Moreover, the increase of pad drilling has led to a more efficient use of rigs, allowing more wells to be drilled per rig. As a result of these factors, well count, and hence proppant demand, has grown at a greater rate than overall rig count. Spears estimates that in 2018, proppant demand will exceed the 2014 peak (of approximately 72.5 million tons) and reach 145 million tons even though the projection assumes approximately 5,000 fewer wells will be drilled. Spears estimates that average proppant usage per well will be approximately 9,002 tons per well by 2018.
The following table illustrates the steadily increasing intensity of proppant use in horizontal wells.
Derived from Spears & Associates' "Hydraulic Fracturing Market, 2006-2018", published Third Quarter 2017
Supply and Demand Dynamics in the Proppant Management Systems and Services Market
The increase in proppant demand per well, coupled with increasing completion activity levels is expected to place a strain on the industry's proppant logistics infrastructure, including in-basin proppant terminals and last-mile proppant transportation assets. As the market for proppant logistics services tightens, we believe this may lead to a general increase in demand and pricing for our systems. With demand for our systems in excess of current supply and the ability of our systems to handle the most complex, highest intensity proppant logistics jobs, we are optimally positioned to benefit from increasing pricing trends.
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BUSINESS
Our Company
We are an independent provider of supply chain management and logistics solutions designed to drive efficiencies and reduce costs for the oil and natural gas industry. We manufacture and provide our patented mobile proppant management systems that unload, store and deliver proppant at oil and natural gas well sites. Our systems reduce our customers' cost and time to complete wells by improving the efficiency of proppant logistics, as well as enhancing well site safety. In addition, we are currently constructing an independent, unit-train-capable transload facility in Oklahoma in order to further integrate our supply chain management and drive additional proppant logistics efficiencies for our customers. Our customers include oil and natural gas E&P companies, such as EOG Resources, Inc., Devon Energy and Apache Corporation, as well as oilfield service companies, such as ProPetro Holding Corp. Our 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. Since commencing operations in April 2014, we have grown our fleet from two systems to 68 systems. We currently have more demand for our systems than we can satisfy with our existing fleet, and we expect to increase our fleet to between 74 to 76 systems by the end of 2017 in response to customer demand.
Our mobile proppant management system is 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, which we define as the transportation of proppant from transload terminal or regional proppant mine to the well site. Today's horizontal well completion designs require between 400 and 1,000 truckloads of proppant delivered to the well site per well which creates bottlenecks in the storage, handling and delivery of proppant. Our patented systems typically provide 2.5 million pounds of proppant storage capacity in order to provide a footprint that is considerably smaller than traditional or competing well site proppant storage equipment. Our systems have the ability to unload up to 24 pneumatic proppant trailers simultaneously. In addition, our recently deployed 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 non-pneumatic loading option is compatible with our existing fleet with minimal modification. Importantly, the proppant storage silos in our systems can be filled from trucks while simultaneously delivering proppant on-demand directly to the blender for hydraulic fracturing operations. Accordingly, our systems can maintain high rates of proppant delivery for extended periods of time, which helps achieve a greater number of frac stages per day, driving a reduction in our customers' costs. Our systems also reduce the amount of truck demurrage, or wait time, at the well site which can result in significant cost savings for our customers.
Our proprietary PropView inventory management system enables our customers to track inventory levels in, and delivery rates from, each silo in a system on a real-time basis. The PropView system will also be integrated into our operations at the Kingfisher Facility, which will provide our customers with increased visibility across their supply chain, both at the transload facility and the well site. The PropView system provides critical information to our customers, both directly at a well site and as well as at a transload location, and can be viewed remotely in real-time through our mobile device application and website. Access to this data and the ability to integrate it into existing monitoring systems allows our customers to realize efficiencies throughout the proppant supply chain and across multiple well sites.
Our mobile proppant management system improves well site HS&E by reducing respirable dust, decreasing the number of well site personnel and providing enhanced lighting. We expect the well site HS&E improvements provided by our systems, combined with increased industry focus on HS&E matters, will support continued adoption of our systems.
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We manufacture our systems in our facility in Early, Texas, which is proximate to some of the most prolific oil and natural gas producing regions in the country. We are currently manufacturing approximately six systems per month. We have been able to achieve this manufacturing rate through selective outsourcing of certain components of our systems. Our vertically integrated manufacturing capability allows us to better control our supply chain and incorporate improvements and additional features into our systems based on our experience and customer feedback. Additionally, we believe that controlling our manufacturing process provides us cost advantages that improve our returns on capital.
As illustrated in the following chart, we have increased our total system revenue days, defined as the combined number of days our systems earned revenues, in twelve of the last thirteen quarters, and we have increased our system revenue days by more than 2,523% from the second quarter of 2014 to the third quarter of 2017, representing a 173% compound annual growth rate. The increase in total system revenue days is attributable to both an increase in the number of systems available for rental and an increase in the rate at which our systems are utilized.
In order to further integrate our supply chain management, we are constructing the Kingfisher Facility, an independent, unit-train-capable transload facility in Oklahoma. The 300-acre facility will initially include an 8,000 foot unit-train loop, 30,000 tons of high efficiency silo storage and an additional 18,000 feet of rail sidetrack, and it is located directly on a Class I rail line owned by the Union Pacific Railroad, in Kingfisher, Oklahoma, which is strategic to the active SCOOP/STACK formations. The unit-train loop and silo storage will enable the Kingfisher Facility to unload a unit train of 120 rail cars in approximately 24 hours and load more than 10,000 tons into trucks in a 24-hour period. While the Kingfisher Facility will initially provide proppant transloading services, it will also have the capability to provide transloading services for other drilling and completion related consumables. In connection with the development of the Kingfisher Facility, we entered into a seven year contract with minimum quarterly volume commitments with a leading exploration and production company to provide rail-to-truck and high-efficiency sand silo transload and storage services at the facility. We estimate that our current contracted minimum volumes represent approximately 50% of the operational capacity of the initial phase of the facility's construction, and we are actively seeking to contract additional capacity at the facility with other customers.
Current Market Trends and Challenges
Over the past decade, E&P companies have increasingly focused on exploiting the vast hydrocarbon reserves contained in North America's oil and natural gas reservoirs by utilizing advanced drilling and completion techniques, such as horizontal drilling and hydraulic fracturing. Though deteriorating industry conditions caused by the downturn in commodity prices in 2015 resulted in a
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significant decrease in U.S. demand for proppant in 2015 from 2014 record demand levels (and a further decrease in demand in 2016 from 2015 demand levels), oil prices have increased since the 12-year low recorded in February 2016. Recently, there has been an increase in proppant demand as E&P companies have shifted toward:
We believe the increase in completion activity levels and proppant demand per well, coupled with the complexities associated with the management of last mile proppant logistics, will place a strain on the industry's logistics infrastructure. Additionally, increased focus on cost control and increased HS&E regulation has created numerous operational challenges that cannot be efficiently addressed with labor intensive proppant storage equipment, such as those that utilize individual containers for on-site proppant storage and handling.
Our Solutions
Our system is a proven solution for enhancing the management of proppant along the supply chain, from last mile trucking to well site operations. In addition, the Kingfisher Facility will provide our customers with fast and reliable proppant delivery to the SCOOP/STACK and broader visibility into their proppant supply chain. The combination of our wellsite system and the Kingfisher Facility will create additional logistics savings for our customers from the mine to the well site. Our solutions provide:
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We believe these operational efficiencies reduce completion costs for our E&P customers and increase revenue and fleet utilization for our pressure pumping customers, who typically earn revenue on a per-fracturing stage basis.
Competitive Strengths
We believe that we will be able to successfully execute our business strategies because of the following competitive strengths:
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Business Strategies
Our principal business objective is to increase shareholder value by profitably growing our business. We expect to achieve this objective through the following business strategies:
We were formed in 2014 in connection with the purchase of two proppant management systems from Loadcraft Industries, Ltd., the original manufacturer of the systems, under an exclusive marketing arrangement. In September 2014, we acquired Loadcraft Industries' proppant management system
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manufacturing business, including a manufacturing facility located in Early, Texas, and commenced our manufacturing operations.
Since 2014, we have grown our fleet of proppant management systems from two systems to 68 systems, improved the capabilities of our systems and developed additional potential product offerings. Such improvements and offerings include:
We currently own 68 six-silo systems across the U.S., and we currently use 94 silo transportation trailers to manage transportation of our systems. The following table provides locations of our fleet as of November 3, 2017:
Location
|
Number of Systems |
|||
---|---|---|---|---|
Permian Basin |
41 | |||
Eagle Ford Shale |
13 | |||
SCOOP/STACK Formations |
7 | |||
Haynesville Shale |
5 | |||
Marcellus Shale/Utica Shale |
2 |
Our patented mobile proppant management systems typically contain six silos, two base units, one central conveyor, and one PropViewTM system. Each of the six silos has the capacity to store up to 420,000 pounds of proppant (4,200 cubic feet). Three silos are positioned on each base and the central conveyor is positioned between the two base units. A six-silo configuration includes twenty-four unloading points. The six-silo configuration also provides increased inventory capacity compared to other systems, which reduces the amount of truck demurrage, or wait time, at the well site.
Our systems are powered with a single diesel generator. Hydraulic power is not required to operate our system; instead, the systems' motors are electrically driven and operate at variable speeds. Electricity is provided by one of two diesel generators that are standard on the systems while the other serves as a backup for redundancy purposes. The flow of proppant into the well site blender is controlled by the speed of the system's conveyors, which reduces the amount of proppant spillage and silica dust typically associated with labor-intensive, gate-controlled handling equipment. In addition, each silo contains a dust collection system that can handle up to 4,300 cubic feet per minute of proppant flow, which is the equivalent of unloading four pneumatic trucks simultaneously. Each system is also equipped with industrial-grade LED lighting located approximately 55 feet above the well site that provides 336,000 lumens of lighting on the well site.
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Our systems are operated using our third-generation Rockwell Automation control system and each system is equipped with our integrated Prop ViewTM system. The system can be operated by a single individual, who controls the flow of proppant into the well site blender from a rugged, LED-lit Allen-Bradley suitcase touch screen. Our proprietary PropViewTM system enables our customers to track real time proppant inventory levels in and delivery rates from each silo. Our PropViewTM system provides critical information to our customers both directly in the well site data van and remotely through our mobile device application and website. The availability of this data and the ability to integrate the data into existing monitoring systems enables our customers to realize efficiencies through better managing the delivery of proppant throughout the proppant supply chain and across multiple well sites.
Additionally, our systems are highly mobile and can be easily deployed to any North American basin in response to industry activity levels. Our systems do not require specialized equipment to transport and deliver proppant to the well site. Rather, our system is compatible with standard pneumatic trailers, the industry's most abundant proppant transportation option. Our systems are also compatible with other completion equipment, including blending units and pressure pumping fleets, and can store and deliver a full range of proppants, including raw frac sand, resin coated sand and ceramic proppant. The system's compatibility with other well site equipment provides E&P operators with the flexibility to select their preferred choice of pressure pumper and proppant type.
Our systems require minimal maintenance for continued operation in the field, primarily consisting of routine replacement of fill tube components and routine maintenance of generators, all of which can be performed in the field without returning the systems to our manufacturing facility. Additionally, our systems have been configured with multiple redundancies, such as dual generators, dual central conveyor belts and twenty-four truck unloading positions, which further improve the overall reliability and efficiency of our customers' operations and enable them to complete more fracturing stages per day.
Early, Texas Manufacturing Facility
We manufacture our systems in our manufacturing facility located in Early, Texas. Early is located in central Texas, which provides convenient access to our most active operating areas, the Permian Basin, the Eagle Ford Shale and the SCOOP/STACK formations. We acquired our Early facility in September 2014 and have made capital improvements and improved the workflow in the plant to streamline the production process, increase output and reduce the cost of manufacturing our systems. We are currently producing approximately six systems per month.
Our Early facility is located on 10.8 acres of contiguous land and includes over 100,000 square feet of covered manufacturing space. We manufacture new systems at the facility and, when appropriate, make repairs to and upgrade our systems. We cut, roll, weld and assemble our systems, including our custom transportation trailers, at the facility. Machinery and capabilities at our Early facility include steel rolling machines, overhead cranes, trunnions, positioners, I-beam assemblies, plasma tables and a paint booth.
We made capital improvements at our Early facility in late 2015 and early 2016 to streamline our manufacturing processes, including adding welding trunnions, production fixtures and overhead crane capacity that reduce the amount of time required to weld and assemble our systems. In addition, we reconfigured the layout of the plant to improve the manufacturing process flow. We believe our Early facility is a competitive advantage that provides us with a greater ability to control manufacturing costs, as well as additional supply chain and quality security and research and development capabilities.
We have historically outsourced the manufacturing of some of our system components in order to increase our manufacturing rate to meet market demand. All systems are completed and inspected in our Early facility to ensure quality control before entering the field.
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In July 2017, we entered into a seven year contract with an exploration and production company to provide proppant transloading service at a facility to be constructed and operated by Solaris in Kingfisher, Oklahoma. The Kingfisher Facility will be located central to the active SCOOP/STACK plays and we believe it will be the first independent, unit-train capable, high speed transload facility in Oklahoma. The Kingfisher Facility will initially provide proppant transloading services, but will also have capacity to provide transloading services for other drilling and completion related consumables.
The Kingfisher Facility will be located on a 300-acre parcel of land, directly on the Union Pacific Railroad. Solaris has secured a 30-year land lease with the State of Oklahoma and has started ordering long-lead construction items, breaking ground in August 2017. The facility is designed to service multiple large volume customers with dedicated storage and unit train loop tracks, including an initial 8,000 foot unit-train loop and 18,000 feet of rail sidetrack. Initial storage will include 30,000 tons of vertical storage in six silos with individual capacity of 5,000 tons per silo. The facility will also service manifest trains and provide direct rail-to-truck transloading. The estimated capital investment for the first phase of development to complete core infrastructure and fully support the customer contract totals at the Kingfisher Facility is approximately $40.0 million. This investment includes capital expenditures related to engineering and site preparation, as well as rail and silo construction that is scheduled to be fully completed by August 2018.
Raw Materials and Key Suppliers
The primary raw materials used in the manufacturing of our systems are steel in the form of plate, bar stock and square and round tubing. We purchase steel and most other raw materials and components on the open market and rely on third parties for providing certain materials, including axles, motors and generators. We believe that we will be able to obtain an adequate supply of raw materials and finished goods to meet our manufacturing requirements because these items are generally available from multiple sources. However, prices for such raw materials and finished goods can fluctuate widely and represent a significant portion of the cost of manufacturing our systems. Accordingly, our cost of revenue and capital costs may be affected by changes in the market price or disruptions in the availability of raw materials, components and sourced finished goods, and significant increases in the cost of steel or other raw materials and motors, generators and other components could adversely affect our revenues or increase our costs. Steel represents 10% to 15%, purchased parts represent 40% to 50% and labor and indirect manufacturing costs represent 30% to 50% of the total cost of manufacturing a typical system.
We purchase the materials used in the manufacturing of our systems from various suppliers. Occasionally, we also work with select third-party manufacturers to fabricate certain components to supplement our internal production capacity during periods of peak demand. During the nine months ended September 30, 2017, two suppliers including RNB Controls, Inc. and Delta Steel Inc as well as one third party manufacturer, Heil Trailer International Co., accounted for approximately 27% of our total spend. During the year ended December 31, 2016, three suppliers including RNB Controls, Inc., Stewart & Stevenson, LLC and Delta Steel Inc., accounted for approximately 26% of our total purchases.
We have historically relied on one supplier for the motors that we use in our systems, which are a critical component. To date, we have generally been able to obtain these motors and other equipment, parts and supplies necessary to support our manufacturing operations on a timely basis. While we believe that we will be able to make satisfactory alternative arrangements in the event of any interruption in the supply of these materials and/or products by one of our suppliers, including with respect to the supplier of our motors, we may not always be able to make alternative arrangements in the event of any interruption or shortage in the supply of certain of our materials. In addition, certain
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materials for which we do not currently have long-term supply agreements could experience shortages and significant price increases in the future. As a result, we may be unable to mitigate any future supply shortages and our results of operations, prospects and financial condition could be adversely affected.
Our core customers are major E&P and oilfield service companies. We have executed more than 40 master service agreements ("MSAs") with our customers. Generally, the MSAs govern the relationship with our customers with specific work performed under individual work orders, and we typically provide our services on a monthly basis. For the nine months ended September 30, 2017, EOG Resources, Inc., Schlumberger Technology Corporation and ProPetro Holding Corp. accounted for approximately 21%, 15% and 14%, respectively, of our total revenues. For the year ended December 31, 2016, EOG Resources, Inc. and ProPetro Holding Corp. accounted for approximately 39% and 11%, respectively, of our total revenues. More than 90% of our current fleet is deployed to customers who are renting multiple systems.
On July 27, 2017, we entered into a sand storage and transload agreement with a third party customer pursuant to which we have agreed to provide certain rail-to-truck and high-efficiency sand silo transload and storage services for the customer's proppant volumes at the Kingfisher Facility. The agreement has an expected effective date of January 1, 2018 and a term of seven years therefrom, with renewal options for additional six-month terms thereafter. Under the agreement, the customer will pay us a base fee per ton that is transloaded at the facility, and the customer has committed minimum quarterly service and storage volume obligations. In the event of any quarterly shortfall, the customer is subject to a shortfall fee. The contracted minimum annual revenue upon completion of the initial phase of construction, which is expected by August 2018, is approximately $13.0 million, and we are actively seeking to contract additional capacity at the facility with other customers.
The oil and gas services industry is highly competitive. Please read "Risk FactorsRisks Related to Our BusinessWe face significant competition that may impede our ability to gain market share or cause us to lose market share." There are numerous large and small services companies in all regions of the United States with whom we compete. We face competition from proppant producers and proppant transporters who also offer solutions for unloading, storing and delivering proppant at well sites and also from competitors who, like us, are exclusively focused on developing more efficient proppant logistic solutions. Our main competitors include U.S. Silica, Proppant Express Solutions, FB Industries Inc., National Oilwell Varco, Inc., Charlton Hill and Tycrop, CIG Logistics and Hi-Crush Partners LP.
Although some of our competitors have greater financial and other resources than we do, we believe that we are well positioned competitively due to our existing market share, patented protected technology, unique service offerings, low cost of operation and strong operational track record. The most important factors on which we compete are product and service quality, performance, reliability and price. Demand for our systems and services and the prices that we will be able to obtain for our systems and services, are closely linked to proppant consumption patterns for the completion of oil and natural gas wells in North America. These consumption patterns are influenced by numerous factors, including the price for hydrocarbons, the drilling rig count and hydraulic fracturing activity, including the number of stages completed and the amount of proppant used per stage. Further, these consumption patterns are also influenced by the location, quality, price and availability of proppant, including raw frac sand, resin-coated sand and ceramic proppant.
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Environmental and Occupational Health and Safety Regulations
We are subject to stringent and complex federal, state and local laws and regulations governing the discharge of materials into the environment or otherwise relating to worker health and safety and protection of the environment. Compliance with these laws and regulations may expose us to significant costs and liabilities and cause us to incur significant capital expenditures in our operations in particular areas. Any failure to comply with these laws and regulations may result in the assessment of administrative, civil and criminal penalties, imposition of remedial obligations, and the issuance of injunctions delaying or prohibiting operations. Private parties may also have the right to pursue legal actions to enforce compliance as well as to seek damages for non-compliance with environmental laws and regulations or for personal injury or property damage. In addition, the clear trend in environmental regulation is to place more restrictions on activities that may affect the environment, and thus, any changes in, or more stringent enforcement of, these laws and regulations that result in more stringent and costly pollution control equipment, the occurrence of delays in the permitting or performance of projects, or waste handling, storage, transport, disposal or remediation requirements could have a material adverse effect on our operations and financial position.
Historically, our environmental compliance costs have not had a material adverse effect on our results of operations; however, there can be no assurance that future events, such as changes in existing laws or enforcement policies, the promulgation of new laws or regulations or the development or discovery of new facts or conditions adverse to our operations will not cause us to incur material costs or that such future compliance will not have a material adverse effect on our business and operating costs.
The following is a discussion of material environmental and worker health and safety laws, as amended from time to time, that relate to our operations or those of our customers that could have a material adverse effect on our business.
Air Emissions
Our and our customers' operations are subject to the CAA and analogous state laws, which restrict the emission of air pollutants and impose permitting, monitoring and reporting requirements on various sources. These laws and regulations may require us or our customers to obtain pre-approval for the construction or modification of certain projects or facilities expected to produce or significantly increase air emissions, obtain and strictly comply with stringent air permit requirements or utilize specific equipment or technologies to control emissions of certain pollutants. The need to obtain permits has the potential to delay the development of natural gas projects. Recently, there has been increased regulation with respect to air emissions resulting from the oil and natural gas sector. For example, the EPA promulgated rules in 2012 under the CAA that subject oil and natural gas production, processing, transmission and storage operations to regulation under NSPS Subpart OOOO and a separate set of requirements to address certain hazardous air pollutants frequently associated with oil and natural gas production and processing activities pursuant to the National Standards for Emission of Hazardous Air Pollutants program. With regards to production activities, these final rules require, among other things, the reduction of VOC emissions from certain fractured and refractured natural gas wells for which well completion operations are conducted and further requires that a subset of these selected wells use reduced emission completions, also known as "green completions." In a second example, the EPA published a final rule update CAA in June 2016 that established criteria for aggregating multiple oil and gas sites into a single source for air-quality permitting purposes. This rule could cause small facilities (such as tank batteries and compressor stations), on an aggregate basis, to be deemed a major source, thereby triggering more stringent air permitting requirements, which in turn could result in operational delays or require us to install costly pollution control equipment. A third example, in October 2015, the EPA issued a final rule under the CAA, lowering the National Ambient Air Quality Standard for ground-level ozone from the current standard of 75 parts per billion ("ppb") for the
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current 8-hour primary and secondary ozone standards to 70 ppb for both standards. The EPA failed to meet the October 1, 2017 deadline for issuing initial area designations for non-attainment areas. Additionally, states are expected to implement more stringent permitting and pollution control requirements as a result of this new final rule, which could apply to our operations.
These regulatory programs may require us or our customers to install emissions abatement equipment, modify operational practices, and obtain permits for existing or new operations. Obtaining air emissions permits has the potential to delay the development or continued performance of operations. Over the next several years, we may be required to incur certain capital expenditures for air pollution control equipment or to address other air emissions-related issues. Changing and increasingly stricter requirements, future non-compliance, or failure to maintain necessary permits or other authorizations could require us to incur substantial costs or suspend or terminate our operations.
Climate Change
In recent years, the U.S. Congress has considered legislation to reduce emissions of GHGs. It presently appears unlikely that comprehensive climate legislation will be passed by either house of Congress in the near future, although energy legislation and other regulatory initiatives are expected to be proposed that may be relevant to GHG emissions issues. In addition, a number of states or groupings of states are addressing GHG emissions, primarily through the development of emission inventories or regional GHG cap and trade programs. Depending on the particular program, we could be required to control GHG emissions or to purchase and surrender allowances for GHG emissions resulting from our operations. Independent of Congress, the EPA has adopted regulations controlling GHG emissions under its existing authority under the CAA. For example, following its findings that emissions of GHGs present an endangerment to human health and the environment because such emissions contributed to warming of the Earth's atmosphere and other climatic changes, the EPA has adopted regulations that, among other things, establish construction and operating permit reviews for GHG emissions from certain large stationary sources that are already potential major sources for conventional pollutants. In addition, the EPA has adopted rules requiring the monitoring and reporting of GHG emissions from specified production, processing, transmission and storage facilities in the United States on an annual basis. Federal agencies also have begun directly regulating emissions of methane, a GHG, from oil and natural gas operations. In June 2016, the EPA published a final rule establishing NSPS Subpart OOOOa that requires certain new, modified or reconstructed facilities in the oil and natural gas sector to reduce these methane gas and VOC emissions. However, in April 2017, the EPA announced that it would review this 2016 methane rule and would initiate reconsideration proceedings to potentially revise or rescind portions of the rule. Subsequently, effective June 2, 2017, the EPA issued a 90-day stay of certain requirements under the methane rule, but this stay was vacated by a three-judge panel of the U.S. Court of Appeals for the D.C. Circuit on July 3, 2017 and on August 10, 2017, the D.C. Circuit rejected petitions for an en banc review of its July 3, 2017 ruling. In the interim, on July 16, 2017, the EPA issued a proposed rule that would stay subpart OOOOa for two years, but this proposed rule is not yet final and may be subject to legal challenges. Legal uncertainty exists with respect to the future implementation of the methane rule.
Additionally, in December 2015, the United States joined the international community at the 21st Conference of the Parties of the United Nations Framework Convention on Climate Change in Paris, France that prepared an agreement requiring member countries to review and "represent a progression" in their intended nationally determined contributions, which set GHG emission reduction goals every five years beginning in 2020. This "Paris agreement" was signed by the United States in April 2016 and entered into force in November 2016; however, this agreement does not create any binding obligations for nations to limit their GHG emissions, but rather includes pledges to voluntarily limit or reduce future emissions. On June 1, 2017, President Trump announced that the United States plans to withdraw from the Paris Agreement and to seek negotiations either to re-enter the Paris
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Agreement on different terms or to establish a new framework agreement. The Paris Agreement provides for a four-year exit date of November 2020. The United States' adherence to the exit process and/or the terms on which the United States may re-enter the Paris Agreement or a separately negotiated agreement are unclear at this time. The adoption and implementation of any international, federal or state legislation or regulations that require reporting of GHGs or otherwise restrict emissions of GHGs could result in increased compliance costs or additional operating restrictions, and could have a material adverse effect on our business, financial condition, demand for our systems and services, results of operations, and cash flows. In addition, substantial limitations on GHG emissions could adversely affect demand for the oil and natural gas our customers produce, which could reduce demand for our systems and services. Finally, it should be noted that increasing concentrations of GHGs in the Earth's atmosphere may produce climate changes that have significant physical effects, such as increased frequency and severity of storms, floods and other climatic events. If any such effects were to occur, they could have an adverse effect on our financial condition and results of operations and the financial condition and operations of our customers.
Water Discharges
The federal Clean Water Act ("CWA"), and analogous state laws impose restrictions and strict controls with respect to the discharge of pollutants, including spills and leaks of oil and other substances, into state waters or waters of the United States. The discharge of pollutants into regulated waters is prohibited, except in accordance with the terms of a permit issued by the EPA or an analogous state agency. Spill prevention, control and countermeasure ("SPCC") requirements require containment to mitigate or prevent contamination of navigable waters in the event of an oil overflow, rupture or leak, and the development and maintenance of SPCC plans at our or our customers' facilities. In addition, the CWA and analogous state laws require individual permits or coverage under general permits for discharges of storm water runoff from certain types of facilities. The CWA and regulations implemented thereunder also prohibit the discharge of dredge and fill material into regulated waters, including jurisdictional wetlands, unless authorized by the Army Corps of Engineers pursuant to an appropriately issued permit.
In May 2015, the EPA issued final rules attempting to clarify the federal jurisdictional reach over waters of the United States but this rule has been stayed nationwide by the U.S. Sixth Circuit Court of Appeals as that appellate court and several other district courts ponder lawsuits opposing implementation of the rule. In January 2017, the U.S. Supreme Court accepted review of the rule to determine whether jurisdiction rests with the federal district or appellate courts. In February 2017, President Trump issued an executive order directing the EPA and the Army Corps of Engineers to review and, consistent with applicable law, initiate rulemaking to rescind or revise the rule. In March 2017, the EPA and Army Corps of Engineers published a notice of intent to review and rescind or revise the rule and on June 27, 2017, the EPA and the Army Corps of Engineers proposed a rule that would initiate the first step in a two-step process intended to review and revise the definition of "waters of the United States" consistent with President Trump's executive order. Under the proposal, the first step would be to rescind the May 2015 final rule and put back into effect the narrower language defining "waters of the United States" under the CWA that existed prior to the rule. The second step would be a notice and comment rulemaking in which the agencies will conduct a substantive reevaluation of the definition of "waters of the United States" in accordance with the executive order. At this time, it is unclear what impact these actions will have on the future implementation of the May 2015 rule. Federal and state regulatory agencies can impose administrative, civil and criminal penalties as well as other enforcement mechanisms for non-compliance with discharge permits or other requirements of the CWA and analogous state laws and regulations.
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Hydraulic Fracturing
We manufacture and operate proprietary equipment and provide well site services that enhance the delivery of proppant used by hydraulic fracturing operators in the oil and natural gas industry. Hydraulic fracturing is an important and increasingly common practice that is used to stimulate production of natural gas and oil from low permeability hydrocarbon bearing subsurface rock formations. The hydraulic fracturing process involves the injection of water, proppants, and chemicals under pressure into the formation to fracture the surrounding rock, increase permeability and stimulate production. Although we do not directly engage in hydraulic fracturing activities, our customers use our systems and services in their hydraulic fracturing activities. While the U.S. Congress has from time to time considered regulation of hydraulic fracturing, no such legislation has been adopted. Rather, hydraulic fracturing is typically regulated by state oil and natural gas commissions and similar agencies. Also, some states have adopted, and other states have, from time to time, considered adopting regulations that could impose new or more stringent permitting, disclosure or well construction requirements on hydraulic fracturing operations. Aside from state laws, local land use restrictions may restrict drilling in general or hydraulic fracturing in particular. Municipalities may adopt local ordinances attempting to prohibit hydraulic fracturing altogether or, at a minimum, allow such fracturing processes within their jurisdictions to proceed but regulating the time, place and manner of those processes. In addition, federal agencies have started to assert regulatory authority over the process and in December 2016, the EPA released its final report on the potential impacts of hydraulic fracturing on drinking water resources, concluding that "water cycle" activities associated with hydraulic fracturing may impact drinking water resources under certain circumstances, including as a result of water withdrawals for fracturing in times or areas of low water availability or due to surface spills during the management of fracturing fluids, chemicals or produced water. At the same time, certain environmental groups have suggested that additional laws may be needed to more closely and uniformly limit or otherwise regulate the hydraulic fracturing process.
The adoption of new laws or regulations at the federal or state levels imposing reporting obligations on, or otherwise limiting or delaying, the hydraulic fracturing process could make it more difficult to complete natural gas wells, increase our customers' costs of compliance and doing business, and otherwise adversely affect the hydraulic fracturing services they perform, which could adversely impact demand for our systems and services. In addition, heightened political, regulatory, and public scrutiny of hydraulic fracturing practices could expose us or our customers to increased legal and regulatory proceedings, which could be time-consuming, costly, or result in substantial legal liability or significant reputational harm. We could be directly affected by adverse litigation involving us, or indirectly affected if the cost of compliance limits the ability of our customers to operate. Such costs and scrutiny could directly or indirectly, through reduced demand for our systems and services, have a material adverse effect on our business, financial condition and results of operations.
Non-Hazardous and Hazardous Wastes
The Resource Conservation and Recovery Act ("RCRA") and comparable state laws control the management and disposal of hazardous and non-hazardous waste. These laws and regulations govern the generation, storage, treatment, transfer and disposal of wastes that we generate. In the course of our operations, we generate waste that are regulated as non-hazardous wastes and hazardous wastes, obligating us to comply with applicable standards relating to the management and disposal of such wastes. In addition, drilling fluids, produced waters, and most of the other wastes associated with the exploration, development, and production of oil or natural gas, if properly handled, are currently exempt from regulation as hazardous waste under RCRA and, instead, are regulated under RCRA's less stringent non-hazardous waste provisions, state laws or other federal laws. However, it is possible that certain oil and natural gas drilling and production wastes now classified as non-hazardous could be classified as hazardous wastes in the future. For example, following the filing of a lawsuit in the U.S.
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District Court for the District of Columbia in May 2016 by several non-governmental environmental groups against the EPA for the agency's failure to timely assess its RCRA Subtitle D criteria regulations for oil and gas wastes, the EPA and the environmental groups entered into an agreement that was finalized in a consent decree issued by the District Court on December 28, 2016. Under the decree, the EPA is required to propose no later than March 15, 2019, a rulemaking for revision of certain Subtitle D criteria regulations pertaining to oil and gas wastes or sign a determination that revision of the regulations is not necessary. If the EPA proposes a rulemaking for revised oil and as waste regulations, the Consent Decree requires that the EPA take final action following notice and comment rulemaking no later than July 15, 2021. A loss of the RCRA exclusion for drilling fluids, produced waters and related wastes could result in an increase in our customers' costs to manage and dispose of generated wastes and a corresponding decrease in their drilling operations, which developments could have a material adverse effect on our business.
Site Remediation
The CERCLA and comparable state laws impose strict, joint and several liability without regard to fault or the legality of the original conduct on certain classes of persons that contributed to the release of a hazardous substance into the environment. These persons include the owner and operator of a disposal site where a hazardous substance release occurred and any company that transported, disposed of, or arranged for the transport or disposal of hazardous substances released at the site. Under CERCLA, such persons may be liable for the costs of remediating the hazardous substances that have been released into the environment, for damages to natural resources, and for the costs of certain health studies. In addition, where contamination may be present, it is not uncommon for the neighboring landowners and other third parties to file claims for personal injury, property damage and recovery of response costs. We have not received notification that we may be potentially responsible for cleanup costs under CERCLA at any site.
Endangered Species
The Endangered Species Act ("ESA") restricts activities that may affect endangered or threatened species or their habitats. Similar protections are offered to migratory birds under the Migratory Bird Treaty Act. As a result of one or more settlements entered into by the U.S. Fish and Wildlife Service ,that agency is required to consider listing numerous species as endangered or threatened under the Endangered Species Act by specified timelines. Current ESA listings and the designation of previously unprotected species as threatened or endangered in areas where we or our customers operate could cause us or our customers to incur increased costs arising from species protection measures and could result in delays or limitations in our or our customers' performance of operations, which could adversely affect or reduce demand for our systems and services.
State and Local Regulation
We are subject to a variety of state and local environmental review and permitting requirements. Some states, including Texas where our manufacturing facility is located, have state laws similar to major federal environmental laws and thus our operations are also subject to state requirements that may be more stringent than those imposed under federal law. Our operations may require state-law based permits in addition to federal permits, requiring state agencies to consider a range of issues, many the same as federal agencies, including, among other things, a project's impact on wildlife and their habitats, historic and archaeological sites, aesthetics, agricultural operations, and scenic areas. Texas has specific permitting and review processes for oilfield service operations, and state agencies may impose different or additional monitoring or mitigation requirements than federal agencies. The development of new sites and our existing operations also are subject to a variety of local
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environmental and regulatory requirements, including land use, zoning, building, and transportation requirements.
We continuously seek to innovate our manufacturing processes and product and service offerings to enhance our operations and deliver increased value to our customers. Our engineering team is focused on continuing to improve our manufacturing operations, expanding the capabilities of our systems and enhance our service offerings. We believe our investment in research and development will result in the development of complementary products and services, which will provide a competitive advantage as our customers focus on extracting oil and natural gas in the most economical and efficient ways possible.
We seek patent and trademark protections for our technology when we deem it prudent, and we aggressively pursue protection of these rights. We believe our patents, trademarks, and other protections for our proprietary technologies are adequate for the conduct of our business and that no single patent or trademark is critical to our business. In addition, we rely to a great extent on the technical expertise and know-how of our personnel to maintain our competitive position, and we take commercially reasonable measures to protect trade secrets and other confidential and/or proprietary information relating to the technologies we develop.
As of September 30, 2017, we had two issued patents in the United States and corollary patents issued in Canada and Mexico; two utility patent applications in the United States and Canada and one provisional patent applications in the United States, each relating to our systems and services and other technologies. Our issued patents expire, if all of the maintenance fees are paid, between 2032 and 2033. We cannot assure you that any of our patent applications will result in the issuance of a patent or whether the examination process will require us to narrow our claims. In addition, any patents may be contested, circumvented, found unenforceable or invalid, and we may not be able to prevent third parties from infringing them.
Our principal properties are described above under the captions "Early, Texas Manufacturing Facility" and "Kingfisher Facility." We believe that our properties and facility are adequate for our operations and are maintained in a good state of repair in the ordinary course of our business. However, our assets may be affected by natural or man-made disasters and other external events that may disrupt our manufacturing operations. These hazards can also cause personal injury and loss of life, severe damage to and destruction of property and equipment, pollution or environmental damage, and suspension of operations. In addition, our operations are subject to, and exposed to, employee/employer liabilities and risks such as wrongful termination, discrimination, labor organizing, retaliation claims and general human resource related matters.
Further, claims for loss of oil and natural gas production and damage to formations can occur in our industry. Litigation arising from a catastrophic occurrence at a location where our systems are deployed or services are performed may result in our being named as a defendant in lawsuits asserting large claims.
We believe that our insurance coverage is customary for the industry in which we operate and adequate for our business. To address the hazards inherent in our business, we maintain insurance coverage that includes first-party physical damage coverage, third-party general liability insurance, auto liability, employer's liability, environmental liability and other coverage, although coverage for environmental related losses is subject to certain limitations. However, we do not have insurance against all foreseeable risks, either because insurance is not available or because of the high premium costs. The occurrence of an event not fully insured against or the failure of an insurer to meet its
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insurance obligations could result in substantial losses. In addition, we may not be able to maintain adequate insurance in the future at rates we consider reasonable. Insurance may not be available to cover any or all of the risks to which we are subject, or, even if available, it may be inadequate, or insurance premiums or other costs could rise significantly in the future so as to make such insurance prohibitively expensive.
We customarily enter into MSAs with our customers that delineate our customer's and our respective indemnification obligations with respect to the systems we deploy. Generally, under our MSAs, we assume responsibility for pollution, contamination and other damage originating from any negligence or willful misconduct in our operation of the system. However, we generally do not assume responsibility for any other pollution or contamination that may occur during operations, including any pollution or contamination which may result from the actual proppant used on the well site, including pollution or contamination that may result from seepage or any other uncontrolled disbursement of proppant. While we have not received claims relating to pollution or contamination in the deployment of our systems, if we are ultimately deemed responsible, our obligations may include the control, removal and clean-up of any pollution or contamination. In such cases, we may be exposed to additional liability if we are negligent or commit willful acts causing the pollution or contamination. We routinely attempt to require and are sometime successful in requiring our customers to agree to indemnify us against claims arising from their employees' personal injury or death to the extent that their employees are injured by operating our systems, unless the loss is a result of our negligence or willful misconduct. Similarly, we generally agree to indemnify our customers for liabilities arising from personal injury to or death of any of our employees, unless resulting from the gross negligence or willful misconduct of our customer. The same principals often apply to mutual indemnification for loss or destruction of customer-owned property or equipment, except such indemnification is not limited by negligence or misconduct. Losses due to catastrophic events are generally the responsibility of the customer. However, despite this general allocation of risk, we may be unsuccessful in enforcing contractual terms, incur an unforeseen liability that is not addressed by the scope of the contractual provisions or be required to enter into an MSA with terms that vary from our standard allocations of risk, as described above. Consequently, we may incur substantial losses above our insurance coverage that could materially and adversely affect our financial condition and results of operations.
Due to the nature of our business, we may become, from time to time, involved in routine litigation or subject to disputes or claims related to our business activities. In the opinion of our management, there are no pending litigation, disputes or claims against us which, if decided adversely, will have a material adverse effect on our financial condition, cash flows or results of operations.
As of September 30, 2017, we employed 217 people and received services from two other individuals employed by Solaris Energy Management, LLC pursuant to an Administrative Services Agreement. For additional information, please see "Certain Relationships and Related Party TransactionsHistorical Transactions with Affiliates." None of our employees are subject to collective bargaining agreements. We consider our employee relations to be good.
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MANAGEMENT
Directors and Executive Officers
Set forth below are the name, age, position and description of the business experience of our executive officers and directors, as of November 3, 2017.
Name
|
Age | Position with Solaris Oilfield Infrastructure, Inc. | |||
---|---|---|---|---|---|
William A. Zartler |
52 | Founder and Chairman | |||
Gregory A. Lanham |
53 | Chief Executive Officer and Director | |||
Kyle S. Ramachandran |
32 | Chief Financial Officer | |||
Kelly L. Price |
59 | Chief Operating Officer | |||
Cynthia M. Durrett |
52 | Chief Administrative Officer | |||
Lindsay R. Bourg |
39 | Chief Accounting Officer | |||
Christopher M. Powell |
42 | Chief Legal Officer | |||
James R. Burke |
79 | Director | |||
Edgar R. Giesinger |
61 | Director | |||
W. Howard Keenan, Jr. |
66 | Director | |||
F. Gardner Parker |
75 | Director | |||
A. James Teague |
71 | Director |
William A. ZartlerFounder and Chairman. William A. Zartler is our Chairman and has served as a member of our board of directors since February 2017 and a manager of our predecessor since October 2014. Mr. Zartler founded Loadcraft Site Services LLC and served as its Executive Chairman from February 2014 to September 2014. Mr. Zartler served as our predecessor's Chief Executive Officer and Chairman from October 2014 to January 2017. Mr. Zartler has extensive experience in both energy industry investing and managing growth businesses. Prior to founding our predecessor, in January 2013 Mr. Zartler founded Solaris Energy Capital, a private investment firm focused on investing in and managing emerging, high growth potential businesses primarily in midstream energy and oilfield services, including Solaris LLC, and Mr. Zartler continues to serve as the sole member and manager of Solaris Energy Capital. Prior to founding Solaris Energy Capital, Mr. Zartler was a founder and Managing Partner of Denham Capital Management ("Denham"), a $7 billion global energy and commodities private equity firm, from its inception in 2004 to January 2013. Mr. Zartler led Denham's global investing activity in the midstream and oilfield services sectors and served on the firm's Investment and Executive Committees. Previously, Mr. Zartler held the role of Senior Vice President and General Manager at Dynegy Inc., building and managing the natural gas liquids business. Mr. Zartler also served as a director of the general partner of NGL Partners LP (NYSE: NGL) from its inception in September 2012 to August 2013. Mr. Zartler began his career at Dow Hydrocarbons and Resources. Mr. Zartler received a Bachelor of Science in Mechanical Engineering from the University of Texas at Austin and a Masters of Business Administration from Texas A&M University. Mr. Zartler serves on the Engineering Advisory Board of the Cockrell School of Engineering at the University of Texas at Austin.
We believe that Mr. Zartler's industry experience and deep knowledge of our business makes him well suited to serve as a member of our board of directors.
Gregory A. LanhamChief Executive Officer and Director. Gregory A. Lanham was named our Chief Executive Officer and Director in February 2017. From December 2015 to January 2017, Mr. Lanham was co-founder and Chief Executive Officer of Accendo Services LLC, where he advised private equity firms and credit investors on various investment opportunities in the oilfield services sector. From November 2012 to November 2015, Mr. Lanham served as Chief Executive Officer and Director of FTS International, the then largest private oilfield service company in North America. From 2008 to October 2012, Mr. Lanham served as Managing Director at Temasek Holdings
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(PTE.) Ltd, an investment holding company with $200 billion of assets under management. Mr. Lanham began his career at Anadarko Petroleum Corporation, where he spent twenty years in increasing roles of global responsibility. In 2015, Mr. Lanham was selected as the EY Entrepreneur Of The Year® Southwest in the Energy category. Mr. Lanham serves on the board of directors of Stallion Oilfield Services. Mr. Lanham received his B.S. in Petroleum Engineering from the University of Oklahoma.
Mr. Lanham has broad knowledge of the energy industry and significant experience with energy companies. We believe his skills and background qualifies to serve as a member of our board of directors.
Kyle S. RamachandranChief Financial Officer. Kyle S. Ramachandran was named our Chief Financial Officer in February 2017. Mr. Ramachandran was previously our Vice President, Corporate Development and Strategy from October 2014 to January 2017, our Secretary from December 2014 to January 2017 and the Vice President of Solaris Energy Capital from February 2014 to September 2014. From August 2011 to January 2014, Mr. Ramachandran was a member of the Barra Energia management team, a private equity sponsored E&P company based in Rio de Janeiro. From 2009 to 2011, Mr. Ramachandran was an Associate at First Reserve, a global energy-focused private equity firm. Mr. Ramachandran began his career as an investment banker in the Mergers & Acquisitions Group at Citigroup. Mr. Ramachandran received a Bachelor of Science in Finance and Accounting from the Carroll School of Management Honors Program at Boston College, where he graduated cum laude.
Kelly L. PriceChief Operating Officer. Kelly L. Price was named our Chief Operating Officer in March 2017. Mr. Price served as an operations consultant to us from January 2017 to February 2017. Mr. Price was previously a consultant for Accendo Services LLC from August 2016 to December 2016. From September 2015 to July 2016, Mr. Price pursued entrepreneurial opportunities in the pressure pumping industry. From January 2014 to August 2015, Mr. Price served as Senior Vice President of Pumping Services, Wireline and Logistics for FTS International, the then-largest private oilfield service company in North America. From August 2010 to October 2013, Mr. Price served as President, U.S. for Trican Well Service, subsequent to which he evaluated potential opportunities prior to joining FTS International. Mr. Price began his career at BJ Services, where he spent 32 years, including senior roles such as Vice President of Global Sales and Marketing, Vice President of West Division Sales and Rocky Mountain Regional Manager. Mr. Price began his career as field operator in Alberta, Canada.
Cynthia M. DurrettChief Administrative Officer. Cynthia M. Durrett was named our Chief Administrative Officer in March 2017. Ms. Durrett was previously our Vice President of Business Operations from October 2014 to February 2017 and the Vice President of Business Operations of Solaris Energy Capital from October 2013 to September 2014. From July 2013 to September 2013, Ms. Durrett served as an independent consultant in the proppant industry. From 2007 to June 2013, Ms. Durrett was the Director of Business Planning and Capital Projects for Cadre Proppants. Ms. Durrett previously served as Managing Director of Dynegy Midstream Services ("Dynegy"), where she provided leadership to several sectors of the organization including information technology, regulated energy delivery, natural gas liquids and midstream. Ms. Durrett began her career at Ferrell North America, where she managed operations for the energy commodities trading business, including natural gas liquids and refined products. Ms. Durrett received a Bachelor of Science in Business Administration from Park University in Kansas City, Missouri, where she graduated with distinction.
Lindsay R. BourgChief Accounting Officer. Lindsay R. Bourg was named our Chief Accounting Officer in April 2017. From July 2009 to April 2017, Ms. Bourg served in various roles of responsibility including Vice President, Chief Accounting Officer and Controller, for Sabine Oil & Gas Corporation after serving as Controller for Sabine Oil & Gas LLC. Sabine Oil & Gas LLC was a privately held upstream company which actively engaged in the acquisition, exploration, development, and production
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of oil and natural gas through debt and equity financings of nearly $4.0 billion. In July 2015, Sabine Oil & Gas Corporation filed a petition for voluntary reorganization under Chapter 11 of the U.S. Bankruptcy Code and emerged from reorganization under Chapter 11 in August 2016. Prior thereto, Ms. Bourg held management and senior level positions at Davis Petroleum Corporation, Burlington Resources and PricewaterhouseCoopers LLP. Ms. Bourg's accounting experience spans both public and private companies within the energy industry. Ms. Bourg obtained her Bachelor of Business Administration degree in Accounting from Texas State University where she graduated magna cum laude and is a Certified Public Accountant.
Christopher M. PowellChief Legal Officer. Christopher M. Powell was named our Chief Legal Officer in August 2017. From 2009 to August 2017, Mr. Powell served in various roles of responsibility, including Vice President, General Counsel, Corporate Secretary and Chief Compliance Officer for CARBO Ceramics Inc., a leading technology and services company providing products and services to the global oil and gas and industrial markets. Prior thereto, Mr. Powell served as counsel at Baker Hughes Incorporated. Mr. Powell began his career with the international law firm of Norton Rose Fulbright (formerly Fulbright & Jaworski L.L.P.). Mr. Powell obtained his Doctorate of Jurisprudence from the University of Houston Law Center, where he graduated magna cum laude. Mr. Powell received a Bachelor of Business Administration in Accounting from Texas A&M University, where he graduated cum laude and was selected as a member of the Mays Business School Fellows Program. Mr. Powell is also a licensed Certified Public Accountant and worked as an auditor with Arthur Andersen LLP prior to obtaining his law degree.
James R. BurkeDirector. James R. Burke has served as a member of our board of directors since May 2017 and served as a manager of our predecessor from October 2014 to May 2017. Since July 2013 Mr. Burke has served on the board of Centurion, a private equity sponsored oilfield services company based in Aberdeen, Scotland. Mr. Burke served as the Chief Executive Officer and President of Forum Energy Technologies ("Forum") from May 2005 to October 2007 and as Chairman of Forum from 2007 to 2010. Mr. Burke retired from his position as Chairman of Forum in 2010, subsequent to which he evaluated potential opportunities prior to becoming a director of Centurion. Prior to joining Forum, Mr. Burke served as Chief Executive Officer of Access Oil Tools Inc. ("Access") from April 2000 to May 2005. Before joining Access, Mr. Burke held various positions with Weatherford International Ltd. from January 1991 to August 1999, including Executive Vice President responsible for all manufacturing operations and engineering at its Compressor Division. Prior to joining Weatherford, Mr. Burke was employed by Cameron Iron Works from 1967 to 1989, where he held positions of increasing seniority, including Vice President of Cameron's Ball Valve division. Mr. Burke holds a Bachelor of Science in Electrical Engineering from University College, Dublin, Ireland, and a Master of Business Administration from Harvard University.
Mr. Burke has broad knowledge of the energy industry and significant operating experience. We believe his skills and industry experience qualify him to serve as a member of our board of directors.
Edgar R. GiesingerDirector. Edgar R. Giesinger has served as a member of our board of directors since May 2017. Mr. Giesinger retired as a managing partner from KPMG LLP in 2015. Since November of 2015, Mr. Giesinger has served on the board of Geospace Technologies Corporation, a publicly traded company primarily involved in the design and manufacture of instruments and equipment utilized in oil and gas industries and since August of 2017, Newfield Exploration Company, a publicly traded crude oil and natural gas exploration and production company. He has 35 years of accounting and finance experience working mainly with publicly traded corporations. Over the years, he has advised a number of clients in accounting and financial matters, capital raising, international expansions and in dealings with the Securities and Exchange Commission. While working with companies in a variety of industries, his primary focus has been energy and manufacturing clients. Mr. Giesinger is a Certified Public Accountant in the State of Texas and member of the American
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Institute of Public Accountants. He has lectured and led seminars on various topics dealing with financial risks, controls and financial reporting.
We believe that Mr. Giesinger's extensive financial and accounting experience, including that related to energy and manufacturing industries, qualifies him to effectively serve as a director.
W. Howard Keenan, Jr.Director. W. Howard Keenan, Jr. has served as a member of our board of directors since May 2017 and served as a manager of our predecessor from November 2014 to May 2017. Mr. Keenan has over 40 years of experience in the financial and energy businesses. Since 1997, he has been a Member of Yorktown Partners LLC, a private investment manager focused on the energy industry. From 1975 to 1997, he was in the Corporate Finance Department of Dillon, Read & Co. Inc. and active in the private equity and energy areas, including the founding of the first Yorktown Partners fund in 1991. Mr. Keenan also serves on the Boards of Directors of the following public companies: Antero Resources Corporation, Antero Midstream Partners LP, Antero Midstream GP LP and Ramaco Resources, Inc. In addition, he is serving or has served as a director or manager of multiple Yorktown Partners portfolio companies. Mr. Keenan holds a Bachelor of Arts degree cum laude from Harvard College and a Masters of Business Administration degree from Harvard University.
Mr. Keenan has broad knowledge of the energy industry and significant experience with energy companies. We believe his skills and background qualify him to serve as a member of our board of directors.
F. Gardner ParkerDirector. F. Gardner Parker has served as a member of our board of directors since May 2017. Mr. Parker has been a private investor since 1984 and a director of Carrizo Oil & Gas, Inc. ("Carrizo") (NASDAQ: CRZO) since 2000. He currently serves as Chairman of Carrizo's Audit Committee and as Lead Independent Director. Mr. Parker also serves on the board and is Chairman of the Audit Committee of Sharps Compliance Corp. (NASDAQ: SMED), a medical waste management services provider. Mr. Parker is also a Trust Director of Camden Property Trust (NYSE: CPT). Previously, Mr. Parker was a director of Triangle Petroleum Corporation from November 2009 to July 2015 and a director of Hercules Offshore Inc. from 2005 to November 2015. Mr. Parker was a founding director for Camden in 1993 and also served as the Lead Independent Trust Manager from 1998 to 2008. In the private sector, Mr. Parker is Chairman of the Board of Edge Resources LTD, Enterprise Offshore Drilling and Norton Ditto. He was a partner at Ernst & Ernst (now Ernst & Young LLP) from 1978 to 1984. Mr. Parker is a graduate of the University of Texas and is a certified public accountant in Texas. Mr. Parker is board certified by the National Association of Corporate Directors (the "NACD"), where he serves as a NACD Board Leadership Fellow.
Mr. Parker has broad knowledge of the energy industry and significant experience as a director on the boards and audit, compensation and corporate governance committees of numerous public and private companies. We believe his skills and experience qualify him to serve as a member of our board of directors.
A. James TeagueDirector. A. James Teague has served as a member of our board of directors since May 2017. Mr. Teague has served as the Chief Executive Officer of Enterprise Products Holdings LLC since January 2016 and has been a Director of Enterprise Products Holdings LLC since July 2008. Mr. Teague previously served as the Chief Operating Officer of Enterprise Products Holdings LLC from November 2010 to December 2015 and served as an Executive Vice President of Enterprise Products Holdings from November 2010 until February 2013. Mr. Teague joined Enterprise in connection with its purchase of certain midstream energy assets from affiliates of Shell Oil Company in 1999. From 1998 to 1999, Mr. Teague served as President of Tejas Natural Gas Liquids, LLC, then an affiliate of Shell. From 1997 to 1998, he was President of Marketing and Trading for MAPCO, Inc.
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Prior to 1997 he spent 22 years with Dow Chemical in various roles including Vice President, Hydrocarbon Feedstocks.
Mr. Teague has broad knowledge of the energy industry and significant operating experience. We believe his skills and industry experience qualify him to serve as a member of our board of directors.
Composition of Our Board of Directors
Our board of directors currently consists of seven members.
In evaluating director candidates, we will assess whether a candidate possesses the integrity, judgment, knowledge, experience, skills and expertise that are likely to enhance the board's ability to manage and direct our affairs and business, including, when applicable, to enhance the ability of committees of the board to fulfill their duties of increasing the length of time necessary to change the composition of a majority of the board of directors.
Our directors are divided into three classes serving staggered three-year terms. Class I, Class II and Class III directors serve until our annual meetings of stockholders in 2018, 2019 and 2020, respectively. Messrs. Burke and Parker are assigned to Class I, Messrs. Keenan and Lanham are assigned to Class II, and Messrs. Giesinger, Teague and Zartler are assigned to Class III. At each annual meeting of stockholders, directors will be elected to succeed the class of directors whose terms have expired. This classification of our board of directors could have the effect of increasing the length of time necessary to change the composition of a majority of the board of directors. In general, at least two annual meetings of stockholders will be necessary for stockholders to effect a change in a majority of the members of the board of directors.
The board of directors has reviewed the independence of our directors using the independence standards of the NYSE. The board of directors has determined that each of Messrs. Burke, Giesinger, Keenan, Parker and Teague are independent within the meaning of the NYSE listing standards currently in effect and that Messrs. Giesinger, Parker and Teague are independent within the meaning of 10A-3 of the Exchange Act.
Committees of the Board of Directors
Audit Committee
Rules implemented by the NYSE and the SEC require us to have an audit committee comprised of at least three directors who meet the independence and experience standards established by the NYSE and the Exchange Act, subject to transitional relief during the one-year period following the completion of this offering. Our audit committee consists of three directors, Messrs. Giesinger, Parker and Teague, who are independent under the rules of the SEC. As required by the rules of the SEC and listing standards of the NYSE, the audit committee consists solely of independent directors.
This committee oversees, reviews, acts on and reports on various auditing and accounting matters to our board of directors, including: the selection of our independent accountants, the scope of our annual audits, fees to be paid to the independent accountants, the performance of our independent accountants and our accounting practices. In addition, the audit committee oversees our compliance programs relating to legal and regulatory requirements. We have adopted an audit committee charter defining the committee's primary duties in a manner consistent with the rules of the SEC and NYSE listing standards.
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Compensation Committee
We have established a compensation committee that consists of three directors, Messrs. Parker, Keenan and Zartler, of whom Messrs. Parker and Keenan are "independent" under the rules of the SEC, the Sarbanes-Oxley Act of 2002 and the NYSE. This committee establishes salaries, incentives and other forms of compensation for officers and other employees. Our compensation committee also administers our incentive compensation and benefit plans. We have adopted a compensation committee charter defining the committee's primary duties in a manner consistent with the rules of the SEC, the PCAOB and applicable stock exchange or market standards.
Nominating and Corporate Governance Committee
We have established a nominating and corporate governance committee that consists of three directors, Messrs. Zartler, Burke and Keenan, of whom Messrs. Burke and Keenan are "independent" under the rules of the SEC, the Sarbanes-Oxley Act of 2002 and the NYSE. This committee identifies, evaluates and recommends qualified nominees to serve on our board of directors; develops and oversees our internal corporate governance processes; and maintains a management succession plan. We have adopted a nominating and corporate governance committee charter that defines the committee's primary duties in a manner consistent with the rules of the SEC and NYSE standards.
Compensation Committee Interlocks and Insider Participation
None of our executive officers serve on the board of directors or compensation committee of a company that has an executive officer that serves on our board or compensation committee. No member of our board is an executive officer of a company in which one of our executive officers serves as a member of the board of directors or compensation committee of that company.
Code of Business Conduct and Ethics
Our board of directors has adopted a code of business conduct and ethics applicable to our employees, directors and officers, in accordance with applicable U.S. federal securities laws and the corporate governance rules of the NYSE. Any waiver of this code may be made only by our board of directors and will be promptly disclosed as required by applicable U.S. federal securities laws and the corporate governance rules of the NYSE.
Corporate Governance Guidelines
Our board of directors has adopted corporate governance guidelines in accordance with the corporate governance rules of the NYSE.
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We are currently considered an "emerging growth company," within the meaning of the Securities Act, for purposes of the SEC's executive compensation disclosure rules. In accordance with such rules, we are required to provide a Summary Compensation Table and an Outstanding Equity Awards at Fiscal Year End Table, as well as limited narrative disclosures regarding executive compensation for our last completed fiscal year. Further, our reporting obligations extend only to our "named executive officers," who are the individuals who served as our principal executive officer, our next two other most highly compensated officers at the end of the last completed fiscal year and up to two additional individuals who would have been considered one of our next two most highly compensated officers except that such individuals did not serve as executive officers at the end of the last completed fiscal year. Accordingly, our named executive officers are:
Name
|
Principal Position | |
---|---|---|
William A. Zartler | Founder and Chairman | |
Kyle S. Ramachandran | Chief Financial Officer | |
Christopher Work | Former Chief Financial Officer |
Mr. Zartler served as our principal executive officer during fiscal year 2016 and began serving as our Chairman and member of our board of directors in February 2017. Mr. Work served as our Chief Financial Officer during fiscal year 2016 before his resignation in 2017.
The following table summarizes, with respect to our named executive officers, information relating to compensation earned for services rendered in all capacities during the fiscal year ended December 31, 2016.
Name and Principal Position
|
Year | Salary ($) | Bonus ($)(1) |
All Other Compensation ($) |
Total ($) | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
William A. Zartler |
2016 | $ | 240,250 | $ | 125,000 | $ | 16,000 | $ | 381,250 | |||||||
(Founder and Chairman) |
||||||||||||||||
Kyle S. Ramachandran |
2016 | $ | 151,875 | $ | 50,250 | $ | 7,748 | $ | 209,873 | |||||||
(Chief Financial Officer) |
||||||||||||||||
Christopher Work |
2016 | $ | 215,416 | $ | 60,500 | $ | 10,876 | $ | 286,792 | |||||||
(Former Chief Financial Officer) |
Outstanding Equity Awards at 2016 Fiscal Year-End
None of our named executive officers held outstanding equity-based awards as of December 31, 2016 and, as a result, the Outstanding Equity Awards at 2016 Fiscal Year-End table is not presented here.
Additional Narrative Disclosures
Base Salary
Each named executive officer's base salary is a fixed component of compensation and does not vary depending on the level of performance achieved. Base salaries are determined for each named executive officer based on his or her position and responsibility. Our board of directors reviews the
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base salaries for each named executive officer periodically as well as at the time of any promotion or significant change in job responsibilities and, in connection with each review, our board of directors considers individual and company performance over the course of the applicable year. The board of directors has historically made adjustments to base salaries for named executive officers upon consideration of any factors that it deems relevant, including but not limited to: (a) any increase or decrease in the named executive officer's responsibilities, (b) the named executive officer's job performance, and (c) the level of compensation paid to senior executives of other companies with whom we compete for executive talent, as estimated based on publicly available information and the experience of members of our board of directors.
Cash Bonuses
We did not maintain a formal bonus program for our named executive officers during fiscal year 2016. However, our named executive officers have historically received discretionary bonuses to recognize their significant contributions and aid in our retention efforts. Based upon a year-end review of certain performance and individual criteria established by our predecessor's board of managers, it was determined whether each named executive officer was eligible to receive a cash bonus for a given year and the amount of such cash bonus. Bonus payments, if any, were historically made in the year following the fiscal year to which the bonus relates and required that the named executive officer be employed by us through the applicable payment date in order to receive payment. In August 2017, our board of directors approved the 2017 Incentive Compensation Program, a performance-based short-term incentive bonus arrangement pursuant to which our named executive officers may earn a cash bonus for fiscal year 2017. The 2017 Incentive Compensation Program takes into account the following factors: annualized base salary, target bonus percentage, achievement with respect to pre-established performance goals and board discretion. Bonus payments under the 2017 Incentive Compensation Program are expected to be made in fiscal year 2018 and each named executive officer must be employed by us through the applicable payment date in order to receive payment.
Other Benefits
We offer participation in broad-based retirement, health and welfare plans to all of our employees. We currently maintain a plan intended to provide benefits under section 401(k) of the Internal Revenue Code (the "401(k) Plan"). The 401(k) Plan permits employees to contribute portions of their base compensation into a retirement account in order to encourage all employees, including any participating named executive officers, to save for the future. We provide matching contributions equal to 100% of the first 4% of each employee's eligible compensation contributed to the plan.
Employment, Severance or Change in Control Agreements
We do not currently maintain any employment, severance or change in control agreements with our named executive officers. In addition, our named executive officers are not currently entitled to any payments or other benefits in connection with a termination of employment or a change in control outside of the potential initial public offering bonuses described below.
We may enter into employment agreements with certain named executive officers in the future, but the terms of such employment agreements and the recipients thereof, if any, have not been determined at this time.
In connection with our initial public offering, we adopted an omnibus equity incentive plan, the Solaris Oilfield Infrastructure, Inc. 2017 Long Term Incentive Plan (the "2017 Plan"), for the employees, consultants and the directors of the Company and its affiliates who perform services for us.
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A summary of the principal features of the 2017 Plan is provided below but does not purport to be a complete description of all the provisions of the 2017 Plan. The summary below should be read in conjunction with, and is qualified in its entirety by reference to the full text of the 2017 Plan, which is incorporated by reference to Exhibit 4.3 of our Registration Statement on Form S-8, filed May 17, 2017 (File No. 333-218043).
The 2017 Plan provides for potential grants of: (i) incentive stock options qualified as such under U.S. federal income tax laws ("incentive options"); (ii) stock options that do not qualify as incentive stock options ("nonstatutory options," and together with incentive options, "options"); (iii) stock appreciation rights ("SARs"); (iv) restricted stock awards ("restricted stock awards"); (v) restricted stock units ("restricted stock units" or "RSUs"); (vi) bonus stock ("bonus stock awards"); (vii) performance awards ("performance awards"); (viii) dividend equivalents; (ix) other stock-based awards; (x) cash awards; and (xi) substitute awards (referred to collectively herein with the other awards as the "awards").
Eligibility
Our employees, consultants and non-employee directors, and employees, consultants and non-employee directors of our affiliates, are eligible to receive awards under the 2017 Plan.
Administration
Our board of directors, or a committee thereof later appointed by our board of directors (as applicable, the "Administrator"), administers the 2017 Plan pursuant to its terms and all applicable state, federal or other rules or laws. The Administrator has the power to determine to whom and when awards will be granted, determine the amount of awards (measured in cash or in shares of our Class A common stock), proscribe and interpret the terms and provisions of each award agreement (the terms of which may vary), accelerate the vesting or exercisability of an award, delegate duties under the 2017 Plan and execute all other responsibilities permitted or required under the 2017 Plan.
Securities to be Offered
Subject to adjustment in the event of any distribution, recapitalization, split, merger, consolidation or similar corporate event, 5,118,080 shares of our Class A common stock are available for delivery pursuant to awards under the 2017 Plan. If an award under the 2017 Plan is forfeited, settled for cash or expires without the actual delivery of shares, any shares subject to such award will again be available for new awards under the 2017 Plan.
Types of Awards
OptionsWe may grant options to eligible persons including: (i) incentive options (only to our employees or those of our subsidiaries) which comply with section 422 of the Code; and (ii) nonstatutory options. The exercise price of each option granted under the 2017 Plan will be stated in the option agreement and may vary; however, the exercise price for an option must not be less than the fair market value per share of Class A common stock as of the date of grant (or 110% of the fair market value for certain incentive options), nor may the option be re-priced without the prior approval of our stockholders. Options may be exercised as the Administrator determines, but not later than ten years from the date of grant. The Administrator will determine the methods and form of payment for the exercise price of an option (including, in the discretion of the Administrator, payment in Class A common stock, other awards or other property) and the methods and forms in which Class A common stock will be delivered to a participant.
SARsA SAR is the right to receive a share of Class A common stock, or an amount equal to the excess of the fair market value of one share of the Class A common stock on the date of exercise over
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the grant price of the SAR, as determined by the Administrator. The exercise price of a share of Class A common stock subject to the SAR shall be determined by the Administrator, but in no event shall that exercise price be less than the fair market value of the Class A common stock on the date of grant. The Administrator has the discretion to determine other terms and conditions of a SAR award.
Restricted stock awardsA restricted stock award is a grant of shares of Class A common stock subject to a risk of forfeiture, performance conditions, restrictions on transferability and any other restrictions imposed by the Administrator in its discretion. Restrictions may lapse at such times and under such circumstances as determined by the Administrator. Except as otherwise provided under the terms of the 2017 Plan or an award agreement, the holder of a restricted stock award will have rights as a stockholder, including the right to vote the Class A common stock subject to the restricted stock award or to receive dividends on the Class A common stock subject to the restricted stock award during the restriction period. The Administrator shall provide, in the restricted stock award agreement, whether the restricted stock will be forfeited upon certain terminations of employment. Unless otherwise determined by the Administrator, Class A common stock distributed in connection with a stock split or stock dividend, and other property distributed as a dividend, will be subject to restrictions and a risk of forfeiture to the same extent as the restricted stock award with respect to which such Class A common stock or other property has been distributed.
Restricted stock unitsRSUs are rights to receive Class A common stock, cash, or a combination of both at the end of a specified period. The Administrator may subject RSUs to restrictions (which may include a risk of forfeiture) to be specified in the RSU award agreement, and those restrictions may lapse at such times determined by the Administrator. Restricted stock units may be settled by delivery of Class A common stock, cash equal to the fair market value of the specified number of shares of Class A common stock covered by the RSUs, or any combination thereof determined by the Administrator at the date of grant or thereafter. Dividend equivalents on the specified number of shares of Class A common stock covered by RSUs may be paid on a current, deferred or contingent basis, as determined by the Administrator on or following the date of grant.
Bonus stock awardsThe Administrator is authorized to grant Class A common stock as a bonus stock award. The Administrator will determine any terms and conditions applicable to grants of Class A common stock, including performance criteria, if any, associated with a bonus stock award.
Performance awardsThe vesting, exercise or settlement of awards may be subject to achievement of one or more performance criteria set forth in the 2017 Plan. One or more of the following performance criteria for the Company, on a consolidated basis, and/or for specified subsidiaries, may be used by the Administrator in establishing performance goals for such performance awards: (1) revenues, sales or other income; (2) free cash flow, discretionary cash flow, cash flows from operations, cash flows from investing activities, and/or cash flows from financing activities; (3) return on net assets, return on assets, return on investment, return on capital, return on capital employed or return on equity; (4) income, operating income or net income; (5) earnings or earnings margin determined before or after any one or more of depletion, depreciation and amortization expense; impairment of inventory and other property and equipment; accretion of discount on asset retirement obligations; interest expense; net gain or loss on the disposition of assets; income or loss from discontinued operations, net of tax; noncash derivative related activity; amortization of stock-based compensation; income taxes; or other items (including but not limited to EBITDA and Adjusted EBITDA); (6) equity; net worth; tangible net worth; book capitalization; debt; debt, net of cash and cash equivalents; capital budget or other balance sheet goals; (7) debt or equity financings or improvement of financial ratings or leverage ratings; (8) general and administrative expenses; (9) capital expenditures, operating costs or base operating costs; (10) net asset value; (11) fair market value of the Class A common stock, share price, share price appreciation, total stockholder return or payments of dividends; (12) achievement of savings from business improvement projects and
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achievement of capital projects deliverables; (13) working capital or working capital changes; (14) operating profit or net operating profit; (15) internal research or development programs; (16) geographic business expansion; (17) corporate development (including licenses, innovation, research or establishment of third party collaborations); (18) performance against environmental, ethics or sustainability targets; (19) safety performance and/or incident rate; (20) human resources management targets, including medical cost reductions, employee satisfaction or retention, workforce diversity and time to hire; (21) satisfactory internal or external audits; (22) consummation, implementation or completion of a change in control or other strategic partnerships, transactions, projects, processes or initiatives or other goals relating to acquisitions or divestitures (in whole or in part), joint ventures or strategic alliances; (23) regulatory approvals or other regulatory milestones; (24) legal compliance or risk reduction; (25) market share; (26) economic value added; (27) cost reduction targets; (28) total revenue days; (29) operating ratios or metrics; or (30) customer acquisition or customer retention. The Administrator may also use any of the above goals determined on an absolute or relative basis or as compared to the performance of a published or special index deemed applicable by the Administrator including, but not limited to, the Standard & Poor's 500 stock index or a group of comparable companies. At the time a performance goal is established with respect to an award, the Administrator may also exclude the impact of one or more events or occurrences, as specified by the Administrator, so long such events or occurrences are objective determinable, and further provided that any such adjustment would not cause an award intended to comply with Section 162(m) of the Code to fail to so qualify.
Performance awards granted to eligible persons who are deemed by the Administrator to be "covered employees" pursuant to section 162(m) of the Code shall be administered in accordance with the rules and regulations issued under section 162(m) of the Code. The Administrator may also impose individual performance criteria on the awards, which, if required for compliance with section 162(m) of the Code, will be approved by our stockholders .
Dividend EquivalentsDividend equivalents entitle a participant to receive cash, Class A common stock, other awards or other property equal in value to dividends paid with respect to a specified number of shares of our Class A common stock, or other periodic payments at the discretion of the Administrator. Dividend equivalents may be granted on a free-standing basis or in connection with another award (other than a restricted stock award or a bonus stock award).
Other Stock-Based AwardsOther stock-based awards are awards denominated or payable in, valued in whole or in part by reference to, or otherwise based on or related to, the value of our Class A common stock.
Cash AwardsCash awards may be granted on a free-standing basis, as an element of or a supplement to, or in lieu of any other award.
Substitute AwardsAwards may be granted in substitution or exchange for any other award granted under the 2017 Plan or under another equity incentive plan or any other right of an eligible person to receive payment from us. Awards may also be granted under the 2017 Plan in substitution for similar awards held for individuals who become participants as a result of a merger, consolidation or acquisition of another entity by or with the Company or one of our affiliates.
Certain Transactions. If any change is made to our capitalization, such as a stock split, stock combination, stock dividend, exchange of shares or other recapitalization, merger or otherwise, which results in an increase or decrease in the number of outstanding shares of Class A common stock, appropriate adjustments will be made by the Administrator in the shares subject to an award under the 2017 Plan. The Administrator also has the discretion to make certain adjustments to awards in the event of a change in control, such as accelerating the vesting or exercisability of awards, requiring the
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surrender of an award, with or without consideration, or making any other adjustment or modification to the award that the Administrator determines is appropriate in light of such transaction.
Plan Amendment and Termination. Our board of directors may amend or terminate the 2017 Plan at any time; however, stockholder approval will be required for any amendment to the extent necessary to comply with applicable law or exchange listing standards. The Administrator does not have the authority, without the approval of stockholders, to amend any outstanding stock option or stock appreciation right to reduce its exercise price per share. The 2017 Plan will remain in effect for a period of ten years (unless earlier terminated by our board of directors).
Clawback. All awards under the 2017 Plan will be subject to any clawback or recapture policy adopted by the Company, as in effect from time to time.
Solaris Inc. was formed in February, 2017. No obligations with respect to compensation for directors were accrued or paid during fiscal year 2016. Two of the six individuals serving on the board of managers of Solaris LLC received $25,000, and the lead manager received $50,000, for their services on such board of managers during fiscal year 2016.
We believe that attracting and retaining qualified non-employee directors will be critical to the future value growth and governance of our company. We also believe that a significant portion of the total compensation package for our non-employee directors should be equity-based to align the interest of directors with our stockholders.
As a result, we implemented the following non-employee director compensation program in August 2017:
We do not pay any additional fees for attendance at board or committee meetings, but we do reimburse each director for reasonable travel and out-of-pocket expenses incurred to attend meetings and activities of our board or its committees. Directors who are also our employees will not receive any additional compensation for their service on our board of directors.
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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Solaris LLC Agreement
The Solaris LLC Agreement is filed as an exhibit to the registration statement of which this prospectus forms a part, and the following description of the Solaris LLC Agreement is qualified in its entirety by reference thereto.
Redemption Rights
Under the Solaris LLC Agreement, each Original Investor has, subject to certain limitations, the right, pursuant to the Redemption Right, to cause Solaris LLC to acquire all or a portion of its Solaris LLC Units for, at Solaris LLC's election, (x) shares of our Class A common stock at a redemption ratio of one share of Class A common stock for each Solaris LLC Unit redeemed, subject to conversion rate adjustments for stock splits, stock dividends and reclassifications and other similar transactions, or (y) an equivalent amount of cash. Alternatively, upon the exercise of the Redemption Right, Solaris Inc. (instead of Solaris LLC) will have the right, pursuant to the Call Right, to acquire each tendered Solaris LLC Unit directly from the exchanging Original Investor for, at Solaris Inc.'s election, (x) one share of Class A common stock or (y) an equivalent amount of cash. In addition, upon a change of control of Solaris Inc., Solaris Inc. has the right to require each holder of Solaris LLC Units (other than Solaris Inc.) to exercise its Redemption Right with respect to some or all of such unitholder's Solaris LLC Units. As the Original Investors redeem their Solaris LLC Units, our membership interest in Solaris LLC will be correspondingly increased, the number of shares of Class A common stock outstanding will be increased, and the number of shares of Class B common stock outstanding will be reduced.
Distributions and Allocations
Under the Solaris LLC Agreement, we have the right to determine when distributions will be made to the holders of Solaris LLC Units and the amount of any such distributions. If we authorize a distribution, such distribution will be made to the holders of Solaris LLC Units generally on a pro rata basis in accordance with their respective percentage ownership of Solaris LLC Units.
Solaris LLC will allocate its net income or net loss for each year to the holders of Solaris LLC Units pursuant to the terms of the Solaris LLC Agreement, and the holders of Solaris LLC Units, including Solaris Inc., will generally incur U.S. federal, state and local income taxes on their share of any taxable income of Solaris LLC. Net income and losses of Solaris LLC generally will be allocated to the holders of Solaris LLC Units on a pro rata basis in accordance with their respective percentage ownership of Solaris LLC Units, subject to requirements under U.S. federal income tax law that certain items of income, gain, loss or deduction be allocated disproportionately in certain circumstances. To the extent Solaris LLC has available cash and subject to the terms of any future debt instruments, we intend to cause Solaris LLC to make (i) generally pro rata distributions to the holders of Solaris LLC Units, including Solaris Inc., in an amount at least sufficient to allow us to pay our taxes and make payments under the Tax Receivable Agreement that we will enter into with the TRA Holders in connection with the closing of this offering and any subsequent tax receivable agreements that we may enter into in connection with future acquisitions and (ii) non-pro rata payments to Solaris Inc. to reimburse us for our corporate and other overhead expenses.
Issuance of Equity
The Solaris LLC Agreement provides that, except as otherwise determined by us, at any time Solaris Inc. issues a share of its Class A common stock or any other equity security, the net proceeds received by Solaris Inc. with respect to such issuance, if any, shall be concurrently invested in Solaris LLC, and Solaris LLC shall issue to Solaris Inc. one Solaris LLC Unit or other economically
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equivalent equity interest. Conversely, if at any time, any shares of Solaris Inc.'s Class A common stock are redeemed, repurchased or otherwise acquired, Solaris LLC shall redeem, repurchase or otherwise acquire an equal number of Solaris LLC Units held by Solaris Inc., upon the same terms and for the same price, as the shares of our Class A common stock are redeemed, repurchased or otherwise acquired.
Competition
Under the Solaris LLC Agreement, the members have agreed that certain of our Original Investors, including Yorktown, and their respective affiliates will be permitted to engage in business activities or invest in or acquire businesses which may compete with our business or do business with our customers.
Dissolution
Solaris LLC will be dissolved only upon the first to occur of (i) the sale of substantially all of its assets or (ii) an election by us to dissolve the company. Upon dissolution, Solaris LLC will be liquidated and the proceeds from any liquidation will be applied and distributed in the following manner: (a) first, to creditors (including to the extent permitted by law, creditors who are members) in satisfaction of the liabilities of Solaris LLC, (b) second, to establish cash reserves for contingent or unforeseen liabilities and (c) third, to the members in proportion to the number of Solaris LLC Units owned by each of them.
Tax Receivable Agreement
As described above, the Original Investors may redeem their Solaris LLC Units for shares of Class A common stock or cash, as applicable, in the future pursuant to the Redemption Right or the Call Right. Solaris LLC (and each of its direct or indirect subsidiaries that is treated as a partnership for U.S. federal income tax purposes and that it controls) has in effect an election under Section 754 of the Code. Pursuant to the Section 754 election, our acquisition (or deemed acquisition for U.S. federal income tax purposes) of Solaris LLC Units as a part of the Reorganization Transactions and redemptions of Solaris LLC Units pursuant to the Redemption Right or the Call Right have resulted or are expected to result in adjustments to the tax basis of the tangible and intangible assets of Solaris LLC. These adjustments will be allocated to Solaris Inc. Such adjustments to the tax basis of the tangible and intangible assets of Solaris LLC would not have been available to Solaris Inc. absent its acquisition or deemed acquisition of Solaris LLC Units as part of the Reorganization Transactions or pursuant to the exercise of the Redemption Right or the Call Right and are expected to increase (for tax purposes) Solaris Inc.'s depreciation, depletion and amortization deductions and may also decrease Solaris Inc.'s gains (or increase its losses) on future dispositions of certain assets to the extent tax basis is allocated to those assets. Such increased deductions and losses and reduced gains may reduce the amount of tax that Solaris Inc. would otherwise be required to pay in the future.
Solaris entered into the Tax Receivable Agreement with the TRA Holders at the closing of the IPO. This agreement generally provides for the payment by Solaris Inc. to each TRA Holder of 85% of the net cash savings, if any, in U.S. federal, state and local income tax and franchise tax that Solaris 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 of Solaris Inc.'s 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 Reorganization Transactions or pursuant to an exercise of the Redemption Right or the Call Right and (ii) imputed interest deemed to be paid by Solaris Inc. as a result of, and additional tax basis arising from, any payments Solaris Inc. makes under the Tax Receivable Agreement. We will retain the benefit of the remaining 15% of the cash savings. Certain of the TRA Holders'
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rights under the Tax Receivable Agreement are transferable in connection with a permitted transfer of Solaris LLC Units or if the TRA Holder no longer holds Solaris LLC Units.
The payment obligations under the Tax Receivable Agreement are Solaris Inc.'s obligations and not obligations of Solaris LLC, and we expect that the payments we will be required to make under the Tax Receivable Agreement will be substantial. Estimating the amount and timing of payments that may become due under the Tax Receivable Agreement is by its nature imprecise. For purposes of the Tax Receivable Agreement, cash savings in tax generally will be calculated by comparing Solaris Inc.'s actual tax liability (determined by using the actual applicable U.S. federal income tax rate and an assumed combined state and local income and franchise tax rate) to the amount it would have been required to pay had it not been able to utilize any of the tax benefits subject to the Tax Receivable Agreement. The actual increase in tax basis, as well as the amount and timing of any payments under the Tax Receivable Agreement, will vary depending upon a number of factors, including the timing of any redemption of Solaris LLC Units, the price of our Class A common stock at the time of each redemption, the extent to which such redemptions are taxable transactions, the amount and timing of the taxable income we generate in the future and the U.S. federal income tax rate then applicable, and the portion of Solaris Inc.'s payments under the Tax Receivable Agreement that constitute imputed interest or give rise to depreciable or amortizable tax basis. Assuming no material changes in the relevant tax law, we expect that if the Tax Receivable Agreement were terminated immediately after this offering, the estimated termination payments, based on the assumptions discussed below, would be approximately $177.1 million (calculated using a discount rate equal to one-year LIBOR plus 100 basis points, applied against an undiscounted liability of $ million, based upon the last reported closing sale price of our Class A common stock on November 1, 2017). For more information on the Tax Receivable Agreement, see the pro forma financial statements and the related notes thereto appearing elsewhere in this prospectus.
The foregoing amounts are merely estimates and the actual payments could differ materially. It is possible that future transactions or events could increase or decrease the actual tax benefits realized and the corresponding Tax Receivable Agreement payments as compared to the foregoing estimates. Moreover, there may be a negative impact on our liquidity if, as a result of timing discrepancies or otherwise, (i) the payments under the Tax Receivable Agreement exceed the actual benefits we realize in respect of the tax attributes subject to the Tax Receivable Agreement and/or (ii) distributions to Solaris Inc. by Solaris LLC are not sufficient to permit Solaris Inc. to make payments under the Tax Receivable Agreement after it has paid its taxes and other obligations. Please read "Risk FactorsRisks Related to this Offering and Our Class A Common StockIn certain cases, payments under the Tax Receivable Agreement may be accelerated and/or significantly exceed the actual benefits, if any, we realize in respect of the tax attributes subject to the Tax Receivable Agreement." The payments under the Tax Receivable Agreement will not be conditioned upon a holder of rights under the Tax Receivable Agreement having a continued ownership interest in either Solaris LLC or Solaris Inc.
In addition, although we are not aware of any issue that would cause the Internal Revenue Service ("IRS") or other relevant tax authorities, to challenge potential tax basis increases or other tax benefits covered under the Tax Receivable Agreement, the TRA Holders will not reimburse us for any payments previously made under the Tax Receivable Agreement if such basis increases or other benefits are subsequently disallowed, except that excess payments made to any such holder will be netted against payments otherwise to be made, if any, to such holder after our determination of such excess. As a result, in such circumstances, Solaris Inc. could make payments that are greater than its actual cash tax savings, if any, and may not be able to recoup those payments, which could adversely affect its liquidity.
The term of the Tax Receivable Agreement will continue until all tax benefits that are subject to the Tax Receivable Agreement have been utilized or expired, unless we exercise our right to terminate the Tax Receivable Agreement. It is expected that payments will continue to be made under the Tax Receivable Agreement for more than 20 to 25 years. If we experience a change of control (as defined
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under the Tax Receivable Agreement, which includes certain mergers, asset sales and other forms of business combinations) or the Tax Receivable Agreement terminates early (at our election or as a result of our breach), we would be required to make a substantial, immediate lump-sum payment. This payment would equal the present value of hypothetical future payments that could be required to be paid under the Tax Receivable Agreement (determined by applying a discount rate of one-year LIBOR plus 100 basis points). The calculation of hypothetical future payments will be based upon certain assumptions and deemed events set forth in the Tax Receivable Agreement, including (i) we have sufficient taxable income to fully utilize the tax benefits covered by the Tax Receivable Agreement and (ii) any Solaris LLC Units (other than those held by Solaris Inc.) outstanding on the termination date are deemed to be redeemed on the termination date. Any early termination payment may be made significantly in advance of, and may materially exceed, the actual realization, if any, of the future tax benefits to which the termination payment relates.
The Tax Receivable Agreement provides that in the event that we breach any of our material obligations under the Tax Receivable Agreement, whether as a result of (i) our failure to make any payment when due (including in cases where we elect to terminate the Tax Receivable Agreement early, the Tax Receivable Agreement is terminated early due to certain mergers, asset sales, or other forms of business combinations or changes of control or we have available cash but fail to make payments when due under circumstances where we do not have the right to elect to defer the payment, as described below), (ii) our failure to honor any other material obligation under it or (iii) by operation of law as a result of the rejection of the Tax Receivable Agreement in a case commenced under the U.S. Bankruptcy Code or otherwise, then the TRA Holders may elect to treat such breach as an early termination, which would cause all our payment and other obligations under the Tax Receivable Agreement to be accelerated and become due and payable applying the same assumptions described above.
As a result of either an early termination or a change of control, we could be required to make payments under the Tax Receivable Agreement that exceed our actual cash tax savings under the Tax Receivable Agreement. In these situations, our obligations under the Tax Receivable Agreement could have a substantial negative impact on our liquidity and could have the effect of delaying, deferring or preventing certain mergers, asset sales, or other forms of business combinations or changes of control. For example, if we experienced a change of control or the Tax Receivable Agreement were terminated immediately after this offering, the estimated lump-sum payment would be approximately $177.1 million (based upon the last reported closing sale price of our Class A common stock on November 1, 2017). There can be no assurance that we will be able to finance our obligations under the Tax Receivable Agreement.
Decisions we make in the course of running our business, such as with respect to mergers, asset sales, other forms of business combinations or other changes in control, may influence the timing and amount of payments that are received by the TRA Holders under the Tax Receivable Agreement. For example, the earlier disposition of assets following a redemption of Solaris LLC Units may accelerate payments under the Tax Receivable Agreement and increase the present value of such payments, and the disposition of assets before a redemption of Solaris LLC Units may increase the TRA Holders' tax liability without giving rise to any rights of the TRA Holders to receive payments under the Tax Receivable Agreement. Such effects and such consent rights may result in differences or conflicts of interest between the interests of the TRA Holders and other stockholders.
Payments generally are due under the Tax Receivable Agreement within five business days following the finalization of the schedule with respect to which the payment obligation is calculated. However, interest on such payments will begin to accrue from the due date (without extensions) of our U.S. federal income tax return for the period to which such payments relate until such payment due date at a rate equal to one-year LIBOR plus 150 basis points. Except in cases where we elect to terminate the Tax Receivable Agreement early or it is otherwise terminated as described above,
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generally we may elect to defer payments due under the Tax Receivable Agreement if we do not have available cash to satisfy our payment obligations under the Tax Receivable Agreement or if our contractual obligations limit our ability to make these payments. Any such deferred payments under the Tax Receivable Agreement generally will accrue interest from the due date for such payment until the payment date at a rate of one-year LIBOR plus 550 basis points. However, interest will accrue from the due date for such payment until the payment date at a rate of one-year LIBOR plus 150 basis points if we are unable to make such payment as a result of limitations imposed by existing credit agreements. We have no present intention to defer payments under the Tax Receivable Agreement.
Because we are a holding company with no operations of our own, our ability to make payments under the Tax Receivable Agreement is dependent on the ability of Solaris LLC to make distributions to us in an amount sufficient to cover our obligations under the Tax Receivable Agreement. This ability, in turn, may depend on the ability of Solaris LLC's subsidiaries to make distributions to it. The ability of Solaris LLC, its subsidiaries and other entities in which it directly or indirectly holds an equity interest to make such distributions will be subject to, among other things, (i) the applicable provisions of Delaware law (or other applicable jurisdiction) that may limit the amount of funds available for distribution and (ii) restrictions in relevant debt instruments issued by Solaris LLC or its subsidiaries and/other entities in which it directly or indirectly holds an equity interest. To the extent that we are unable to make payments under the Tax Receivable Agreement for any reason, such payments will be deferred and will accrue interest until paid.
The Tax Receivable Agreement is filed as an exhibit to the registration statement of which this prospectus forms a part, and the foregoing description of the Tax Receivable Agreement is qualified by reference thereto.
In connection with the closing of the IPO, we entered into a registration rights agreement with certain of the Original Investors, including Yorktown, Solaris Energy Capital and certain members of our management team (the "Initial Holders"). Pursuant to the registration rights agreement, we agreed to register the sale of shares of our Class A common stock under certain circumstances.
Demand Rights
At any time after the 180 day lock-up period described in the registration rights agreement, and subject to the limitations set forth below, any Initial Holder (or its permitted transferees) has the right to require us by written notice to prepare and file a registration statement registering the offer and sale of a certain number of its shares of Class A common stock. Generally, we are required to file such registration statement within 15 days of such written notice. Subject to certain exceptions, we will not be obligated to effect a demand registration within 90 days after the closing of any underwritten offering of shares of our Class A common stock.
We are also not obligated to effect any demand registration in which the amount of Class A common stock to be registered has an aggregate value of less than $35 million. Once we are eligible to effect a registration on Form S-3, any such demand registration may be for a shelf registration statement. We will be required to use all commercially reasonable efforts to maintain the effectiveness of any such registration statement until all shares covered by such registration statement have been sold.
In addition, any Initial Holder (or its permitted transferees) then able to effectuate a demand registration has the right to require us, subject to certain limitations, to effect a distribution of any or all of its shares of Class A common stock by means of an underwritten offering.
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Piggyback Rights
Subject to certain exceptions, if at any time we propose to register an offering of common stock or conduct an underwritten offering, whether or not for our own account, then we must notify the Initial Holders (or their permitted transferees) of such proposal at least five business days before the anticipated filing date or commencement of the underwritten offering, as applicable, to allow them to include a specified number of their shares in that registration statement or underwritten offering, as applicable.
Conditions and Limitations; Expenses
These registration rights are subject to certain conditions and limitations, including the right of the underwriters to limit the number of shares to be included in a registration and our right to delay or withdraw a registration statement under certain circumstances. We will generally pay all registration expenses in connection with our obligations under the registration rights agreement, regardless of whether a registration statement is filed or becomes effective.
Historical Transactions with Affiliates
Promissory Notes
In 2014, Solaris LLC amended its Limited Liability Company Agreement to authorize Solaris LLC to issue membership units at a value of $100 per unit in exchange for a promissory note. During the years ended December 31, 2016 and 2015, Solaris LLC issued 0 and 66,103 units, respectively, in exchange for notes receivable to certain members of management. In August 2015, a former employee assigned us 10,526 units previously purchased with proceeds from a promissory note in exchange for a release of the applicable promissory note. In November 2016, a former employee that was previously assigned 8,701 units paid off the applicable promissory note in cash. The promissory notes were partial recourse, accrued interest at 6% per annum and matured through various dates during 2022. Principal and accrued interest were due and payable upon the earlier of employee termination or the maturity date of the note. As of December 31, 2016, the outstanding principal and accrued interest for the notes totaled $4.7 million and $0.5 million, respectively, which is recorded in members' equity as the notes were originally received in exchange for the issuance of membership units. As of September 30, 2017, the promissory notes that were issued to our directors and executive officers have been repaid and terminated.
Solaris Energy Management, LLC
On November 22, 2016 we entered into an administrative services arrangement with Solaris Energy Management LLC ("SEM"), a company partially-owned by William A. Zartler, the Chairman of our board of directors, for the provision of certain personnel and administrative services to us at cost. The services provided by SEM, include, but are not limited to, executive management functions, accounting and bookkeeping and treasury. In addition, SEM provides office space, equipment and supplies to us under the administrative service agreement. Contemporaneously with the completion of the IPO, certain employees of SEM became our employees, and we amended and restated the administrative service agreement in its entirety. We also hired new employees to perform duties previously provided by SEM, though we continue to utilize office space under the administrative service agreement and receive certain other administrative services from SEM. For the nine months ended September 30, 2017 and the year ended December 31, 2016, we paid SEM $0.7 million and $0.3 million for these services, respectively.
Our predecessor's employees also provided consulting and advisory services to Solaris Water Operations, LLC ("Solaris Water"), a company owned by William A. Zartler, the Chairman of our
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board of directors. The company received $0.3 million from Solaris Water for the provision of services between February 2016 and July 2016. Our employees no longer provide services to Solaris Water.
In connection with the IPO, we engaged in certain transactions with certain affiliates and the members of Solaris LLC. Please read "SummaryOur Initial Public Offering and Corporation Structure."
Policies and Procedures for Review of Related Party Transactions
A "Related Party Transaction" is a transaction, arrangement or relationship in which we or any of our subsidiaries was, is or will be a participant, the amount of which involved exceeds $120,000, and in which any related person had, has or will have a direct or indirect material interest. A "Related Person" means:
Our board of directors has adopted a written related party transactions policy. Pursuant to this policy, our audit committee will review all material facts of all Related Party Transactions and either approve or disapprove entry into the Related Party Transaction, subject to certain limited exceptions. In determining whether to approve or disapprove entry into a Related Party Transaction, our audit committee shall take into account, among other factors, the following: (i) whether the Related Party Transaction is on terms no less favorable than terms generally available to an unaffiliated third-party under the same or similar circumstances and (ii) the extent of the Related Person's interest in the transaction. Furthermore, the policy requires that all Related Party Transactions required to be disclosed in our filings with the SEC be so disclosed in accordance with applicable laws, rules and regulations.
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PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information with respect to the beneficial ownership of our Class A common stock and Class B common stock that, upon the consummation of this offering and transactions related thereto, will be owned by:
All information with respect to beneficial ownership has been furnished by the respective 5% or more stockholders, directors, executive officers or selling stockholders, as the case may be. Unless otherwise noted, the mailing address of each listed beneficial owner is 9811 Katy Freeway, Suite 900, Houston, Texas 77024.
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Additional shares of Class A common stock offered if option to purchase additional shares is exercise in full(3) |
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Shares Beneficially Owned After the Offering (Assuming No Exercise of the Underwriters' Option)(1) |
Shares Beneficially Owned After the Offering (Assuming the Underwriters' Option is Exercised in Full)(1) |
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Class B Common Stock |
Combined Voting Power(2) |
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Yorktown Energy Partners X, L.P.(4) |
| 15,022,823 | 34.4 | % | 2,111,323 | 554,224 | | 12,911,500 | 27.7 | % | | 12,357,276 | 26.5 | % | ||||||||||||||||||||
Solaris Energy Capital, LLC(5) |
| 6,052,744 | 13.9 | % | 850,659 | 223,298 | | 5,202,085 | 11.1 | % | | 4,978,787 | 10.7 | % | ||||||||||||||||||||
Directors and Named Executive Officers: |
||||||||||||||||||||||||||||||||||
Gregory A. Lanham(6) |
301,886 | | * | | | 301,886 | | * | 301,886 | | * | |||||||||||||||||||||||
Kyle S. Ramachandran(7) |
154,427 | 749,662 | 2.1 | % | 103,117 | 27,068 | 154,427 | 646,545 | 1.7 | % | 154,427 | 619,477 | 1.7 | % | ||||||||||||||||||||
William A. Zartler(5)(8) |
77,911 | 7,063,974 | 16.3 | % | 1,002,222 | 263,083 | 77,911 | 6,061,752 | 13.2 | % | 77,911 | 5,798,669 | 12.6 | % | ||||||||||||||||||||
James R. Burke(9) |
17,799 | 129,055 | * | 19,363 | 5,083 | 17,799 | 109,692 | * | 17,799 | 104,609 | * | |||||||||||||||||||||||
Edgar R. Giesinger(10) |
7,170 | | * | | | 7,170 | | * | 7,170 | | * | |||||||||||||||||||||||
W. Howard Keenan, Jr.(10) |
7,170 | | * | | | 7,170 | | * | 7,170 | | * | |||||||||||||||||||||||
F. Gardner Parker(10) |
7,170 | | * | | | 7,170 | | * | 7,170 | | * | |||||||||||||||||||||||
A. James Teague(10) |
7,170 | | * | | | 7,170 | | * | 7,170 | | * | |||||||||||||||||||||||
Directors and executive officers as a group (12 persons)(11) |
879,915 |
8,182,821 |
20.7 |
% |
1,167,459 |
306,458 |
879,915 |
7,015,362 |
16.9 |
% |
879,915 |
6,708,904 |
16.2 |
% |
||||||||||||||||||||
Other Selling Stockholders: |
||||||||||||||||||||||||||||||||||
Wells Fargo Central Pacific Holdings, Inc.(12) |
| 1,236,447 | 2.8 | % | 173,772 | 45,615 | | 1,062,675 | 2.3 | % | | 1,017,060 | 2.2 | % | ||||||||||||||||||||
Freebird Partners LP(13) |
| 840,074 | 1.9 | % | 118,065 | 30,992 | | 722,009 | 1.5 | % | | 691,017 | 1.5 | % | ||||||||||||||||||||
Gregory Garcia(14) |
43,877 | 807,429 | 1.9 | % | 114,765 | 30,126 | 43,877 | 692,664 | 1.6 | % | 43,877 | 662,538 | 1.5 | % | ||||||||||||||||||||
Brian Dobbs(15) |
86,206 | 79,632 | * | 21,134 | 5,548 | 86,206 | 58,498 | * | 86,206 | 52,950 | * | |||||||||||||||||||||||
Jonathan Scheiner(16) |
35,851 | 141,843 | * | 20,900 | 5,486 | 35,851 | 120,943 | * | 35,851 | 115,457 | * | |||||||||||||||||||||||
Cynthia M. Durrett(17) |
99,257 | 240,130 | * | 42,757 | 11,224 | 99,257 | 197,373 | * | 99,257 | 186,149 | * | |||||||||||||||||||||||
Chris Work(18) |
9,733 | 757,343 | 1.8 | % | 107,806 | 28,299 | 9,733 | 649,537 | 1.4 | % | 9,733 | 621,238 | 1.4 | % | ||||||||||||||||||||
Alexander Hodosh, TTEE, FBO: Randall and Gail Gibbs(19) |
| 133,830 | * | 18,809 | 4,937 | | 115,021 | * | | 110,084 | * | |||||||||||||||||||||||
Jean K. Brown(20) |
| 428,255 | 1.0 | % | 60,187 | 15,799 | | 368,068 | * | | 352,269 | * | ||||||||||||||||||||||
Rory Burke(21) |
| 80,298 | * | 11,285 | 2,962 | | 69,013 | * | | 66,051 | * | |||||||||||||||||||||||
William Managan(22) |
67,578 | 48,757 | * | 13,430 | 3,525 | 67,578 | 35,327 | * | 67,578 | 31,802 | * | |||||||||||||||||||||||
Terry McIver(23) |
| 82,888 | * | 11,649 | 3,058 | | 71,239 | * | | 68,181 | * | |||||||||||||||||||||||
Privateer Energy Services, LLC(24) |
| 216,247 | * | 30,392 | 7,978 | | 185,855 | * | | 177,877 | * | |||||||||||||||||||||||
Ben Stocker(25) |
49,315 | 48,757 | * | 11,799 | 3,097 | 49,315 | 36,958 | * | 49,315 | 33,861 | * | |||||||||||||||||||||||
Williamsburg Enterprises(26) |
| 267,659 | * | 37,617 | 9,874 | | 230,042 | * | | 220,168 | * |
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The authorized capital stock of Solaris consists of 600,000,000 shares of Class A common stock, $0.01 par value per share, of which 18,316,468 shares will be issued and outstanding upon completion of this offering (19,366,438 shares if the underwriters' option to purchase additional shares of Class A common stock is exercised in full), 180,000,000 shares of Class B common stock, zero par value per share, of which 28,365,823 shares will be issued and outstanding upon completion of this offering (27,315,823 shares if the underwriters' option to purchase additional shares of Class A common stock is exercised in full) and 50,000,000 shares of preferred stock, $0.01 par value per share, of which no shares will be issued and outstanding upon completion of this offering.
The following summary of the capital stock and amended and restated certificate of incorporation and amended and restated bylaws of Solaris does not purport to be complete and is qualified in its entirety by reference to the provisions of applicable law and to our amended and restated certificate of incorporation and amended and restated bylaws, which are filed as exhibits to the registration statement of which this prospectus is a part.
Voting Rights. Holders of shares of Class A common stock are entitled to one vote per share held of record on all matters to be voted upon by the stockholders. The holders of Class A common stock do not have cumulative voting rights in the election of directors.
Dividend Rights. Holders of shares of our Class A common stock are entitled to ratably receive dividends when and if declared by our board of directors out of funds legally available for that purpose, subject to any statutory or contractual restrictions on the payment of dividends and to any prior rights and preferences that may be applicable to any outstanding preferred stock.
Liquidation Rights. Upon our liquidation, dissolution, distribution of assets or other winding up, the holders of Class A common stock are entitled to receive ratably the assets available for distribution to the stockholders after payment of liabilities and the liquidation preference of any of our outstanding shares of preferred stock.
Other Matters. The shares of Class A common stock have no preemptive or conversion rights and are not subject to further calls or assessment by us. There are no redemption or sinking fund provisions applicable to the Class A common stock. All outstanding shares of our Class A common stock, including the Class A common stock offered in this offering, are fully paid and non-assessable.
Generally. In connection with the IPO, each Original Investor received one share of Class B common stock for each Solaris LLC Unit that it held. Accordingly, each Original Investor has a number of votes in Solaris equal to the aggregate number of Solaris LLC Units that it holds.
Voting Rights. Holders of shares of our Class B common stock are entitled to one vote per share held of record on all matters to be voted upon by the stockholders. Holders of shares of our Class A common stock and Class B common stock vote together as a single class on all matters presented to our stockholders for their vote or approval, except with respect to the amendment of certain provisions of our amended and restated certificate of incorporation that would alter or change the powers, preferences or special rights of the Class B common stock so as to affect them adversely, which amendments must be by a majority of the votes entitled to be cast by the holders of the shares affected by the amendment, voting as a separate class, or as otherwise required by applicable law.
Dividend and Liquidation Rights. Holders of our Class B common stock do not have any right to receive dividends, unless the dividend consists of shares of our Class B common stock or of rights,
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options, warrants or other securities convertible or exercisable into or redeemable for shares of Class B common stock paid proportionally with respect to each outstanding share of our Class B common stock and a dividend consisting of shares of Class A common stock or of rights, options, warrants or other securities convertible or exercisable into or redeemable for shares of Class A common stock on the same terms is simultaneously paid to the holders of Class A common stock. Holders of our Class B common stock do not have any right to receive a distribution upon a liquidation or winding up of Solaris.
Our amended and restated certificate of incorporation authorizes our board of directors, subject to any limitations prescribed by law, without further stockholder approval, to establish and to issue from time to time one or more classes or series of preferred stock, par value $0.01 per share, covering up to an aggregate of 50,000,000 shares of preferred stock. Each class or series of preferred stock will have the powers, preferences, rights, qualifications, limitations and restrictions determined by the board of directors, which may include, among others, dividend rights, liquidation preferences, voting rights, conversion rights, preemptive rights and redemption rights. Except as provided by law or in a preferred stock designation, the holders of preferred stock will not be entitled to vote at or receive notice of any meeting of stockholders.
Anti-Takeover Effects of Provisions of Our Amended and Restated Certificate of Incorporation, Our Amended and Restated Bylaws and Delaware Law
Some provisions of Delaware law, and our amended and restated certificate of incorporation and our amended and restated bylaws contain provisions that could make the following transactions more difficult: acquisitions of us by means of a tender offer, a proxy contest or otherwise; or removal of our incumbent officers and directors. These provisions may also have the effect of preventing changes in our management. It is possible that these provisions could make it more difficult to accomplish or could deter transactions that stockholders may otherwise consider to be in their best interest or in our best interests, including transactions that might result in a premium over the market price for our shares.
These provisions are expected to discourage coercive takeover practices and inadequate takeover bids. These provisions are also designed to encourage persons seeking to acquire control of us to first negotiate with us. We believe that the benefits of increased protection and our potential ability to negotiate with the proponent of an unfriendly or unsolicited proposal to acquire or restructure us outweigh the disadvantages of discouraging these proposals because, among other things, negotiation of these proposals could result in an improvement of their terms.
Delaware Law
We are not subject to the provisions of Section 203 of the DGCL, regulating corporate takeovers. In general, those provisions prohibit a Delaware corporation, including those whose securities are listed for trading on the NYSE, from engaging in any business combination with any interested stockholder for a period of three years following the date that the stockholder became an interested stockholder, unless:
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Our Amended and Restated Certificate of Incorporation and Our Amended and Restated Bylaws
Provisions of our amended and restated certificate of incorporation and our amended and restated bylaws may delay or discourage transactions involving an actual or potential change in control or change in our management, including transactions in which stockholders might otherwise receive a premium for their shares, or transactions that our stockholders might otherwise deem to be in their best interests. Therefore, these provisions could adversely affect the price of our Class A common stock.
Among other things, our amended and restated certificate of incorporation and amended and restated bylaws:
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directors may tend to discourage a third party from making a tender offer or otherwise attempting to obtain control of us, because it generally makes it more difficult for stockholders to replace a majority of the directors;
Under our amended and restated certificate of incorporation, to the extent permitted by law:
Our amended and restated certificate of incorporation provides that unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware will, to the fullest extent permitted by applicable law, be the sole and exclusive forum for:
Our amended and restated certificate of incorporation also provides that any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock will be deemed to have notice of, and to have consented to, this forum selection provision. Although we believe these provisions will benefit us by providing increased consistency in the application of Delaware law for the specified types of actions and proceedings, the provisions may have the effect of discouraging lawsuits against our directors, officers, employees and agents. The enforceability of similar exclusive forum provisions in other companies' certificates of incorporation has been challenged in legal proceedings, and it is possible that, in connection with one or more actions or proceedings described above, a court could rule that this provision in our amended and restated certificate of incorporation is inapplicable or unenforceable.
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Limitation of Liability and Indemnification Matters
Our amended and restated certificate of incorporation limits the liability of our directors for monetary damages for breach of their fiduciary duty as directors, except for liability that cannot be eliminated under the DGCL. Delaware law provides that directors of a company will not be personally liable for monetary damages for breach of their fiduciary duty as directors, except for liabilities:
Any amendment, repeal or modification of these provisions will be prospective only and would not affect any limitation on liability of a director for acts or omissions that occurred prior to any such amendment, repeal or modification.
Our amended and restated bylaws also provide that we will indemnify our directors and officers to the fullest extent permitted by Delaware law. Our amended and restated bylaws also permit us to purchase insurance on behalf of any officer, director, employee or other agent for any liability arising out of that person's actions as our officer, director, employee or agent, regardless of whether Delaware law would permit indemnification. We have entered into indemnification agreements with each of our current directors and officers and intend to enter into indemnification agreement with any future directors and officers. These agreements require us to indemnify these individuals to the fullest extent permitted under Delaware law against liability that may arise by reason of their service to us, and to advance expenses incurred as a result of any proceeding against them as to which they could be indemnified. We believe that the limitation of liability provision that is in our amended and restated certificate of incorporation and the indemnification agreements will facilitate our ability to continue to attract and retain qualified individuals to serve as directors and officers.
For a description of registration rights with respect to our Class A common stock, see the information under the heading "Certain Relationships and Related Party TransactionsRegistration Rights Agreement."
The transfer agent and registrar for our Class A common stock is American Stock Transfer & Trust Company, LLC.
Our Class A common stock is listed on the NYSE under the symbol "SOI."
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SHARES ELIGIBLE FOR FUTURE SALE
Future sales of our Class A common stock in the public market, or the availability of such shares for sale in the public market, could adversely affect the market price of our Class A common stock prevailing from time to time. As described below, only a limited number of shares will be available for sale shortly after this offering due to contractual and legal restrictions on resale. Nevertheless, sales of a substantial number of shares of our Class A common stock in the public market after such restrictions lapse, or the perception that those sales may occur, could adversely affect the prevailing market price of our Class A common stock at such time and our ability to raise equity-related capital at a time and price we deem appropriate.
Upon the closing of this offering, we will have outstanding an aggregate of 18,316,468 shares of Class A common stock. Of these shares, all of the 7,000,000 shares of Class A common stock (or 8,050,000 shares of Class A common stock if the underwriters' option to purchase additional shares of Class A common stock is exercised) to be sold in this offering, in addition to the 10,100,000 shares that that were sold in the IPO, will be freely tradable without restriction or further registration under the Securities Act, unless the shares are held by any of our "affiliates" as such term is defined in Rule 144 under the Securities Act. All remaining shares of Class A common stock held by existing stockholders will be deemed "restricted securities" as such term is defined under Rule 144. The restricted securities were issued and sold by us in private transactions and are eligible for public sale only if registered under the Securities Act or if they qualify for an exemption from registration under Rule 144 or Rule 701 under the Securities Act, which rules are summarized below.
Each Original Investor will, subject to certain limitations, have the right, pursuant to the Redemption Right, to cause Solaris LLC to acquire all or a portion of its Solaris LLC Units. Upon the exercise of the Redemption Right, Solaris LLC (or Solaris Inc., if it exercises the Call Right) will acquire each such Solaris LLC Unit for one share of Class A common stock (or, if Solaris Inc. or Solaris LLC, as applicable, so elects, an equivalent amount of cash). Upon consummation of this offering, the Original Investors will hold 28,365,823 Solaris LLC Units (27,315,823 Solaris LLC Units if the underwriters' option to purchase additional shares of Class A common stock is exercised in full), all of which (together with a corresponding number of shares of our Class B common stock) will be redeemable for 28,365,823 shares of our Class A common stock (27,315,823 shares if the underwriters' option to purchase additional shares of Class A common stock is exercised in full). See "Certain Relationships and Related Party TransactionsSolaris LLC Agreement." The shares of Class A common stock we issue upon such redemptions would be "restricted securities" as defined in Rule 144 described below. However, upon the closing of the IPO, we entered into a registration rights agreement with certain of the Original Investors that requires us to register under the Securities Act these shares of Class A common stock. See "Certain Relationships and Related Party TransactionsRegistration Rights Agreement."
As a result of the lock-up agreements described below and the provisions of Rule 144 and Rule 701 under the Securities Act, all of the shares of our Class A common stock (excluding the shares to be sold in this offering) that will be available for sale in the public market are as follows:
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Class A common stock issuable upon redemption by the Original Investors of their Solaris LLC Units (along with a corresponding number of shares of our Class B common stock) pursuant to the Redemption Right or our Call Right).
In addition, we have issued 1,216,438 shares of restricted Class A common stock that remain subject to vesting.
We, all of our directors and officers, the selling stockholders and certain of the Original Investors have agreed not to sell any Class A common stock for a period of 90 days from the date of this prospectus, subject to certain exceptions and extensions. See "Underwriting" for a description of these lock-up provisions.
In general, under Rule 144 under the Securities Act as currently in effect, a person (or persons whose shares are aggregated) who is not deemed to have been an affiliate of ours at any time during the three months preceding a sale, and who has beneficially owned restricted securities within the meaning of Rule 144 for at least sixth months (including any period of consecutive ownership of preceding non-affiliated holders) would be entitled to sell those shares, subject only to the availability of current public information about us. A non-affiliated person (who has been unaffiliated for at least the past three months) who has beneficially owned restricted securities within the meaning of Rule 144 for at least one year would be entitled to sell those shares without regard to the provisions of Rule 144.
A person (or persons whose shares are aggregated) who is deemed to be an affiliate of ours and who has beneficially owned restricted securities within the meaning of Rule 144 for at least six months would be entitled to sell within any three-month period a number of shares that does not exceed the greater of one percent of the then outstanding shares of our Class A common stock or the average weekly trading volume of our Class A common stock reported through the NYSE during the four calendar weeks preceding the filing of notice of the sale. Such sales are also subject to certain manner of sale provisions, notice requirements and the availability of current public information about us.
In general, under Rule 701 under the Securities Act, any of our employees, directors, officers, consultants or advisors who purchases shares from us in connection with a compensatory stock or option plan or other written agreement before the effective date of this offering is entitled to sell such shares 90 days after the effective date of this offering in reliance on Rule 144, without having to comply with the holding period requirement of Rule 144 and, in the case of non-affiliates, without having to comply with the public information, volume limitation or notice filing provisions of Rule 144. The SEC has indicated that Rule 701 will apply to typical stock options granted by an issuer before it becomes subject to the reporting requirements of the Exchange Act, along with the shares acquired upon exercise of such options, including exercises after the date of this prospectus.
Stock Issued Under Employee Plans
We have filed a registration statement on Form S-8 under the Securities Act to register stock issuable under our long-term incentive plan. Accordingly, shares registered under such registration statement will be available for sale in the open market, unless such shares are subject to vesting restrictions with us or the lock-up restrictions described above.
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The following is a summary of certain considerations associated with the acquisition and holding of shares of common stock by employee benefit plans that are subject to Title I of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), plans, individual retirement accounts and other arrangements that are subject to Section 4975 of the Code or employee benefit plans that are governmental plans (as defined in Section 3(32) of ERISA), certain church plans (as defined in Section 3(33) of ERISA), non-U.S. plans (as described in Section 4(b)(4) of ERISA) or other plans that are not subject to the foregoing but may be subject to provisions under any other federal, state, local, non-U.S. or other laws or regulations that are similar to such provisions of ERISA or the Code (collectively, "Similar Laws"), and entities whose underlying assets are considered to include "plan assets" of any such plan, account or arrangement (each, a "Plan").
This summary is based on the provisions of ERISA and the Code (and related regulations and administrative and judicial interpretations) as of the date of this registration statement. This summary does not purport to be complete, and no assurance can be given that future legislation, court decisions, regulations, rulings or pronouncements will not significantly modify the requirements summarized below. Any of these changes may be retroactive and may thereby apply to transactions entered into prior to the date of their enactment or release. This discussion is general in nature and is not intended to be all inclusive, nor should it be construed as investment or legal advice.
ERISA and the Code impose certain duties on persons who are fiduciaries of a Plan subject to Title I of ERISA or Section 4975 of the Code (an "ERISA Plan") and prohibit certain transactions involving the assets of an ERISA Plan and its fiduciaries or other interested parties. Under ERISA and the Code, any person who exercises any discretionary authority or control over the administration of an ERISA Plan or the management or disposition of the assets of an ERISA Plan, or who renders investment advice for a fee or other compensation to an ERISA Plan, is generally considered to be a fiduciary of the ERISA Plan.
In considering an investment in shares of common stock with a portion of the assets of any Plan, a fiduciary should consider the Plan's particular circumstances and all of the facts and circumstances of the investment and determine whether the acquisition and holding of shares of common stock is in accordance with the documents and instruments governing the Plan and the applicable provisions of ERISA, the Code, or any Similar Law relating to the fiduciary's duties to the Plan, including, without limitation:
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Section 406 of ERISA and Section 4975 of the Code prohibit ERISA Plans from engaging in specified transactions involving plan assets with persons or entities who are "parties in interest," within the meaning of ERISA, or "disqualified persons," within the meaning of Section 4975 of the Code, unless an exemption is available. A party in interest or disqualified person who engages in a non-exempt prohibited transaction may be subject to excise taxes and other penalties and liabilities under ERISA and the Code. In addition, the fiduciary of the ERISA Plan that engages in such a non-exempt prohibited transaction may be subject to excise taxes, penalties and liabilities under ERISA and the Code. The acquisition and/or holding of shares of common stock by an ERISA Plan with respect to which the issuer, the initial purchaser, or a guarantor is considered a party in interest or a disqualified person may constitute or result in a direct or indirect prohibited transaction under Section 406 of ERISA and/or Section 4975 of the Code, unless the investment is acquired and is held in accordance with an applicable statutory, class or individual prohibited transaction exemption.
Because of the foregoing, shares of common stock should not be acquired or held by any person investing "plan assets" of any Plan, unless such acquisition and holding will not constitute a non-exempt prohibited transaction under ERISA and the Code or a similar violation of any applicable Similar Laws.
Additionally, a fiduciary of a Plan should consider whether the Plan will, by investing in us, be deemed to own an undivided interest in our assets, with the result that we would become a fiduciary of the Plan and our operations would be subject to the regulatory restrictions of ERISA, including its prohibited transaction rules, as well as the prohibited transaction rules of the Code and any other applicable Similar Laws.
The Department of Labor (the "DOL") regulations provide guidance with respect to whether the assets of an entity in which ERISA Plans acquire equity interests would be deemed "plan assets" under some circumstances. Under these regulations, an entity's assets generally would not be considered to be "plan assets" if, among other things:
Due to the complexity of these rules and the excise taxes, penalties and liabilities that may be imposed upon persons involved in non-exempt prohibited transactions, it is particularly important that
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fiduciaries, or other persons considering acquiring and/or holding shares of our common stock on behalf of, or with the assets of, any Plan, consult with their counsel regarding the potential applicability of ERISA, Section 4975 of the Code and any Similar Laws to such investment and whether an exemption would be applicable to the acquisition and holding of shares of common stock. Purchasers of shares of common stock have the exclusive responsibility for ensuring that their acquisition and holding of shares of common stock complies with the fiduciary responsibility rules of ERISA and does not violate the prohibited transaction rules of ERISA, the Code or applicable Similar Laws. The sale of shares of common stock to a Plan is in no respect a representation by us or any of our affiliates or representatives that such an investment meets all relevant legal requirements with respect to investments by any such Plan or that such investment is appropriate for any such Plan.
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MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS FOR NON-U.S. HOLDERS
The following is a summary of the material U.S. federal income tax considerations related to the purchase, ownership and disposition of our Class A common stock by a non-U.S. holder (as defined below), that holds our Class A common stock as a "capital asset" (generally property held for investment). This summary is based on the provisions of the Internal Revenue Code of 1986, as amended (the "Code"), U.S. Treasury regulations, administrative rulings and judicial decisions, all as in effect on the date hereof, and all of which are subject to change, possibly with retroactive effect. The President has proposed significant changes to U.S. federal tax laws, and Congress is currently considering these and other tax reform proposals. We cannot assure you that a change in law will not significantly alter the tax considerations that we describe in this summary. We have not sought any ruling from the Internal Revenue Service ("IRS") with respect to the statements made and the conclusions reached in the following summary, and there can be no assurance that the IRS or a court will agree with such statements and conclusions.
This summary does not address all aspects of U.S. federal income taxation that may be relevant to non-U.S. holders in light of their personal circumstances. In addition, this summary does not address the Medicare tax on certain investment income, U.S. federal estate or gift tax laws, any state, local or non-U.S. tax laws or any tax treaties. This summary also does not address tax considerations applicable to investors that may be subject to special treatment under the U.S. federal income tax laws, such as:
PROSPECTIVE INVESTORS ARE ENCOURAGED TO CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE APPLICATION OF THE U.S. FEDERAL INCOME TAX LAWS (INCLUDING ANY POTENTIAL FUTURE CHANGES THERETO) TO THEIR PARTICULAR SITUATION, AS WELL AS ANY TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF OUR CLASS A COMMON STOCK ARISING UNDER THE U.S. FEDERAL ESTATE OR GIFT TAX LAWS OR UNDER THE LAWS OF ANY STATE, LOCAL, NON-U.S. OR OTHER TAXING JURISDICTION OR UNDER ANY APPLICABLE INCOME TAX TREATY.
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For purposes of this discussion, a "non-U.S. holder" is a beneficial owner of our Class A common stock that is not for U.S. federal income tax purposes a partnership or any of the following:
If a partnership (including an entity or arrangement treated as a partnership for U.S. federal income tax purposes) holds our Class A common stock, the tax treatment of a partner in the partnership generally will depend upon the status of the partner, upon the activities of the partnership and upon certain determinations made at the partner level. Accordingly, we urge partners in partnerships (including entities or arrangements treated as partnerships for U.S. federal income tax purposes) considering the purchase of our Class A common stock to consult their tax advisors regarding the U.S. federal income tax considerations of the purchase, ownership and disposition of our Class A common stock by such partnership.
As described in the section entitled "Dividend Policy," we do not plan to make any distributions on our Class A common stock for the foreseeable future. However, in the event we do make distributions of cash or other property on our Class A common stock, such distributions will constitute dividends for U.S. federal income tax purposes to the extent paid from our current or accumulated earnings and profits, as determined under U.S. federal income tax principles. To the extent those distributions exceed our current and accumulated earnings and profits, the distributions will be treated as a non-taxable return of capital to the extent of the non-U.S. holder's tax basis in our Class A common stock and thereafter as capital gain from the sale or exchange of such Class A common stock. See "Gain on Disposition of Class A Common Stock." Subject to the withholding requirements under FATCA (as defined below) and with respect to effectively connected dividends, each of which is discussed below, any distribution made to a non-U.S. holder on our Class A common stock generally will be subject to U.S. withholding tax at a rate of 30% of the gross amount of the distribution unless an applicable income tax treaty provides for a lower rate. To receive the benefit of a reduced treaty rate, a non-U.S. holder must provide the applicable withholding agent with an IRS Form W-8BEN or IRS Form W-8BEN-E (or other applicable or successor form) certifying qualification for the reduced rate.
Dividends paid to a non-U.S. holder that are effectively connected with a trade or business conducted by the non-U.S. holder in the United States (and, if required by an applicable income tax treaty, are treated as attributable to a permanent establishment maintained by the non-U.S. holder in the United States) generally will be taxed on a net income basis at the rates and in the manner generally applicable to United States persons (as defined under the Code). Such effectively connected dividends will not be subject to U.S. withholding tax if the non-U.S. holder satisfies certain certification requirements by providing the applicable withholding agent with a properly executed IRS Form W-8ECI certifying eligibility for exemption. If the non-U.S. holder is a corporation for U.S. federal income tax purposes, it may also be subject to a branch profits tax (at a 30% rate or such lower rate as specified by an applicable income tax treaty) on its effectively connected earnings and profits (as adjusted for certain items), which will include effectively connected dividends.
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Gain on Disposition of Class A Common Stock
Subject to the discussions below under "Backup Withholding and Information Reporting" and "Additional Withholding Requirements under FATCA," a non-U.S. holder generally will not be subject to U.S. federal income tax or withholding on any gain realized upon the sale or other disposition of our Class A common stock unless:
A non-U.S. holder described in the first bullet point above will be subject to U.S. federal income tax at a rate of 30% (or such lower rate as specified by an applicable income tax treaty) on the amount of such gain, which generally may be offset by U.S. source capital losses.
A non-U.S. holder whose gain is described in the second bullet point above or, subject to the exceptions described in the next paragraph, the third bullet point above generally will be taxed on a net income basis at the rates and in the manner generally applicable to United States persons (as defined under the Code) unless an applicable income tax treaty provides otherwise. If the non-U.S. holder is a corporation for U.S. federal income tax purposes whose gain is described in the second bullet point above, then such gain would also be included in its effectively connected earnings and profits (as adjusted for certain items), which may be subject to a branch profits tax (at a 30% rate or such lower rate as specified by an applicable income tax treaty).
Generally, a corporation is a USRPHC if the fair market value of its United States real property interests equals or exceeds 50% of the sum of the fair market value of its worldwide real property interests and its other assets used or held for use in a trade or business. We believe that we currently are not a USRPHC for U.S. federal income tax purposes, and we do not expect to become a USRPHC for the foreseeable future. However, in the event that we become a USRPHC, as long as our Class A common stock continues to be "regularly traded on an established securities market" (within the meaning of the U.S. Treasury Regulations), only a non-U.S. holder that actually or constructively owns, or owned at any time during the shorter of the five-year period ending on the date of the disposition or the non-U.S. holder's holding period for the Class A common stock, more than 5% of our Class A common stock will be treated as disposing of a U.S. real property interest and will be taxable on gain realized on the disposition of our Class A common stock as a result of our status as a USRPHC. If we were to become a USRPHC and our Class A common stock were not considered to be regularly traded on an established securities market, such holder (regardless of the percentage of stock owned) would be treated as disposing of a U.S. real property interest and would be subject to U.S. federal income tax on a taxable disposition of our Class A common stock (as described in the preceding paragraph), and a 15% withholding tax would apply to the gross proceeds from such disposition.
Non-U.S. holders should consult their tax advisors with respect to the application of the foregoing rules to their ownership and disposition of our Class A common stock.
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Backup Withholding and Information Reporting
Any dividends paid to a non-U.S. holder must be reported annually to the IRS and to the non-U.S. holder. Copies of these information returns may be made available to the tax authorities in the country in which the non-U.S. holder resides or is established. Payments of dividends to a non-U.S. holder generally will not be subject to backup withholding if the non-U.S. holder establishes an exemption by properly certifying its non-U.S. status on an IRS Form W-8BEN or IRS Form W-8BEN-E (or other applicable or successor form).
Payments of the proceeds from a sale or other disposition by a non-U.S. holder of our Class A common stock effected by or through a U.S. office of a broker generally will be subject to information reporting and backup withholding (at the applicable rate) unless the non-U.S. holder establishes an exemption by properly certifying its non-U.S. status on an IRS Form W-8BEN or IRS Form W-8BEN-E (or other applicable or successor form) and certain other conditions are met. Information reporting and backup withholding generally will not apply to any payment of the proceeds from a sale or other disposition of our Class A common stock effected outside the United States by a non-U.S. office of a broker. However, unless such broker has documentary evidence in its records that the non-U.S. holder is not a United States person and certain other conditions are met, or the non-U.S. holder otherwise establishes an exemption, information reporting will apply to a payment of the proceeds of the disposition of our Class A common stock effected outside the United States by such a broker if it has certain relationships within the United States.
Backup withholding is not an additional tax. Rather, the U.S. federal income tax liability (if any) of persons subject to backup withholding will be reduced by the amount of tax withheld. If backup withholding results in an overpayment of taxes, a refund may be obtained, provided that the required information is timely furnished to the IRS.
Additional Withholding Requirements under FATCA
Sections 1471 through 1474 of the Code, and the U.S. Treasury regulations and administrative guidance issued thereunder ("FATCA"), impose a 30% withholding tax on any dividends paid on our Class A common stock and on the gross proceeds from a disposition of our Class A common stock (if such disposition occurs after December 31, 2018), in each case if paid to a "foreign financial institution" or a "non-financial foreign entity" (each as defined in the Code) (including, in some cases, when such foreign financial institution or non-financial foreign entity is acting as an intermediary), unless (i) in the case of a foreign financial institution, such institution enters into an agreement with the U.S. government to withhold on certain payments, and to collect and provide to the U.S. tax authorities substantial information regarding U.S. account holders of such institution (which includes certain equity and debt holders of such institution, as well as certain account holders that are non-U.S. entities with U.S. owners); (ii) in the case of a non-financial foreign entity, such entity certifies that it does not have any "substantial United States owners" (as defined in the Code) or provides the applicable withholding agent with a certification identifying the direct and indirect substantial United States owners of the entity (in either case, generally on an IRS Form W-8BEN-E); or (iii) the foreign financial institution or non-financial foreign entity otherwise qualifies for an exemption from these rules and provides appropriate documentation (such as an IRS Form W-8BEN-E). Foreign financial institutions located in jurisdictions that have an intergovernmental agreement with the United States governing these rules may be subject to different rules. Under certain circumstances, a holder might be eligible for refunds or credits of such taxes. Non-U.S. holders are encouraged to consult their own tax advisors regarding the effects of FATCA on an investment in our Class A common stock.
INVESTORS CONSIDERING THE PURCHASE OF OUR CLASS A COMMON STOCK ARE URGED TO CONSULT THEIR OWN TAX ADVISORS REGARDING THE APPLICATION OF THE U.S. FEDERAL INCOME TAX LAWS (INCLUDING ANY POTENTIAL FUTURE CHANGES THERETO)TO THEIR PARTICULAR SITUATIONS AND THE APPLICABILITY AND EFFECT OF U.S. FEDERAL ESTATE AND GIFT TAX LAWS AND ANY STATE, LOCAL OR NON-U.S. TAX LAWS AND TAX TREATIES.
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Under the terms and subject to the conditions contained in an underwriting agreement dated , 2017, we and the selling stockholders have agreed to sell to the underwriters named below, for whom Credit Suisse Securities (USA) LLC and Goldman Sachs & Co. LLC are acting as representatives, the following respective numbers of shares of Class A common stock:
Underwriter
|
Number of Shares |
|||
---|---|---|---|---|
Credit Suisse Securities (USA) LLC |
||||
Goldman Sachs & Co. LLC |
||||
| | | | |
Total |
7,000,000 | |||
| | | | |
| | | | |
| | | | |
The underwriting agreement provides that the underwriters are obligated to purchase all the shares of Class A common stock in the offering if any are purchased, other than those shares covered by the option described below. The underwriting agreement also provides that if an underwriter defaults the purchase commitments of non-defaulting underwriters may be increased or the offering may be terminated.
The selling stockholders have granted the underwriters a 30-day option to purchase up to 1,050,000 additional shares of Class A common stock at the public offering price less the underwriting discounts and commissions. If the underwriters exercise this option, each will be obligated, subject to conditions contained in the underwriting agreement, to purchase a number of additional shares proportionate to that underwriter's initial amount reflected in the above table.
The underwriters propose to offer the shares of Class A common stock initially at the public offering price on the cover page of this prospectus and to selling group members at that price less a selling concession of $ per share. After the initial offering of the shares of Class A common stock, the underwriters may change the public offering price and concession and discount to broker/dealers. The offering of the shares by the underwriters is subject to receipt and acceptance and subject to the underwriters' right to reject any order in whole or in part.
The following table summarizes the compensation and estimated expenses that we and the selling stockholders will pay:
|
Per Share | Total | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Without Option |
With Option |
Without Option |
With Option |
|||||||||
Underwriting Discounts and Commissions Paid by us |
$ | $ | $ | $ | |||||||||
Underwriting Discounts and Commissions Paid by the selling stockholders |
$ | $ | $ | $ |
We estimate that our out-of-pocket expenses for this offering will be approximately $0.6 million. We have agreed to pay expenses incurred by the selling stockholders in connection with this offering, other than the underwriting discounts and commissions. We have also agreed to reimburse the underwriters for certain of their expenses in an amount up to $30,000 as set forth in the underwriting agreement.
Credit Suisse Securities (USA) LLC and Goldman Sachs & Co. LLC have informed us that they do not expect sales to accounts over which the underwriters have discretionary authority to exceed 5% of the shares of Class A common stock being offered.
In connection with this offering, we agreed that, subject to certain exceptions, we will not offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, or file with the SEC a
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registration statement under the Securities Act relating to, any shares of our common stock or securities convertible into or exchangeable or exercisable for any shares of our Class A common stock, or publicly disclose the intention to make any offer, sale, pledge, disposition or filing, without the prior written consent of Credit Suisse Securities (USA) LLC and Goldman Sachs & Co. LLC for a period of 180 days after the date of this prospectus.
Each of our officers and directors, the selling stockholders, Yorktown and Solaris Energy Capital have agreed in connection with this offering that they will not offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, any shares of our common stock or securities convertible into or exchangeable or exercisable for any shares of our Class A common stock, enter into a transaction that would have the same effect, or enter into any swap, hedge or other arrangement that transfers, in whole or in part, any of the economic consequences of ownership of our Class A common stock, whether any of these transactions are to be settled by delivery of our Class A common stock or other securities, in cash or otherwise, or publicly disclose the intention to make any offer, sale, pledge or disposition, or to enter into any transaction, swap, hedge or other arrangement, without, in each case, the prior written consent of Credit Suisse Securities (USA) LLC and Goldman Sachs & Co. LLC for a period of 90 days after the date of this prospectus.
Credit Suisse Securities (USA) LLC and Goldman Sachs & Co. LLC, in their sole discretion, may release the common stock and other securities subject to the lock-up agreements described above in whole or in part at any time. When determining whether or not to release the common stock and other securities from lock-up agreements, Credit Suisse Securities (USA) LLC and Goldman Sachs & Co. LLC will consider, among other factors, the holder's reasons for requesting the release and the number of shares of common stock or other securities for which the release is being requested.
We and the selling stockholders have agreed to indemnify the underwriters against liabilities under the Securities Act, or contribute to payments that the underwriters may be required to make in that respect.
Our Class A common stock is listed on the NYSE under the symbol "SOI."
The underwriters and their respective affiliates are full service financial institutions engaged in various activities, which may include securities trading, commercial and investment banking, financial advisory, investment management, investment research, principal investment hedging, financing and brokerage activities. Certain of the underwriters and their respective affiliates have from time to time performed, and may in the future perform, various financial advisory, commercial banking and investment banking services for us and for our affiliates in the ordinary course of business for which they have received and would receive customary compensation.
In the ordinary course of their various business activities, the underwriters and their respective affiliates may make or hold a broad array of investments and actively trade debt and equity securities (or related derivative securities) and financial instruments (including bank loans) for their own account and for the accounts of their customers, and such investments and securities activities may involve securities and/or instruments of the issuer. The underwriters and their respective affiliates may also make investment recommendations and/or publish or express independent research views in respect of such securities or instruments and may at any time hold, or recommend to clients that they acquire, long and/or short positions in such securities and instruments.
In connection with the offering the underwriters may engage in stabilizing transactions, syndicate covering transactions, penalty bids and passive market making in accordance with Regulation M under the Exchange Act.
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These stabilizing transactions, syndicate covering transactions and penalty bids may have the effect of raising or maintaining the market price of our Class A common stock or preventing or retarding a decline in the market price of the Class A common stock. As a result the price of our Class A common stock may be higher than the price that might otherwise exist in the open market. These transactions may be effected on the NYSE or otherwise and, if commenced, may be discontinued at any time.
A prospectus in electronic format may be made available on the web sites maintained by one or more of the underwriters, or selling group members, if any, participating in this offering and one or more of the underwriters participating in this offering may distribute prospectuses electronically. The representatives may agree to allocate a number of shares to underwriters and selling group members for sale to their online brokerage account holders. Internet distributions will be allocated by the underwriters and selling group members that will make internet distributions on the same basis as other allocations.
EEA Restriction
In relation to each Member State of the European Economic Area which has implemented the Prospectus Directive (each, a "Relevant Member State") an offer to the public of any shares which are the subject of the offering contemplated by this prospectus (the "Shares") may not be made in that Relevant Member State except that an offer to the public in that Relevant Member State of any Shares may be made at any time under the following exemptions under the Prospectus Directive, if they have been implemented in that Relevant Member State:
(a) to legal entities which are qualified investors as defined under the Prospectus Directive;
(b) by the underwriters to fewer than 100, or, if the Relevant Member State has implemented the relevant provisions of the 2010 PD Amending Directive, 150, natural or legal persons (other than qualified investors as defined in the Prospectus Directive), as permitted under the Prospectus Directive; or
(c) in any other circumstances falling within Article 3(2) of the Prospectus Directive,
provided that no such offer of Shares shall result in a requirement for the Company or any underwriter to publish a prospectus pursuant to Article 3 of the Prospectus Directive or supplement a prospectus pursuant to Article 16 of the Prospectus Directive.
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For the purposes of this provision, the expression an "offer to the public" in relation to any Shares in any Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the offer and any Shares to be offered so as to enable an investor to decide to purchase any Shares, as the same may be varied in that Member State by any measure implementing the Prospectus Directive in that Member State, the expression "Prospectus Directive" means Directive 2003/71/EC (and amendments thereto, including the 2010 PD Amending Directive, to the extent implemented in the Relevant Member State), and includes any relevant implementing measure in each Relevant Member State and the expression "2010 PD Amending Directive" means Directive 2010/73/EU.
United Kingdom
Each underwriter has represented and agreed that:
(a) it has only communicated or caused to be communicated and will only communicate or cause to be communicated an invitation or inducement to engage in investment activity (within the meaning of Section 21 of the Financial Services and Markets Act 2000 (the "FSMA")) received by it in connection with the issue or sale of the shares in circumstances in which Section 21(1) of the FSMA does not apply to the Company; and
(b) it has complied and will comply with all applicable provisions of the FSMA with respect to anything done by it in relation to the shares in, from or otherwise involving the United Kingdom.
Notice to United Kingdom Investors
This prospectus is only being distributed to and is only directed at (i) persons who are outside the United Kingdom or (ii) investment professionals falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the "Order") or (iii) high net worth companies, and other persons to whom it may lawfully be communicated, falling within Article 49(2)(a) to (d) of the Order (all such persons together being referred to as "relevant persons"). The Shares are only available to, and any invitation, offer or agreement to subscribe, purchase or otherwise acquire such Shares will be engaged in only with, relevant persons. Any person who is not a relevant person should not act or rely on this document or any of its contents.
Hong Kong
The shares may not be offered or sold by means of any document other than (i) in circumstances which do not constitute an offer to the public within the meaning of the Companies Ordinance (Cap. 32, Laws of Hong Kong), or (ii) to "professional investors" within the meaning of the Securities and Futures Ordinance (Cap. 571, Laws of Hong Kong) and any rules made thereunder, or (iii) in other circumstances which do not result in the document being a "prospectus" within the meaning of the Companies Ordinance (Cap. 32, Laws of Hong Kong), and no advertisement, invitation or document relating to the shares may be issued or may be in the possession of any person for the purpose of issue (in each case whether in Hong Kong or elsewhere), which is directed at, or the contents of which are likely to be accessed or read by, the public in Hong Kong (except if permitted to do so under the laws of Hong Kong) other than with respect to shares which are or are intended to be disposed of only to persons outside Hong Kong or only to "professional investors" within the meaning of the Securities and Futures Ordinance (Cap. 571, Laws of Hong Kong) and any rules made thereunder.
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Singapore
This prospectus has not been registered as a prospectus with the Monetary Authority of Singapore. Accordingly, this prospectus and any other document or material in connection with the offer or sale, or invitation for subscription or purchase, of the shares may not be circulated or distributed, nor may the shares be offered or sold, or be made the subject of an invitation for subscription or purchase, whether directly or indirectly, to persons in Singapore other than (i) to an institutional investor under Section 274 of the Securities and Futures Act, Chapter 289 of Singapore, or the SFA, (ii) to a relevant person, or any person pursuant to Section 275(1A), and in accordance with the conditions, specified in Section 275 of the SFA or (iii) otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA.
Where the shares are subscribed or purchased under Section 275 by a relevant person which is: (a) a corporation (which is not an accredited investor) the sole business of which is to hold investments and the entire share capital of which is owned by one or more individuals, each of whom is an accredited investor; or (b) a trust (where the trustee is not an accredited investor) whose sole purpose is to hold investments and each beneficiary is an accredited investor, shares, debentures and units of shares and debentures of that corporation or the beneficiaries' rights and interest in that trust shall not be transferable for 6 months after that corporation or that trust has acquired the shares under Section 275 except: (1) to an institutional investor under Section 274 of the SFA or to a relevant person, or any person pursuant to Section 275(1A), and in accordance with the conditions, specified in Section 275 of the SFA; (2) where no consideration is given for the transfer; or (3) by operation of law.
Japan
The securities have not been and will not be registered under the Financial Instruments and Exchange Law of Japan, or the Financial Instruments and Exchange Law, and each underwriter has agreed that it will not offer or sell any securities, directly or indirectly, in Japan or to, or for the benefit of, any resident of Japan (which term as used herein means any person resident in Japan, including any corporation or other entity organized under the laws of Japan), or to others for re-offering or resale, directly or indirectly, in Japan or to a resident of Japan, except pursuant to an exemption from the registration requirements of, and otherwise in compliance with, the Financial Instruments and Exchange Law and any other applicable laws, regulations and ministerial guidelines of Japan.
Notice to Canadian Residents
Resale Restrictions
The distribution of our Class A common stock in Canada is being made only in the provinces of Ontario, Quebec, Alberta and British Columbia on a private placement basis exempt from the requirement that we prepare and file a prospectus with the securities regulatory authorities in each province where trades of these securities are made. Any resale of our Class A common stock in Canada must be made under applicable securities laws which may vary depending on the relevant jurisdiction, and which may require resales to be made under available statutory exemptions or under a discretionary exemption granted by the applicable Canadian securities regulatory authority. Purchasers are advised to seek legal advice prior to any resale of the securities.
138
Representations of Canadian Purchasers
By purchasing our Class A common stock in Canada and accepting delivery of a purchase confirmation, a purchaser is representing to us and the dealer from whom the purchase confirmation is received that:
Conflicts of Interest
Canadian purchasers are hereby notified that is the underwriters are relying on the exemption set out in section 3A.3 or 3A.4, if applicable, of National Instrument 33-105Underwriting Conflicts from having to provide certain conflict of interest disclosure in this document.
Statutory Rights of Action
Securities legislation in certain provinces or territories of Canada may provide a purchaser with remedies for rescission or damages if the offering memorandum (including any amendment thereto) such as this document contains a misrepresentation, provided that the remedies for rescission or damages are exercised by the purchaser within the time limit prescribed by the securities legislation of the purchaser's province or territory. The purchaser of these securities in Canada should refer to any applicable provisions of the securities legislation of the purchaser's province or territory for particulars of these rights or consult with a legal advisor.
Enforcement of Legal Rights
All of our directors and officers as well as the experts named herein may be located outside of Canada and, as a result, it may not be possible for Canadian purchasers to effect service of process within Canada upon us or those persons. All or a substantial portion of our assets and the assets of those persons may be located outside of Canada and, as a result, it may not be possible to satisfy a judgment against us or those persons in Canada or to enforce a judgment obtained in Canadian courts against us or those persons outside of Canada.
Taxation and Eligibility for Investment
Canadian purchasers of our Class A common stock should consult their own legal and tax advisors with respect to the tax consequences of an investment in the our Class A common stock in their particular circumstances and about the eligibility of our Class A common stock for investment by the purchaser under relevant Canadian legislation.
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The validity of our Class A common stock offered by this prospectus will be passed upon for us by Vinson & Elkins L.L.P., Houston, Texas. Certain legal matters in connection with this offering will be passed upon for the underwriters by Latham & Watkins LLP, Houston, Texas.
The balance sheet of Solaris Oilfield Infrastructure, Inc. as of February 2, 2017, included in this prospectus has been audited by BDO USA, LLP, an independent registered public accounting firm, as stated in their report appearing herein. Such financial statement has been so included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing.
The consolidated financial statements of Solaris Oilfield Infrastructure, LLC, Predecessor, for the years ended December 31, 2016 and 2015 have been included herein in reliance upon the report of BDO USA, LLP, independent registered public accounting firm, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1 (including the exhibits, schedules and amendments thereto) under the Securities Act, with respect to the shares of our Class A common stock offered hereby. This prospectus does not contain all of the information set forth in the registration statement and the exhibits and schedules thereto. For further information with respect to us and the Class A common stock offered hereby, we refer you to the registration statement and the exhibits and schedules filed therewith. Statements contained in this prospectus as to the contents of any contract, agreement or any other document are summaries of the material terms of this contract, agreement or other document. With respect to each of these contracts, agreements or other documents filed as an exhibit to the registration statement, reference is made to the exhibits for a more complete description of the matter involved. A copy of the registration statement, and the exhibits and schedules thereto, may be inspected without charge at the Public Reference Room of the SEC at 100 F Street N.E., Washington, DC 20549. Copies of these materials may be obtained from such office, upon payment of a duplicating fee. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the Public Reference Room.
The SEC maintains a website at www.sec.gov that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC. Our registration statement, of which this prospectus constitutes a part, can be downloaded from the SEC's website. We file with or furnish to the SEC periodic reports and other information. These reports and other information may be inspected and copied at the Public Reference Room maintained by the SEC or obtained from the SEC's website as provided above. Our website is located at www.solarisoilfield.com. We intend to make our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, amendments to those reports and other information filed with or furnished to the SEC available, free of charge, through our website, as soon as reasonably practicable after those reports and other information are electronically filed with or furnished to the SEC. Information on our website or any other website is not incorporated by reference into this prospectus and does not constitute a part of this prospectus.
We intend to furnish or make available to our stockholders annual reports containing our audited financial statements prepared in accordance with GAAP. We also intend to furnish or make available to our stockholders quarterly reports containing our unaudited interim financial information, including the information required by Form 10-Q, for the first three fiscal quarters of each fiscal year.
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F-1
SOLARIS OILFIELD INFRASTRUCTURE, INC.
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
Solaris Oilfield Infrastructure, Inc. (the "Company" or "Solaris Inc.") is a Delaware corporation formed by Solaris Oilfield Infrastructure, LLC ("Solaris LLC") to engage in the manufacturing and rental of patented mobile proppant management systems that unload, store and deliver proppant at oil and natural gas well sites. 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. The following unaudited pro forma consolidated financial statements of the Company reflect the historical consolidated results of Solaris LLC, on a pro forma basis to give effect to the following transactions, which are described in further detail below, as if they had occurred on January 1, 2016:
The unaudited pro forma consolidated statement of operations of the Company are based on the audited historical consolidated statement of operations of Solaris LLC for the year ended December 31, 2016 and the unaudited interim condensed consolidated statement of operations of Solaris LLC for the nine months ended September 30, 2017, having been adjusted to give effect to the described transactions as if they occurred on January 1, 2016.
The unaudited pro forma consolidated financial statements have been prepared on the basis that the Company is now taxed as a corporation under the Internal Revenue Code of 1986, as amended, and as a result, has become a tax-paying entity subject to U.S. federal and state income taxes, and should be read in conjunction with "Our Initial Public Offering and Corporate Structure," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Certain Relationships and Related Party TransactionsTax Receivable Agreement" and with the audited historical consolidated financial statements and related notes of Solaris LLC and unaudited interim condensed consolidated financial statements and related notes of Solaris Inc., included elsewhere in this prospectus.
The pro forma data presented reflect events directly attributable to the described transactions and certain assumptions the Company believes are reasonable. The pro forma data are not necessarily indicative of financial results that would have been attained had the described transactions occurred on the dates indicated above or which could be achieved in the future because they necessarily exclude various operating expenses, such as incremental general and administrative expenses associated with being a public company. The adjustments are based on currently available information and certain estimates and assumptions. Therefore, the actual adjustments may differ from the pro forma adjustments. However, management believes that the assumptions provide a reasonable basis for presenting the significant effects of the transactions as contemplated and that the pro forma adjustments give appropriate effect to those assumptions and are properly applied in the unaudited pro forma consolidated financial statements.
F-2
SOLARIS OILFIELD INFRASTRUCTURE, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2017
|
Historical Solaris Oilfield Infrastructure, LLC |
Pro Forma Adjustments | |
Pro Forma Solaris Oilfield Infrastructure, Inc. |
||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
|
(in thousands) |
|||||||||||
Revenue |
||||||||||||
Proppant management system rental |
$ | 34,560 | $ | | $ | 34,560 | ||||||
Proppant management system services |
7,631 | | 7,631 | |||||||||
| | | | | | | | | | | | |
Total revenue |
42,191 | | 42,191 | |||||||||
Operating costs and expenses |
|
|||||||||||
Cost of proppant management system rental (excluding $3,748 of depreciation and amortization, shown separately) |
1,588 | | 1,588 | |||||||||
Cost of proppant management system services (excluding $283 of depreciation and amortization, shown separately) |
8,640 | | 8,640 | |||||||||
Depreciation and amortization |
4,276 | | 4,276 | |||||||||
Salaries, benefits and payroll taxes |
5,687 | (504 | ) | (a) | 5,183 | |||||||
Selling, general and administrative (excluding $245 of depreciation and amortization, shown separately) |
3,653 | | 3,653 | |||||||||
Other operating expenses |
3,770 | (3,383 | ) | (b) | 387 | |||||||
| | | | | | | | | | | | |
Total operating expenses |
27,614 | (3,887 | ) | 23,727 | ||||||||
| | | | | | | | | | | | |
Operating income (loss) |
14,577 | 3,887 | 18,464 | |||||||||
| | | | | | | | | | | | |
Interest expense |
(71 | ) | 6 | (c) | (65 | ) | ||||||
Other income (expense) |
(119 | ) | | (119 | ) | |||||||
| | | | | | | | | | | | |
Total other income (expense) |
(190 | ) | 6 | (184 | ) | |||||||
| | | | | | | | | | | | |
Income (loss) before income tax expense |
14,387 | 3,893 | 18,280 | |||||||||
Provision for income taxes |
(1,137 | ) | (554 | ) | (d) | (1,691 | ) | |||||
| | | | | | | | | | | | |
Net Income (loss) |
13,250 | 3,339 | 16,589 | |||||||||
Less: Net (income) loss related to Solaris LLC |
(3,665 | ) | 3,665 | | ||||||||
Less: Net (income) loss attributable to noncontrolling interests |
(8,049 | ) | (5,883 | ) | (e) | (13,932 | ) | |||||
| | | | | | | | | | | | |
Net income (loss) attributable to stockholders |
$ | 1,536 | $ | 1,121 | $ | 2,657 | ||||||
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Net Income Per Common Share (f) |
||||||||||||
Basic |
$ | 0.24 | ||||||||||
Diluted |
$ | 0.23 | ||||||||||
Weighted Average Common Shares Outstanding (f) |
||||||||||||
Basic |
10,451 | |||||||||||
Diluted |
10,919 |
The accompanying notes are an integral part of these unaudited pro forma consolidated financial statements.
F-3
SOLARIS OILFIELD INFRASTRUCTURE, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2016
|
Historical Solaris Oilfiel Infrastructure, LLC |
Pro Forma Adjustments |
|
Pro Forma Solaris Oilfield Infrastructure, Inc. |
||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
|
(in thousands) |
|||||||||||
Revenue |
||||||||||||
Proppant system rental |
$ | 14,594 | $ | | $ | 14,594 | ||||||
Proppant system services |
3,563 | | 3,563 | |||||||||
| | | | | | | | | | | | |
Total revenue |
18,157 | | 18,157 | |||||||||
Operating costs and expenses |
|
|||||||||||
Cost of proppant system rental (excluding $3,352 of depreciation and amortization, shown separately) |
1,431 | | 1,431 | |||||||||
Cost of proppant system services (excluding $160 of depreciation and amortization, shown separately) |
4,916 | | 4,916 | |||||||||
Depreciation and amortization |
3,792 | | 3,792 | |||||||||
Salaries, benefits and payroll taxes |
3,061 | 4,558 | (a) | 7,619 | ||||||||
Selling, general and administrative (excluding $280 of depreciation and amortization, shown separately) |
2,096 | | 2,096 | |||||||||
| | | | | | | | | | | | |
Total operating expenses |
15,296 | 4,558 | 19,854 | |||||||||
| | | | | | | | | | | | |
Operating income (loss) |
2,861 | (4,558 | ) | (1,697 | ) | |||||||
| | | | | | | | | | | | |
Interest expense |
(23 | ) | (187 | ) | (c) | (210 | ) | |||||
Other income (expense) |
8 | | 8 | |||||||||
| | | | | | | | | | | | |
Total other income (expense) |
(15 | ) | (187 | ) | (202 | ) | ||||||
| | | | | | | | | | | | |
Income (loss) before income tax expense |
2,846 | (4,745 | ) | (1,899 | ) | |||||||
Provision for income taxes |
(43 | ) | 162 | (d) | 119 | |||||||
| | | | | | | | | | | | |
Net Income (loss) |
2,803 | (4,583 | ) | (1,780 | ) | |||||||
Less: Net loss attributable to noncontrolling interests |
| 1,480 | (e) | 1,480 | ||||||||
| | | | | | | | | | | | |
Net income (loss) attributable to stockholders |
$ | 2,803 | $ | (3,103 | ) | $ | (300 | ) | ||||
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Net Income Per Common Share (f) |
|
|||||||||||
Basic and Diluted |
$ | (0.03 | ) | |||||||||
Weighted Average Common Shares Outstanding (f) |
||||||||||||
Basic and Diluted |
10,100 |
The accompanying notes are an integral part of these unaudited pro forma
consolidated financial statements.
F-4
SOLARIS OILFIELD INFRASTRUCTURE, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
PRO FORMA ADJUSTMENTS AND ASSUMPTIONS
The Company made the following adjustments and assumptions in the preparation of the unaudited pro forma consolidated statements of operations:
On a pro forma basis, there would have been no outstanding borrowings under Solaris LLC's credit facility as of January 1, 2016.
F-5
SOLARIS OILFIELD INFRASTRUCTURE, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS (Continued)
the nine months ended September 30, 2017, Class B common stock and 33,324 shares of restricted Class A common stock were not recognized in dilutive earnings per share as they would have been antidilutive.
In addition, we have provided the below calculation to present the net impact on earnings per share assuming that all Solaris LLC Units and shares of Class B common stock are exchanged for shares of Class A common stock. Such exchange is affected by the allocation of income or loss associated with the exchange of Solaris LLC Units and shares of Class B common stock for shares of Class A common stock. Giving effect to the exchange of all Solaris LLC Units and shares of Class B common stock for shares of Class A common stock, 1,072,413 restricted shares of our Class A common stock issued under our long-term incentive plan and 591,261 shares of our Class A common stock issuable upon exercise of stock options issued in connection with the IPO, diluted pro forma net income (loss) per share available to Class A common stock would be computed as follows:
|
Nine months ended September 30, 2017 |
Year ended December 31, 2016 |
|||||
---|---|---|---|---|---|---|---|
|
in thousands |
in thousands |
|||||
Pro forma income (loss) before income taxes |
$ | 18,280 | $ | (1,899 | ) | ||
Adjusted pro forma income taxes(a) |
(1,691 | ) | 119 | ||||
| | | | | | | |
Adjusted pro forma net income (loss) |
16,589 | (1,780 | ) | ||||
Net (income) loss attributable to existing noncontrolling interest |
(13,932 | ) | 1,480 | ||||
| | | | | | | |
Adjusted pro forma net income to Solaris Inc. stockholders(b) |
2,657 | (300 | ) | ||||
Weighted average shares of Class A common stock outstanding (assuming the exchange of all Solaris LLC Units for shares of Class A common stock) |
42,817,530 | 42,465,823 | |||||
Pro forma diluted net income available to Class A common stock per share |
$ | 0.23 | $ | (0.03 | ) |
F-6
SOLARIS OILFIELD INFRASTRUCTURE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
|
September 30, 2017 |
December 31, 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 Stockholders'/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.
F-7
SOLARIS OILFIELD INFRASTRUCTURE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
|
Nine Months Ended September 30, |
||||||
---|---|---|---|---|---|---|---|
|
2017 | 2016 | |||||
Revenue: |
|||||||
Proppant management system rental |
$ | 34,560 | $ | 8,679 | |||
Proppant management system services |
7,631 | 2,189 | |||||
| | | | | | | |
Total revenue |
42,191 | 10,868 | |||||
Operating costs and expenses: |
|||||||
Cost of proppant management system rental (excluding $3,748 and $2,418 of depreciation and amortization for the nine months ended September 30, 2017 and 2016, respectively, shown separately) |
1,588 | 1,181 | |||||
Cost of proppant management system services (excluding $283 and $111 of depreciation and amortization for the nine months ended September 30, 2017 and 2016, respectively, shown separately) |
8,640 | 3,301 | |||||
Depreciation and amortization |
4,276 | 2,739 | |||||
Salaries, benefits and payroll taxes(1) |
5,687 | 1,992 | |||||
Selling, general and administrative (excluding $245, and $210 of depreciation and amortization for the nine months ended September 30, 2017 and 2016, respectively, shown separately) |
3,653 | 1,842 | |||||
Other operating expenses |
3,770 | | |||||
| | | | | | | |
Total operating costs and expenses |
27,614 | 11,055 | |||||
| | | | | | | |
Operating income (loss) |
14,577 | (187 | ) | ||||
Interest expense |
(71 | ) | (14 | ) | |||
Other income (expense) |
(119 | ) | 7 | ||||
| | | | | | | |
Total other income (expense) |
(190 | ) | (7 | ) | |||
| | | | | | | |
Income (loss) before income tax expense |
14,387 | (194 | ) | ||||
Provision for income taxes |
(1,137 | ) | (26 | ) | |||
| | | | | | | |
Net income (loss) |
13,250 | (220 | ) | ||||
Less: net (income) loss related to Solaris LLC |
(3,665 | ) | 220 | ||||
Less: net (income) related to non-controlling interests |
(8,049 | ) | | ||||
| | | | | | | |
Net income attributable to Solaris |
$ | 1,536 | $ | | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
Earnings per share of Class A common stockbasic(2) |
$ | 0.14 | $ | | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
Earnings per share of Class A common stockdiluted(2) |
$ | 0.14 | $ | | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
Basic weighted-average shares of Class A common stock outstanding(2) |
10,100 | | |||||
Diluted weighted-average shares of Class A common stock outstanding(2) |
10,552 | |
Stock-based compensation expense |
$ | 2,097 | $ | 108 |
The accompanying notes are an integral part of these financial statements.
F-8
SOLARIS OILFIELD INFRASTRUCTURE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS'/MEMBERS' EQUITY
(In thousands)
(Unaudited)
|
|
Class A Common Stock |
Class B Common Stock |
|
|
|
Total Stockholders' and Members' Equity |
|||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Members' Equity |
Additional Paid-in Capital |
Accumulated Earnings/ (Deficit) |
Non- controlling Interest |
||||||||||||||||||||||||
|
Shares | Amount | Shares | Amount | ||||||||||||||||||||||||
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.
F-9
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.
F-10
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, in 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 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 and intends to continue to use the remaining proceeds for general corporate purposes, including funding the remainder of its 2017 capital program, the majority of which we expect will be used to manufacture additional systems for our fleet and advance construction of the Kingfisher Facility.
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
F-11
SOLARIS OILFIELD INFRASTRUCTURE, INC.
Notes to the Condensed Consolidated Financial Statements (Continued)
(Dollars in thousands)
1. Organization and Background of Business (Continued)
interest related to the portion of Solaris LLC Units not owned by Solaris, which will reduce net income (loss) attributable to Solaris' Class A stockholders.
Reorganization Transactions
In connection with the IPO, we completed a series of reorganization transactions on May 17, 2017 (the "Reorganization Transactions"), including:
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 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").
F-12
SOLARIS OILFIELD INFRASTRUCTURE, INC.
Notes to the Condensed Consolidated Financial Statements (Continued)
(Dollars in thousands)
2. Summary of Significant Accounting Policies (Continued)
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.
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 of 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
F-13
SOLARIS OILFIELD INFRASTRUCTURE, INC.
Notes to the Condensed Consolidated Financial Statements (Continued)
(Dollars in thousands)
2. Summary of Significant Accounting Policies (Continued)
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 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.
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.
F-14
SOLARIS OILFIELD INFRASTRUCTURE, INC.
Notes to the Condensed Consolidated Financial Statements (Continued)
(Dollars in thousands)
2. Summary of Significant Accounting Policies (Continued)
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 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 nine months ended September 30, 2017 and 2016.
F-15
SOLARIS OILFIELD INFRASTRUCTURE, INC.
Notes to the Condensed Consolidated Financial Statements (Continued)
(Dollars in thousands)
2. Summary of Significant Accounting Policies (Continued)
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.
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 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 a revolving credit facility and term loans, for which fair value approximates carrying value as the debt bears interest at a variable rate
F-16
SOLARIS OILFIELD INFRASTRUCTURE, INC.
Notes to the Condensed Consolidated Financial Statements (Continued)
(Dollars in thousands)
2. Summary of Significant Accounting Policies (Continued)
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:
Level 1Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date;
Level 2Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active or other inputs corroborated by observable market data for substantially the full term of the assets or liabilities; and
Level 3Unobservable inputs that reflect the Company's assumptions that market participants would use in pricing assets or liabilities based on the best information available.
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 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.
F-17
SOLARIS OILFIELD INFRASTRUCTURE, INC.
Notes to the Condensed Consolidated Financial Statements (Continued)
(Dollars in thousands)
2. Summary of Significant Accounting Policies (Continued)
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 $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," and together, the "TRA Holders") on May 17, 2017. This agreement generally provides for the payment by Solaris to a 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 (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 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 Reorganization Transactions 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. 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.
F-18
SOLARIS OILFIELD INFRASTRUCTURE, INC.
Notes to the Condensed Consolidated Financial Statements (Continued)
(Dollars in thousands)
2. Summary of Significant Accounting Policies (Continued)
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, CompensationStock 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 IncomeGains 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, IntangiblesGoodwill 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
F-19
SOLARIS OILFIELD INFRASTRUCTURE, INC.
Notes to the Condensed Consolidated Financial Statements (Continued)
(Dollars in thousands)
2. Summary of Significant Accounting Policies (Continued)
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 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
F-20
SOLARIS OILFIELD INFRASTRUCTURE, INC.
Notes to the Condensed Consolidated Financial Statements (Continued)
(Dollars in thousands)
2. Summary of Significant Accounting Policies (Continued)
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, CompensationStock 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.
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 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
F-21
SOLARIS OILFIELD INFRASTRUCTURE, INC.
Notes to the Condensed Consolidated Financial Statements (Continued)
(Dollars in thousands)
2. Summary of Significant Accounting Policies (Continued)
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 StatementsGoing 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.
F-22
SOLARIS OILFIELD INFRASTRUCTURE, INC.
Notes to the Condensed Consolidated Financial Statements (Continued)
(Dollars in thousands)
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, 2017 |
December 31, 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, 2017 |
December 31, 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 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 $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.
F-23
SOLARIS OILFIELD INFRASTRUCTURE, INC.
Notes to the Condensed Consolidated Financial Statements (Continued)
(Dollars in thousands)
5. Accrued Liabilities
Accrued liabilities were comprised of the following:
|
September 30, 2017 |
December 31, 2016 |
|||||
---|---|---|---|---|---|---|---|
Employee related expenses |
$ | 2,374 | $ | 1,237 | |||
Accrued real estate taxes |
357 | 440 | |||||
Accrued excise, franchise and sales taxes |
355 | 83 | |||||
Accrued operating expenses and other(1) |
1,667 | 384 | |||||
| | | | | | | |
Accrued liabilities |
$ | 4,733 | $ | 2,144 | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
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.
F-24
SOLARIS OILFIELD INFRASTRUCTURE, INC.
Notes to the Condensed Consolidated Financial Statements (Continued)
(Dollars in thousands)
7. Notes Payable (Continued)
Notes payable was comprised of the following at September 30, 2017 and December 31, 2016:
|
September 30, 2017 |
December 31, 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 | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
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
F-25
SOLARIS OILFIELD INFRASTRUCTURE, INC.
Notes to the Condensed Consolidated Financial Statements (Continued)
(Dollars in thousands)
8. Senior Secured Credit Facility (Continued)
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.
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.
F-26
SOLARIS OILFIELD INFRASTRUCTURE, INC.
Notes to the Condensed Consolidated Financial Statements (Continued)
(Dollars in thousands)
9. Equity (Continued)
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 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 nine months ended September 30, 2017, the Company recognized $1,829, of stock-based compensation expense on restricted stock.
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
F-27
SOLARIS OILFIELD INFRASTRUCTURE, INC.
Notes to the Condensed Consolidated Financial Statements (Continued)
(Dollars in thousands)
9. Equity (Continued)
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 existing owners received 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 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.
F-28
SOLARIS OILFIELD INFRASTRUCTURE, INC.
Notes to the Condensed Consolidated Financial Statements (Continued)
(Dollars in thousands)
9. Equity (Continued)
The following table sets forth the calculation of earnings per share, or EPS, for the nine months ended September 30, 2017:
Basic net income per share:
|
Nine Months Ended September 30, 2017 |
|||
---|---|---|---|---|
Numerator |
||||
Net income attributable to Solaris |
$ | 1,536 | ||
Less income attributable to participating securities(1) |
(108 | ) | ||
| | | | |
Net income attributable to common stockholders |
$ | 1,428 | ||
Denominator |
||||
Weighted average number of unrestricted outstanding common shares used to calculate basic net income per share |
10,100 | |||
Effect of dilutive securities: |
||||
Stock options(2) |
452 | |||
Diluted weighted-average shares of Class A Common Stock outstanding used to calculate diluted net income per share |
10,552 | |||
| | | | |
| | | | |
| | | | |
Earnings per share of Class A Common Stockbasic |
$ | 0.14 | ||
| | | | |
| | | | |
| | | | |
Earnings per share of Class A Common Stockdiluted |
$ | 0.14 | ||
| | | | |
| | | | |
| | | | |
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:
|
Nine Months Ended September 30, 2017 |
|||
---|---|---|---|---|
Class B common stock |
32,366 | |||
Restricted stock awards |
12 | |||
| | | | |
|
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
F-29
SOLARIS OILFIELD INFRASTRUCTURE, INC.
Notes to the Condensed Consolidated Financial Statements (Continued)
(Dollars in thousands)
10. Income Taxes (Continued)
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 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.
11. Concentrations
For the nine months ended September 30, 2017, four customers accounted for 63% of our revenue. For the nine months ended September 30, 2016, four customers accounted for 72% of our revenue. At September 30, 2017, two customers accounted for 46% of our accounts receivable.
For the nine months ended September 30, 2017 and 2016, six suppliers accounted for approximately 40% and 34% of our total purchases, respectively. As of September 30, 2017, two suppliers accounted for 24% of our accounts payable.
F-30
SOLARIS OILFIELD INFRASTRUCTURE, INC.
Notes to the Condensed Consolidated Financial Statements (Continued)
(Dollars in thousands)
12. Commitments and Contingencies
In the normal course of business, the Company is subjected to various claims, legal actions, contract negotiations and disputes. The Company provides for losses, if any, in the year in which they can be reasonably estimated. In management's opinion, there are currently no such matters outstanding that would have a material effect on the accompanying condensed consolidated financial statements.
Operating Leases
The Company leases land and equipment under operating leases which expire at various dates through February 2047.
The Company's future minimum payments under non-cancelable operating leases are as follows:
Year Ending December 31,
|
Amount | |||
---|---|---|---|---|
2017 (remainder of) |
$ | 67 | ||
2018 |
336 | |||
2019 |
316 | |||
2020 |
268 | |||
2021 and thereafter |
5,915 | |||
| | | | |
Total minimum lease payments |
$ | 6,902 | ||
| | | | |
| | | | |
| | | | |
The above amounts include $6.2 million of commitments related to a 30-year land lease with the State of Oklahoma related to the Company's Kingfisher Facility further described below.
Other Commitments
In the normal course of business, the Company has certain short-term purchase obligations and commitments for products and services, primarily related to purchases of materials used in the manufacturing of its systems. At September 30, 2017, Solaris LLC had commitments of approximately $7.0 million.
On July 27, 2017, Solaris Logistics, LLC, a wholly owned subsidiary of Solaris LLC, entered into a seven year customer contract with an exploration and production company to provide proppant transloading service at the Kingfisher Facility, which is effective upon construction of the Kingfisher Facility.
Estimated capital investment for the first phase of development to complete core infrastructure and fully support the customer contract totals approximately $40 million and will be funded from available cash raised in connection with the IPO and cash flow from operations. This investment includes capital expenditures related to engineering and site preparation, as well as rail and silo construction that is scheduled to be fully completed by August 2018. This investment also includes certain performance based cash awards and performance based equity awards in the form of 156,250 shares of restricted stock, both contingent upon the completion of construction for the first phase of development that will be recognized during the period that such milestones are considered probable. As of September 30, 2017, the Company had remaining obligations related to executed agreements in connection with construction activities at the Kingfisher Facility of approximately $1.9 million.
F-31
SOLARIS OILFIELD INFRASTRUCTURE, INC.
Notes to the Condensed Consolidated Financial Statements (Continued)
(Dollars in thousands)
12. Commitments and Contingencies (Continued)
The Company has executed a guarantee of lease agreement with Solaris Energy Management, LLC, a related party of the Company, related to the rental of office space for the Company's corporate headquarters. The total future guaranty is $2.8 million as of September 30, 2017. Refer to Note 13 for additional information regarding related party transactions recognized.
13. Related Party Transactions
The Company recognizes certain costs incurred in relation to transactions with entities owned or partially owned by William A. Zartler, the Chairman of the Board. These costs include rent paid for office space, travel services, personnel, consulting and administrative costs. For the nine months ended September 30, 2017, Solaris LLC paid $810 for these services of which $452 was included in salaries, benefits and payroll taxes, and $358 was included in selling, general and administrative expenses in the condensed consolidated statement of operations.
These costs are primarily incurred in connection with the administrative services agreement, dated November 22, 2016, by and between Solaris LLC and Solaris Energy Management LLC ("SEM"), a company partially owned by William A. Zartler (as amended, the "Amended Services Agreement").
All related party transactions are immaterial and have not been shown separately on the face of the condensed consolidated financial statements.
F-32
Report of Independent Registered Public Accounting Firm
Board
of Directors and Members
Solaris Oilfield Infrastructure, LLC
Houston, Texas
We have audited the accompanying consolidated balance sheets of Solaris Oilfield Infrastructure, LLC and subsidiaries (the "Company") as of December 31, 2016 and 2015 and the related consolidated statements of operations, members' equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Solaris Oilfield Infrastructure, LLC and subsidiaries at December 31, 2016 and 2015, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
/s/ BDO USA, LLP
Houston,
Texas
March 15, 2017
F-33
SOLARIS OILFIELD INFRASTRUCTURE, LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
|
December 31, | ||||||
---|---|---|---|---|---|---|---|
|
2016 | 2015 | |||||
|
(in thousands) |
||||||
Assets |
|||||||
Current assets: |
|||||||
Cash |
$ | 3,568 | $ | 6,923 | |||
Accounts receivable, net |
4,510 | 1,576 | |||||
Prepaid expenses and other current assets |
403 | 512 | |||||
Inventories |
1,365 | 1,692 | |||||
| | | | | | | |
Total current assets |
9,846 | 10,703 | |||||
Property, plant and equipment, net |
54,350 | 46,846 | |||||
Goodwill |
13,004 | 13,004 | |||||
Intangible assets, net |
36 | | |||||
| | | | | | | |
Total assets |
$ | 77,236 | $ | 70,553 | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
Liabilities and Members' Equity |
|||||||
Current liabilities: |
|||||||
Accounts payable |
$ | 705 | $ | 664 | |||
Accrued liabilities |
2,144 | 1,892 | |||||
Current portion of capital lease obligations |
26 | 25 | |||||
Current portion of notes payable |
169 | 91 | |||||
Current portion of senior secured credit facility |
31 | | |||||
| | | | | | | |
Total current liabilities |
3,075 | 2,672 | |||||
| | | | | | | |
Capital lease obligations, net of current portion |
213 | 239 | |||||
Notes payable, net of current portion |
282 | 174 | |||||
Senior secured credit facility, net of current portion |
2,320 | | |||||
| | | | | | | |
Total liabilities |
5,890 | 3,085 | |||||
| | | | | | | |
Commitments and contingencies (Note 12) |
|||||||
Members' equity |
|||||||
Members' equity |
69,267 | 68,192 | |||||
Accumulated earnings (deficit) |
2,079 | (724 | ) | ||||
| | | | | | | |
Total members' equity |
71,346 | 67,468 | |||||
| | | | | | | |
Total liabilities and members' equity |
$ | 77,236 | $ | 70,553 | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
The accompanying notes are an integral part of these financial statements.
F-34
SOLARIS OILFIELD INFRASTRUCTURE, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
|
For the Years Ended December 31, |
||||||
---|---|---|---|---|---|---|---|
|
2016 | 2015 | |||||
|
(in thousands) |
||||||
Revenue |
|||||||
Proppant system rental |
$ | 14,594 | $ | 8,296 | |||
Proppant system services |
3,563 | 3,167 | |||||
Proppant system sale |
| 2,742 | |||||
| | | | | | | |
Total revenue |
18,157 | 14,205 | |||||
Operating costs and expenses |
|||||||
Cost of proppant system rental (excluding $3,352 and $2,000 of depreciation and amortization for the years ended December 31, 2016 and 2015, respectively, shown separately) |
1,431 | 994 | |||||
Cost of proppant system services (excluding $160 and $119 of depreciation and amortization for the years ended December 31, 2016 and 2015, respectively, shown separately) |
4,916 | 3,847 | |||||
Cost of proppant system sale |
| 1,948 | |||||
Depreciation and amortization |
3,792 | 2,395 | |||||
Salaries, benefits and payroll taxes |
3,061 | 3,571 | |||||
Selling, general and administrative (excluding $250 and $276 of depreciation and amortization for the years ended December 31, 2016 and 2015, respectively, shown separately) |
2,096 | 2,663 | |||||
| | | | | | | |
Total operating cost and expenses |
15,296 | 15,418 | |||||
| | | | | | | |
Operating income (loss) |
2,861 | (1,213 | ) | ||||
Interest expense |
(23 | ) | (22 | ) | |||
Other income (expense) |
8 | (71 | ) | ||||
| | | | | | | |
Total other income (expense) |
(15 | ) | (93 | ) | |||
| | | | | | | |
Income (loss) before income tax expense |
2,846 | (1,306 | ) | ||||
Income tax expense |
43 | 67 | |||||
| | | | | | | |
Net income (loss) |
$ | 2,803 | $ | (1,373 | ) | ||
| | | | | | | |
| | | | | | | |
| | | | | | | |
The accompanying notes are an integral part of these financial statements.
F-35
SOLARIS OILFIELD INFRASTRUCTURE, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS' EQUITY
|
Members' Equity |
Accumulated Earnings (Deficit) |
Total Members' Equity |
|||||||
---|---|---|---|---|---|---|---|---|---|---|
|
(in thousands) |
|||||||||
Balance at January 1, 2015 |
$ | 59,971 | $ | 649 | $ | 60,620 | ||||
Member contributions |
8,162 | | 8,162 | |||||||
Purchase of member units |
(5 | ) | | (5 | ) | |||||
Issuance of membership units in exchange for notes receivable, includes accrued interest |
5,766 | | 5,766 | |||||||
Notes receivable from unit-holders, includes accrued interest |
(5,766 | ) | | (5,766 | ) | |||||
Unit-based compensation expense |
64 | | 64 | |||||||
Net income (loss) |
| (1,373 | ) | (1,373 | ) | |||||
| | | | | | | | | | |
Balance at December 31, 2015 |
68,192 | (724 | ) | 67,468 | ||||||
| | | | | | | | | | |
Additional members' equity related to accrued interest on notes receivable that were exchanged for membership units |
327 | | 327 | |||||||
Accrued interest related to notes receivables that were exchanged for membership units |
(327 | ) | | (327 | ) | |||||
Unit-based compensation expense |
127 | | 127 | |||||||
Proceeds from pay down of promissory note related to membership units |
948 | | 948 | |||||||
Net income (loss) |
| 2,803 | 2,803 | |||||||
| | | | | | | | | | |
Balance at December 31, 2016 |
$ | 69,267 | $ | 2,079 | $ | 71,346 | ||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
The accompanying notes are an integral part of these financial statements.
F-36
SOLARIS OILFIELD INFRASTRUCTURE, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
For the Years Ended December 31, |
||||||
---|---|---|---|---|---|---|---|
|
2016 | 2015 | |||||
|
(in thousands) |
||||||
Cash flows from operating activities: |
|||||||
Net income (loss) |
$ | 2,803 | $ | (1,373 | ) | ||
Adjustment to reconcile net income (loss) to net cash provided by operating activities: |
|||||||
Depreciation and amortization |
3,792 | 2,395 | |||||
Loss on disposal of asset |
| 22 | |||||
Provision for bad debt |
131 | | |||||
Unit-based compensation |
127 | 64 | |||||
Amortization of debt issuance costs |
4 | | |||||
Changes in assets and liabilities: |
|||||||
Accounts receivable |
(3,065 | ) | 1,047 | ||||
Prepaid expenses and other assets |
109 | 1,148 | |||||
Inventories |
327 | 1,794 | |||||
Accounts payable |
41 | (1,515 | ) | ||||
Accrued liabilities |
252 | (1,426 | ) | ||||
| | | | | | | |
Net cash provided by operating activities |
4,521 | 2,156 | |||||
| | | | | | | |
Cash flows from investing activities: |
|||||||
Investment in property, plant and equipment |
(10,899 | ) | (27,790 | ) | |||
Proceeds from disposal of asset |
| 4 | |||||
Purchase price adjustment on acquisition |
| (73 | ) | ||||
Investment in intangible assets |
(36 | ) | | ||||
| | | | | | | |
Net cash used in investing activities |
(10,935 | ) | (27,859 | ) | |||
| | | | | | | |
Cash flows from financing activities: |
|||||||
Payments under capital leases |
(25 | ) | (25 | ) | |||
Payments under notes payable |
(211 | ) | (254 | ) | |||
Proceeds from senior secured credit facility |
2,500 | | |||||
Payments related to debt issuance costs |
(153 | ) | | ||||
Proceeds from members' contributions |
948 | 8,162 | |||||
Payments to purchase member units |
| (5 | ) | ||||
| | | | | | | |
Net cash provided by financing activities |
3,059 | 7,878 | |||||
| | | | | | | |
Net decrease in cash |
(3,355 | ) | (17,825 | ) | |||
Cash at beginning of period |
6,923 | 24,748 | |||||
| | | | | | | |
Cash at end of period |
$ | 3,568 | $ | 6,923 | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
Non-cash activities |
|||||||
Investing: |
|||||||
Capitalized depreciation in property, plant and equipment |
$ | 674 | $ | 539 | |||
Financing: |
|||||||
Notes payable issued |
397 | 297 | |||||
Accrued interest from notes receivable issued for membership units |
327 | 208 | |||||
Cash paid for: |
|||||||
Interest |
$ | 20 | $ | 18 | |||
Income taxes |
$ | 35 | $ | 60 |
The accompanying notes are an integral part of these financial statements.
F-37
SOLARIS OILFIELD INFRASTRUCTURE, LLC AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2016 and
2015
(Dollars in thousands)
1. Organization and Background of Business
Solaris Oilfield Infrastructure, LLC and subsidiaries (the "Company"), based in Houston, Texas, manufactures and provides 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 Company has deployed its systems in many of the most active oil and natural gas basins in the U.S., including the Permian Basin, the Eagle Ford Shale and the SCOOP/STACK Formation.
2. Summary of Significant Accounting Policies
Basis of Presentation
This summary of significant accounting policies of the Company is presented to assist in the understanding of the Company's consolidated financial statements. These accounting policies conform to accounting principles generally accepted in the United States of America and have been consistently applied in the preparation of the consolidated financial statements.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Solaris Oilfield Site Services Operating, LLC, Solaris Oilfield Early Property, LLC, Solaris Oilfield Site Services Personnel, LLC and Solaris Oilfield Infrastructure Personnel, LLC (collectively, the "Subsidiaries"). All material intercompany transactions and balances have been eliminated upon consolidation.
Use of Estimates
The preparation of financial statements in accordance with generally accepted accounting principles 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 financial statements include, but are not limited to, depreciation associated with property, plant and equipment and related impairment considerations of those assets, recoverability of deferred tax 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.
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. The Company has not incurred losses related to these deposits.
F-38
SOLARIS OILFIELD INFRASTRUCTURE, LLC AND SUBSIDIARIES
Notes to the Consolidated Financial Statements (Continued)
For the Years Ended December 31, 2016 and 2015
(Dollars in thousands)
2. Summary of Significant Accounting Policies (Continued)
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 and 2015, the Company had $131 and $0 of allowance for doubtful accounts, respectively.
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 and issued at weighted average cost when consumed. As of December 31, 2016 and 2015, inventory consisted of raw materials and purchased parts. A reserve is recorded against inventory for estimated obsolescence. There was no reserve as of December 31, 2016 and 2015.
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 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 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 accounts and any resulting gain or loss is recognized in the consolidated statements of operations.
F-39
SOLARIS OILFIELD INFRASTRUCTURE, LLC AND SUBSIDIARIES
Notes to the Consolidated Financial Statements (Continued)
For the Years Ended December 31, 2016 and 2015
(Dollars in thousands)
2. Summary of Significant Accounting Policies (Continued)
The Company has vehicles that are pledged against the respective notes payables for those vehicles. As of December 31, 2016 and 2015, the cost of vehicles pledged was $859 and $505, respectively.
Definite-lived Intangible Assets
For the years ended December 31, 2016 and 2015, the Company incurred $36 and $0, 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 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 by the Company. 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.
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. Under the guidance of Accounting Standards Update 2012-02, IntangiblesGoodwill and Other (Topic 350): Testing Indefinite-lived Intangibles for Impairment (ASU 2012-02), the Company performed the first step in the goodwill impairment test and determined there was no impairment for the years ended December 31, 2016 and 2015.
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
F-40
SOLARIS OILFIELD INFRASTRUCTURE, LLC AND SUBSIDIARIES
Notes to the Consolidated Financial Statements (Continued)
For the Years Ended December 31, 2016 and 2015
(Dollars in thousands)
2. Summary of Significant Accounting Policies (Continued)
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 years ended December 31, 2016 and 2015.
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 majority of the services are 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.
In January 2015, the Company completed the sale of a system at prevailing market rates. The Company does not recognize revenue from proppant system sales as a reportable segment as it is not included by management in their evaluation of operating decisions and performance. No other sale of systems has occurred since.
Taxes collected from customers and remitted to governmental authorities are accounted for on a net basis and therefore are excluded from revenues in the consolidated statements of operations.
Unit-based Compensation
The Company sponsors a unit-based management compensation program called the 2015 Membership Unit Option Plan (the "Plan"). The Company accounts 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. The Company recognizes compensation expense on a straight-line basis over the awards' vesting period, which is generally the requisite service period.
Research and Development
The Company expenses research and development costs as incurred, which is included in selling, general and administrative expenses in the consolidated statement of operations. For the years ended December 31, 2016 and 2015, research and development costs were $476 and $141, respectively.
F-41
SOLARIS OILFIELD INFRASTRUCTURE, LLC AND SUBSIDIARIES
Notes to the Consolidated Financial Statements (Continued)
For the Years Ended December 31, 2016 and 2015
(Dollars in thousands)
2. Summary of Significant Accounting Policies (Continued)
Financial Instruments
The carrying value of the Company's financial instruments, consisting of cash, accounts receivable, accounts payable and accrued expenses, approximates their fair value due to the short maturity of such instruments. Financial instruments also consist of debt for which fair value approximates carrying values 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
The Company does not pay federal income tax on its taxable income. Instead, the Company's members are liable for federal income tax on their respective shares of the Company's taxable income reported on the members' federal income tax returns.
The Company recognizes the impact of a tax position in the consolidated financial statements only if that position is more likely than not of being sustained upon examination by the taxing authority. Any penalties or interest assessed as the result of an examination will be passed through to the Company's members.
The Company's revenues are derived through transactions in several states, which may be subject to state and local taxes. Accordingly, the Company has recorded a liability for state and local taxes that management believes is adequate for activities as of December 31, 2016 and 2015.
The Company is 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 Texas margin tax was approximately $43 and $67 for the years ended December 31, 2016 and 2015, respectively.
F-42
SOLARIS OILFIELD INFRASTRUCTURE, LLC AND SUBSIDIARIES
Notes to the Consolidated Financial Statements (Continued)
For the Years Ended December 31, 2016 and 2015
(Dollars in thousands)
2. Summary of Significant Accounting Policies (Continued)
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. The Company maintains insurance which may cover in whole or in part certain environmental expenditures. As of December 31, 2016 and 2015, 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 August 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-15, Classification of Certain Cash Receipts and Cash Payments, 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 financial statements.
In June 16, 2016, the FASB issued ASU 2016-13, Financial InstrumentsCredit Losses, which requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. The ASU requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization's portfolio. These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The ASU is effective for public
F-43
SOLARIS OILFIELD INFRASTRUCTURE, LLC AND SUBSIDIARIES
Notes to the Consolidated Financial Statements (Continued)
For the Years Ended December 31, 2016 and 2015
(Dollars in thousands)
2. Summary of Significant Accounting Policies (Continued)
companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early application will be permitted for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company is in the initial stages of evaluating the potential impact this new standard may have on the financial statements.
In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting. 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. Early adoption is permitted. The Company is in the initial stages of evaluating the potential impact this new standard may have on the financial statements.
On February 25, 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), as part of a joint project with the International Accounting Standards Board ("IASB") 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 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 financial statements.
In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. 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. Early adoption is permitted provided that presentation is applied to the beginning of the fiscal year of adoption. The Company is in the initial stages of evaluating the potential impact this new standard may have on the financial statements.
On August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial StatementsGoing Concern (Subtopic 205-40)Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern. ASU No. 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 No. 2014-15 (1) defines the term substantial doubt, (2) requires an evaluation of every reporting period including interim periods,
F-44
SOLARIS OILFIELD INFRASTRUCTURE, LLC AND SUBSIDIARIES
Notes to the Consolidated Financial Statements (Continued)
For the Years Ended December 31, 2016 and 2015
(Dollars in thousands)
2. Summary of Significant Accounting Policies (Continued)
(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 is in the initial stages of evaluating the potential impact this new standard may have on the financial statements.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. 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 not permitted. Entities have the option of using either a full retrospective or modified approach to adopt ASU 2014-09. The Company is in the initial stages of evaluating the potential impact this new standard may have on the consolidated financial statements which includes analyzing our revenue contracts and evaluating our disclosures. The Company expects to adopt the provisions of this new accounting standard at the beginning of fiscal year 2018.
3. Prepaid Expenses and Other Current Assets
Prepaid expenses and other currents assets were comprised of the following at December 31:
|
2016 | 2015 | |||||
---|---|---|---|---|---|---|---|
Prepaid purchase orders |
$ | 126 | $ | 200 | |||
Prepaid insurance |
69 | 100 | |||||
Prepaid operating expenses |
114 | 79 | |||||
Other receivables |
94 | 133 | |||||
| | | | | | | |
Prepaid expenses and other current assets |
$ | 403 | $ | 512 | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
F-45
SOLARIS OILFIELD INFRASTRUCTURE, LLC AND SUBSIDIARIES
Notes to the Consolidated Financial Statements (Continued)
For the Years Ended December 31, 2016 and 2015
(Dollars in thousands)
4. Property, Plant and Equipment
Property, plant and equipment was comprised of the following at December 31:
|
2016 | 2015 | |||||
---|---|---|---|---|---|---|---|
Proppant systems and related equipment |
$ | 51,899 | $ | 39,233 | |||
Machinery and equipment |
3,916 | 3,209 | |||||
Furniture and fixtures |
7 | 7 | |||||
Computer equipment |
829 | 490 | |||||
Vehicles |
1,235 | 1,032 | |||||
Buildings |
3,008 | 2,488 | |||||
Proppant systems in process |
1,252 | 3,730 | |||||
Land |
578 | 565 | |||||
| | | | | | | |
Property, plant and equipment, gross |
62,724 | 50,754 | |||||
Less: accumulated depreciation |
(8,374 | ) | (3,908 | ) | |||
| | | | | | | |
Property, plant and equipment, net |
$ | 54,350 | $ | 46,846 | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
Depreciation expense for the years ended December 31, 2016 and 2015 was $3,792 and $2,395, respectively, of which $3,352 and $2,000 is attributable to cost of proppant system rental, $160 and $119 is attributable to cost of proppant system services, and $280 and $276 is attributable to selling, general and administrative expenses, respectively. There was no depreciation expense related to the proppant system sale in 2015. The Company capitalized $674 and $539 of depreciation expense associated with machinery and equipment used in the manufacturing of its systems for the years ended December 31, 2016 and 2015, respectively.
5. Goodwill
In 2015 and during the measurement period, as defined in ASC 805, the Company identified additional purchase price adjustments related to the purchase of the silo business from Loadcraft Industries Ltd. that were not included in the initial allocation of the fair value of the liabilities assumed at the acquisition date.
The changes in the carrying amount of goodwill for the years ended December 31, 2016 and 2015 were:
Goodwill as of January 1, 2015 |
$ | 12,931 | ||
Purchase price adjustments |
73 | |||
| | | | |
Goodwill as of December 31, 2015 |
$ | 13,004 | ||
Purchase price adjustments |
| |||
| | | | |
Goodwill as of December 31, 2016 |
$ | 13,004 | ||
| | | | |
| | | | |
| | | | |
F-46
SOLARIS OILFIELD INFRASTRUCTURE, LLC AND SUBSIDIARIES
Notes to the Consolidated Financial Statements (Continued)
For the Years Ended December 31, 2016 and 2015
(Dollars in thousands)
6. Accrued Liabilities
Accrued liabilities were comprised of the following at December 31:
|
2016 | 2015 | |||||
---|---|---|---|---|---|---|---|
Employee related expenses |
$ | 1,237 | $ | 885 | |||
Accrued real estate taxes |
440 | 406 | |||||
Accrued excise, franchise and sales taxes |
83 | 296 | |||||
Accrued other |
384 | 305 | |||||
| | | | | | | |
Accrued liabilities |
$ | 2,144 | $ | 1,892 | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
7. Capital Leases
The Company 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 for each of the five years subsequent to December 31, 2016 and thereafter are as follows:
Year Ending December 31,
|
Amount | |||
---|---|---|---|---|
2017 |
$ | 33 | ||
2018 |
33 | |||
2019 |
33 | |||
2020 |
33 | |||
2021 |
33 | |||
Thereafter |
107 | |||
| | | | |
Total payments |
272 | |||
Less: amount representing imputed interest at 3.25% |
(33 | ) | ||
| | | | |
Present value of payments |
239 | |||
Less: current portion |
(26 | ) | ||
| | | | |
Capital lease obligation, net of current portion |
$ | 213 | ||
| | | | |
| | | | |
| | | | |
8. Notes Payable
The Company finances its annual insurance policy and certain vehicles. The insurance policy renews every April and is amortized over ten monthly installments. The Company financed certain vehicles and the terms of the financing range from three to five years.
F-47
SOLARIS OILFIELD INFRASTRUCTURE, LLC AND SUBSIDIARIES
Notes to the Consolidated Financial Statements (Continued)
For the Years Ended December 31, 2016 and 2015
(Dollars in thousands)
8. Notes Payable (Continued)
Notes payable was comprised of the following at December 31:
As of December 31,
|
2016 | 2015 | |||||
---|---|---|---|---|---|---|---|
Notes payable to insurance finance company. Monthly installments of $14 including interest rate of 3.9%, with final payment due in February 2016 |
$ | | $ | 27 | |||
Notes payable to insurance finance company. Monthly installments of $11 including interest rate of 4.4%, with final payment due in January 2017 |
11 | | |||||
Notes payable to vehicle companies. Monthly installments range from $0.2 to $0.7 including interest rates ranging from 0% to 6.6%, maturing at various dates through August 2020, and secured by vehicles |
440 | 238 | |||||
| | | | | | | |
Total notes payable |
451 | 265 | |||||
Less: current maturities |
(169 | ) | (91 | ) | |||
| | | | | | | |
Notes payable, net of current portion |
$ | 282 | $ | 174 | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
Aggregate maturities of notes payable are as follows:
Year Ending December 31,
|
Amount | |||
---|---|---|---|---|
2017 |
$ | 169 | ||
2018 |
162 | |||
2019 |
112 | |||
2020 |
8 | |||
2021 |
| |||
| | | | |
Total payments |
451 | |||
Less: current portion |
(169 | ) | ||
| | | | |
Long-term notes payable, net of current portion |
$ | 282 | ||
| | | | |
| | | | |
| | | | |
9. Senior Secured Credit Facility
On December 1, 2016, the Company entered a credit agreement with Woodforest National Bank that provides $11.0 million aggregate principal amount of senior secured credit facilities (the "Senior Secured Credit Facility"). The Senior Secured Credit Facility consists of (i) up to $10.0 million aggregate principal amount of advance term loan commitments available for borrowing until December 1, 2017 (the "Advance Facility") and (ii) up to $1.0 million aggregate principal amount of revolving credit commitments available for borrowing until December 1, 2018 (the "Revolving Facility").
Borrowings under the Senior Secured Credit Facility bear interest at a one-month London Interbank Offered Rate ("LIBOR") plus an applicable margin and interest shall be payable monthly. The applicable margin ranges from 3.50% to 5.00% depending on the Company's fixed charge coverage ratio. During the continuance of an event of default, overdue amounts under the Senior Secured Credit Facility will bear interest at 5.00% plus the otherwise applicable interest rate. The Revolving Facility
F-48
SOLARIS OILFIELD INFRASTRUCTURE, LLC AND SUBSIDIARIES
Notes to the Consolidated Financial Statements (Continued)
For the Years Ended December 31, 2016 and 2015
(Dollars in thousands)
9. Senior Secured Credit Facility (Continued)
has a scheduled maturity date of December 1, 2018 and the Advance Facility has a scheduled maturity date of December 1, 2021.
The principal amount of the Advance Facility is payable in monthly installments of 1/48th of the aggregate unpaid principal balance of advance loans under the Advance Facility as of December 1, 2017. No amortization is required with respect to the principal amount of the revolving facility. All outstanding amounts under the Advance Facility will be due on the Advance Facility maturity date and all outstanding amounts under the Revolving Facility will be due on, and the letter of credit commitments will terminate on, the Revolving Facility maturity date or upon earlier prepayment or acceleration.
The Company may voluntarily prepay the Senior Secured Credit Facility in whole or in part at any time; provided that any prepayments of any portion of Advance Facility prior to December 1, 2018 will incur a prepayment premium of 0.50% of the amount of the Advance Facility prepaid.
The Senior Secured 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 Senior Secured Credit Agreement contains certain covenants, restrictions and events of default including, but not limited to, a change of control restriction and limitations on the Company's 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.
The Senior Secured Credit Agreement requires the Company to maintain, at all times, a ratio of total indebtedness to consolidated EBITDA of not more than 2.00 to 1.00 and a ratio of consolidated EBITDA to fixed charges of not less than 1.50 to 1.00. The Company was in compliance with all such ratios as of December 31, 2016.
As of December 31, 2016, we had $1.5 million in borrowings under the Advance Loan Facility outstanding with $8.5 million in advance loan commitments available and $1.0 million in borrowings under the Revolving Facility outstanding with $0.0 million in revolving commitments available.
F-49
SOLARIS OILFIELD INFRASTRUCTURE, LLC AND SUBSIDIARIES
Notes to the Consolidated Financial Statements (Continued)
For the Years Ended December 31, 2016 and 2015
(Dollars in thousands)
9. Senior Secured Credit Facility (Continued)
The Senior Secured Credit Facility was comprised of the following at December 31:
As of December 31,
|
2016 | |||
---|---|---|---|---|
Revolving Facility expiring December 1, 2018 (5.0 - 5.3% at December 31, 2016) |
$ | 1,000 | ||
Advance Facilityfinal maturity December 1, 2021 (5.0% - 5.3% at December 31, 2016) |
1,500 | |||
Less: Unamortized debt issuance cost |
(149 | ) | ||
| | | | |
Total Senior Secured Credit Facility |
2,351 | |||
Less: current maturities |
(31 | ) | ||
| | | | |
Senior Secured Credit Facility, net of current portion |
$ | 2,320 | ||
| | | | |
| | | | |
| | | | |
Aggregate maturities of the Senior Secured Credit Facility are as follows:
Year Ending December 31,
|
Amount | |||
---|---|---|---|---|
2017 |
$ | 31 | ||
2018 |
1,375 | |||
2019 |
375 | |||
2020 |
375 | |||
2021 |
344 | |||
| | | | |
Total payments |
2,500 | |||
Less: current portion |
(31 | ) | ||
| | | | |
Senior Secured Credit Facility, net of current portion |
$ | 2,469 | ||
| | | | |
| | | | |
| | | | |
10. Equity
Notes receivable from unit-holders
The Company's Limited Liability Company Agreement authorizes the Company to issue membership units at a value of $100 per unit to Company'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.
During 2015, the Company issued 66,103 units in exchange for notes receivable to certain members of management. In August 2015, a former employee assigned 10,526 units previously purchased with proceeds from a promissory note to the Company in exchange for a release of the applicable promissory note. As of December 31, 2015, there were 55,577 units issued under promissory notes. In 2016, there were no additional units issued. In November 2016, a former employee that was previously assigned 8,701 units paid off the applicable promissory note of $870 principal and $78 of accrued interest in cash.
F-50
SOLARIS OILFIELD INFRASTRUCTURE, LLC AND SUBSIDIARIES
Notes to the Consolidated Financial Statements (Continued)
For the Years Ended December 31, 2016 and 2015
(Dollars in thousands)
10. Equity (Continued)
As of December 31, 2016 and 2015, the outstanding principal for the notes totaled $4,688 and $5,558 and accrued interest for the notes totaled $457 and $208, respectively. These notes are recorded in 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.
Unit-based compensation
In 2015, the Company approved the Plan whereby the Company may award options for up to 60,000 membership units to its officers, key employees and consultants to purchase the Company's membership units. Units subject to the Plan are awarded at the discretion of the Company's Board of Managers. The term of each option cannot exceed 10 years. Option awards are generally granted with an exercise price above the expected market price of the Company's units at the date of grant. At December 31, 2016 and 2015, there were 12,938 and 14,596 option units outstanding and 47,062 and 45,404 option units available for grant, respectively.
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 as the Company.
The Company used the simplified method 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. During 2015, the Company used the following assumptions to determine compensation costs for options granted:
Expected volatility |
47.00 | % | ||
Expected term (years) |
6.25 | |||
Expected annual dividend yield |
0.00 | % | ||
Expected risk-free rate of return |
2.14 | % |
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 years ended December 31, 2016 and 2015, the Company recognized $127 and $64 of stock-based compensation expense attributable to vested awards, respectively. At December 31, 2016 and 2015, there was $323 and $513 in unrecognized compensation costs that will be expensed over 2.67 and 3.66 years, respectively.
F-51
SOLARIS OILFIELD INFRASTRUCTURE, LLC AND SUBSIDIARIES
Notes to the Consolidated Financial Statements (Continued)
For the Years Ended December 31, 2016 and 2015
(Dollars in thousands)
10. Equity (Continued)
The following is a summary of the unit option activity under the Plan for the years ended December 31, 2016 and 2015:
|
Options Outstanding | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Options | Weighted Average Exercise Price |
Weighted Average Remaining Contractual Term (years) |
Aggregate Intrinsic Value (in thousands) |
|||||||||
Balance, January 1, 2015 |
| $ | | $ | | ||||||||
Granted |
14,596 | 135.00 | | ||||||||||
Exercised |
| | | ||||||||||
Forfeited |
| | | ||||||||||
| | | | | | | | | | | | | |
Balance, December 31, 2015 |
14,596 | $ | 135.00 | 9.66 | $ | | |||||||
| | | | | | | | | | | | | |
Exercisable, December 31, 2015 |
| | | | |||||||||
| | | | | | | | | | | | | |
Balance, January 1, 2016 |
14,596 | $ | 135.00 | 9.66 | $ | | |||||||
Granted |
| | | ||||||||||
Exercised |
| | | ||||||||||
Forfeited |
1,658 | | | ||||||||||
| | | | | | | | | | | | | |
Balance, December 31, 2016 |
12,938 | $ | 135.00 | 8.67 | $ | | |||||||
| | | | | | | | | | | | | |
Exercisable, December 31, 2016 |
3,235 | $ | 135.00 | 8.67 | $ | | |||||||
| | | | | | | | | | | | | |
The following is a summary of the status of the Company's unvested unit options for the years ended December 31, 2016 and 2015:
|
Options | Weighted Average Grant Date Fair Value |
|||||
---|---|---|---|---|---|---|---|
Unvested unit options: |
|||||||
Unvested at January 1, 2015 |
| $ | | ||||
Granted |
14,596 | 39.68 | |||||
Vested |
| | |||||
Cancelled/forfeited |
| | |||||
| | | | | | | |
Unvested at December 31, 2015 |
14,596 | 39.68 | |||||
Granted |
| | |||||
Vested |
(3,235 | ) | 39.68 | ||||
Cancelled/forfeited |
(1,658 | ) | 39.68 | ||||
| | | | | | | |
Unvested at December 31, 2016 |
9,703 | $ | 39.68 | ||||
| | | | | | | |
F-52
SOLARIS OILFIELD INFRASTRUCTURE, LLC AND SUBSIDIARIES
Notes to the Consolidated Financial Statements (Continued)
For the Years Ended December 31, 2016 and 2015
(Dollars in thousands)
11. Concentrations
For the year ended December 31, 2016, two customers accounted for 49% of the Company's revenue. For the year ended December 31, 2015, four customers accounted for 65% of the Company's revenue. As of December 31, 2016, one customer accounted for 23% of the Company's accounts receivable. As of December 31, 2015, five customers accounted for 84% of the Company's accounts receivable.
For the years ended December 31, 2016 and 2015, one supplier accounted for 15% and 13% of the Company's total purchases, respectively. As of December 31, 2015, two suppliers accounted for 24% of the Company's accounts payables. As of December 31, 2016, two suppliers accounted for 25% of the Company's accounts payables.
12. Commitments and Contingencies
In the normal course of business, the Company is subjected to various claims, legal actions, contract negotiations and disputes. The Company provides for losses, if any, in the year in which they can be reasonably estimated. In management's opinion, there are currently no such matters outstanding that would have a material effect on the accompanying consolidated financial statements.
Operating Leases
The Company leases equipment and office space under operating leases which expire at various dates through May 2020. The office space operating lease contains general escalating payment terms. Rental expense is recognized on a straight-line basis over the life of these leases. The expense related to these non-cancellable operating leases is included in rent expense and amounted to $206 and $340 for the years ended December 31, 2016 and 2015, respectively.
The Company's future minimum payments under non-cancelable operating leases for each of the five years subsequent to December 31, 2016 and thereafter are as follows:
Year Ending December 31,
|
Amount | |||
---|---|---|---|---|
2017 |
$ | 48 | ||
2018 |
29 | |||
2019 |
29 | |||
2020 |
12 | |||
2021 and thereafter |
| |||
| | | | |
Total minimum lease payments |
$ | 118 | ||
| | | | |
| | | | |
| | | | |
Other Commitments
In the normal course of business, the Company has certain short-term purchase obligations and commitments for products and services, primarily related to purchases of materials used in the manufacturing of its systems. At December 31, 2016 and 2015, the Company had commitments of approximately $835 and $1,259, respectively.
F-53
SOLARIS OILFIELD INFRASTRUCTURE, LLC AND SUBSIDIARIES
Notes to the Consolidated Financial Statements (Continued)
For the Years Ended December 31, 2016 and 2015
(Dollars in thousands)
13. Related Party Transactions
On November 22, 2016, the Company entered into an administrative services arrangement with Solaris Energy Management LLC ("SEM"), a company partially-owned by William A. Zartler, the Chairman of the Company's board of directors, for the provision of certain personnel and administrative services at cost. The services provided by SEM, include, but are not limited to, executive management functions, accounting and bookkeeping and treasury. In addition, SEM provides office space, equipment and supplies to the Company under the administrative service agreement. Contemporaneously with or prior to the completion of this offering, certain employees of SEM will become the Company's employees. The Company will also hire new employees to perform duties previously provided by SEM, though it may continue to utilize office space under the administrative service agreement or receive certain other administrative services from SEM. For the year ended December 31, 2016, the Company paid $277 for these services, of which $224 was included in salaries, benefits and payroll taxes and $53 was included in selling, general and administrative expenses in the Consolidated Statement of Operations. As of December 31 2016, the Company was due $80 from SEM that was recorded under prepaid expenses and other current assets in the Consolidated Balance Sheet.
The Company's employees also provided consulting and advisory services to Solaris Water Operations, LLC ("Solaris Water"), a company owned by William A. Zartler, the Chairman of the Company's board of directors. The Company received $340 from Solaris Water for the provision of services between February 2016 and July 2016, of which $337 was included in salaries, benefits and payroll taxes and $3 was included in selling, general and administrative expenses in the Consolidated Statement of Operations. The Company does not expect its employees to provide services to Solaris Water following the completion of this offering. As of December 31, 2016, the Company was due $0 from Solaris Water.
For the years ended December 31, 2016 and 2015, the Company incurred $37 and $87, respectively, of expenses related to travel services provided by Anejo Air Services, LLC ("Anejo"), an entity affiliated with Solaris Energy Capital, LLC, a member of the Company ("Solaris Energy Capital"). These expenses were included in selling, general and administrative expenses in the Consolidated Statement of Operations. As of December 31, 2016 and 2015, Anejo was due $9 and $16 from the Company, respectively, and was recorded under accounts payable in the Consolidated Balance Sheet.
The Company incurred $11 and $21 of administrative expenses that were paid on behalf of the Company by Solaris Energy Capital, during the twelve months ended December 31, 2016 and 2015, respectively. As of December 31, 2016 and 2015, Solaris Energy Capital was due $2 and $15 from the Company, respectively, and was recorded in prepaid expenses and other current assets in the Consolidated Balance Sheet.
All related party transactions are immaterial and have not been shown separately on the face of the financial statements.
14. Subsequent Events
The Company has evaluated events and transactions subsequent to the balance sheet date and through March 15, 2017, the date the financial statements were available to be issued.
In March 2017, two existing members that were assigned 21,052 and 6,316 units, respectively, paid off their applicable promissory notes and interest for $2.4 million and $0.7 million in cash, respectively.
F-54
Report of Independent Registered Public Accounting Firm
Board
of Directors and Stockholder of
Solaris Oilfield Infrastructure, Inc.
Houston, Texas
We have audited the accompanying balance sheet of Solaris Oilfield Infrastructure, Inc. (the "Company") as of February 2, 2017 (date of inception) and related notes. The balance sheet is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statement, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statement. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all material respects, the financial position of the Company as of February 2, 2017 in conformity with accounting principles generally accepted in the United States of America.
/s/ BDO USA, LLP
Houston,
Texas
February 9, 2017
F-55
SOLARIS OILFIELD INFRASTRUCTURE, INC.
BALANCE SHEET
(In whole dollars)
|
February 2, 2017 | |||
---|---|---|---|---|
ASSETS |
||||
Receivable from affiliate |
$ | 10 | ||
| | | | |
Total current assets |
10 | |||
| | | | |
Total assets |
$ | 10 | ||
| | | | |
| | | | |
| | | | |
LIABILITIES AND STOCKHOLDER'S EQUITY |
||||
Total liabilities |
$ | | ||
| | | | |
Commitments and contingencies |
||||
Stockholder's equity: |
||||
Common stock, $0.01 par value; 1,000 shares authorized, issued, and outstanding at February 2, 2017 |
10 | |||
| | | | |
Total stockholder's equity |
10 | |||
| | | | |
Total liabilities and stockholder's equity |
$ | 10 | ||
| | | | |
| | | | |
| | | | |
F-56
SOLARIS OILFIELD INFRASTRUCTURE, INC.
NOTES TO BALANCE SHEET
February 2, 2017
1. Organization and Background of Business
Solaris Oilfield Infrastructure, Inc., or the Company, was incorporated on February 2, 2017 as a Delaware corporation.
The Company was formed to serve as the issuer of an initial public offering of equity, or IPO. Concurrent with the completion of the IPO, the Company will serve as the new parent holding company of Solaris Oilfield Infrastructure, LLC, a Delaware limited liability company.
The balance sheet has been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). Separate Statements of Operations, Changes in Stockholder's Equity and of Cash Flows have not been presented because the Company had no business transactions or activities as of February 2, 2017, except for the initial capitalization of the Company which was funded by an affiliate. In this regard, general and administrative costs associated with the formation and daily management of the Company have been determined by the Company to be insignificant.
2. Summary of Significant Accounting Policies
Estimates
The preparation of the balance sheet, in accordance with GAAP, requires management to make estimates and assumptions that affect the amounts reported in the balance sheet and accompanying notes. Actual results could differ from those estimates.
Income Taxes
The Company is a corporation and is subject to U.S. federal and state income taxes. Income taxes are accounted for under the asset and liability method. The Company recognizes deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts and income tax basis of assets and liabilities and the expected benefits of utilizing net operating loss and tax credit carryforwards, using enacted tax rates in effect for the taxing jurisdiction in which the Company operates for the year in which those temporary differences are expected to be recovered or settled. The Company recognizes the financial statement effects of a tax position when it is more-likely-than-not, based on technical merits, that the position will be sustained upon examination. Net deferred tax assets are then reduced by a valuation allowance if the Company believes it more-likely-than-not such net deferred tax assets will not be realized. As of February 2, 2017, there are no income tax related balances reflected in our balance sheet.
3. Stockholder's Equity
The Company has authorized share capital of 1,000 common shares with $0.01 par value. On February 2, 2017, all 1,000 shares were issued and acquired by an affiliate for consideration of $10 note receivable from that affiliate. Each share has one voting right.
4. Subsequent Events
There have been no events subsequent to February 9, 2017 that would require additional adjustments to or disclosure in our financial statements.
F-57
Part II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other expenses of issuance and distribution
The following table sets forth an itemized statement of the amounts of all expenses (excluding underwriting discounts and commissions) payable by us in connection with the registration of the common stock offered hereby. With the exception of the SEC registration fee, FINRA filing fee and the NYSE listing fee, the amounts set forth below are estimates.
SEC registration fee |
$ | 15,375 | ||
FINRA filing fee |
19,024 | |||
NYSE listing fee |
30,000 | |||
Accounting and consulting fees and expenses |
100,000 | |||
Legal fees and expenses |
300,000 | |||
Printing and engraving expenses |
50,000 | |||
Transfer agent and registrar fees |
10,000 | |||
Miscellaneous |
90,000 | |||
| | | | |
Total |
$ | 614,399 | ||
| | | | |
| | | | |
| | | | |
Item 14. Indemnification of Directors and Officers
Our amended and restated certificate of incorporation provides that a director will not be liable to the corporation or its stockholders for monetary damages to the fullest extent permitted by the DGCL. In addition, if the DGCL is amended to authorize the further elimination or limitation of the liability of directors, then the liability of a director of the corporation, in addition to the limitation on personal liability provided for in our certificate of incorporation, will be limited to the fullest extent permitted by the amended DGCL. Our amended and restated bylaws will provide that the corporation will indemnify, and advance expenses to, any officer or director to the fullest extent authorized by the DGCL.
Section 145 of the DGCL provides that a corporation may indemnify directors and officers as well as other employees and individuals against expenses, including attorneys' fees, judgments, fines and amounts paid in settlement in connection with specified actions, suits and proceedings whether civil, criminal, administrative, or investigative, other than a derivative action by or in the right of the corporation, if they acted in good faith and in a manner they reasonably believed to be in or not opposed to the best interests of the corporation and, with respect to any criminal action or proceeding, had no reasonable cause to believe their conduct was unlawful. A similar standard is applicable in the case of derivative actions, except that indemnification extends only to expenses, including attorneys' fees, incurred in connection with the defense or settlement of such action and the statute requires court approval before there can be any indemnification where the person seeking indemnification has been found liable to the corporation. The statute provides that it is not exclusive of other indemnification that may be granted by a corporation's certificate of incorporation, bylaws, disinterested director vote, stockholder vote, agreement or otherwise.
Our amended and restated certificate of incorporation also contains indemnification rights for our directors and our officers. Specifically, our amended and restated certificate of incorporation provides that we shall indemnify our officers and directors to the fullest extent authorized by the DGCL. Furthermore, we may maintain insurance on behalf of our officers and directors against expense, liability or loss asserted incurred by them in their capacities as officers and directors.
II-1
We have obtained directors' and officers' insurance to cover our directors, officers and some of our employees for certain liabilities.
We have entered into written indemnification agreements with our directors and executive officers. Under these agreements, if an officer or director makes a claim of indemnification to us, either a majority of the independent directors or independent legal counsel selected by the independent directors must review the relevant facts and make a determination whether the officer or director has met the standards of conduct under Delaware law that would permit (under Delaware law) and require (under the indemnification agreement) us to indemnify the officer or director.
The underwriting agreement provides for indemnification by the underwriters of us and our officers and directors, and by us and the selling stockholders of the underwriters, for certain liabilities arising under the Securities Act or otherwise in connection with this offering.
Item 15. Recent Sales of Unregistered Securities
In connection with our incorporation in February 2017 under the laws of the State of Delaware, we issued 1,000 shares of our common stock to Solaris Oilfield Infrastructure, LLC for an aggregate purchase price of $10.00. These securities were offered and sold by us in reliance upon the exemption from the registration requirements provided by Section 4(a)(2) of the Securities Act. These shares were redeemed for nominal value in connection with our reorganization.
Item 16. Exhibits and financial statement schedules
See the Exhibit Index immediately preceding the signature page hereto, which is incorporated by reference as if fully set forth herein.
The undersigned registrant hereby undertakes to provide to the underwriters at the closing specified in the underwriting agreement certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
II-2
II-3
II-4
Exhibit Number |
Description | ||
---|---|---|---|
*23.3 | Consent of Vinson & Elkins L.L.P. (included as part of Exhibit 5.1 hereto) | ||
*24.1 |
Power of Attorney (included on the signature page of this Registration Statement) |
||
*101.INS |
XBRL Instance Document. |
||
*101.SCH |
XBRL Taxonomy Extension Schema Document. |
||
*101.CAL |
XBRL Taxonomy Extension Calculation Linkbase Document. |
||
*101.DEF |
XBRL Taxonomy Extension Definition Linkbase Document. |
||
*101.LAB |
XBRL Taxonomy Extension Labels Linkbase Document. |
||
*101.PRE |
XBRL Taxonomy Extension Presentation Linkbase Document. |
II-5
Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Houston, State of Texas, on November 7, 2017.
|
Solaris Oilfield Infrastructure, Inc. | |||
|
By: |
/s/ GREGORY A. LANHAM |
Each person whose signature appears below appoints Gregory A. Lanham, Kyle S. Ramachandran and Christopher M. Powell, and each of them, any of whom may act without the joinder of the other, as his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement and any Registration Statement (including any amendment thereto) for this offering that is to be effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933, as amended, and to file the same, with all exhibits thereto, and all other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he or she might or would do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed below by the following persons in the capacities indicated below as of November 7, 2017.
Name
|
Title
|
|
---|---|---|
/s/ GREGORY A. LANHAM Gregory A. Lanham |
Chief Executive Officer and Director (Principal Executive Officer) | |
/s/ KYLE S. RAMACHANDRAN Kyle S. Ramachandran |
Chief Financial Officer (Principal Financial Officer) |
|
/s/ LINDSAY R. BOURG Lindsay R. Bourg |
Chief Accounting Officer (Principal Accounting Officer) |
|
/s/ WILLIAM A. ZARTLER William A. Zartler |
Chairman |
II-6
Name
|
Title
|
|
---|---|---|
/s/ JAMES R. BURKE James R. Burke |
Director | |
/s/ EDGAR R. GIESINGER Edgar R. Giesinger |
Director |
|
/s/ W. HOWARD KEENAN, JR. W. Howard Keenan, Jr. |
Director |
|
/s/ F. GARDNER PARKER F. Gardner Parker |
Director |
|
/s/ A. JAMES TEAGUE A. James Teague |
Director |
II-7
Exhibit 1.1
7,000,000 Shares
SOLARIS OILFIELD INFRASTRUCTURE, INC.
Class A common stock
FORM OF UNDERWRITING AGREEMENT
[·], 2017
CREDIT SUISSE SECURITIES (USA) LLC,
GOLDMAN SACHS & CO. LLC
As Representatives of the Several Underwriters,
c/o Credit Suisse Securities (USA) LLC,
Eleven Madison Avenue,
New York, New York 10010-3629
c/o Goldman Sachs & Co. LLC
200 West Street
New York, New York 10282
Dear Sirs:
1. Introductory. Solaris Oilfield Infrastructure, Inc., a Delaware corporation (Company), agrees with the several Underwriters named in Schedule B hereto (Underwriters) to issue and sell to the several Underwriters 3,000,000 shares of its Class A common stock, par value $0.01 per share (Securities), and the stockholders listed in Schedule A hereto (Selling Stockholders) agree severally with the Underwriters to sell to the Underwriters an aggregate of 4,000,000 outstanding shares of Securities (such 7,000,000 shares of Securities being hereinafter referred to as the Firm Securities). The Selling Stockholders also agree to sell to the Underwriters, at the option (the Option) of the Underwriters, an aggregate of not more than 1,050,000 additional shares of Securities (Optional Securities), as set forth below. The Firm Securities and the Optional Securities are herein collectively called the Offered Securities.
The Offered Securities to be sold by the Selling Stockholders consist of Securities that are issuable upon redemption of units (Solaris Units) in Solaris Oilfield Infrastructure, LLC, a Delaware limited liability company (Solaris LLC), together with an equal number of shares of Class B common stock of the Company, pursuant to the Second Amended and Restated Limited Liability Company Agreement of Solaris LLC, dated as of May 11, 2017 (the Solaris LLC Agreement), immediately prior to the Closing Date on which such Offered Securities are to be sold (any such redemption being hereinafter referred to as a Redemption Transaction).
2. Representations and Warranties of the Company and the Selling Stockholders.
(a) The Company represents and warrants to, and agrees with, the several Underwriters that:
(i) Filing and Effectiveness of Registration Statement; Certain Defined Terms. The Company has filed with the Commission a registration statement on Form S-1 (No. 333-[·]) covering the registration of the Offered Securities under the Act, including a related preliminary prospectus or prospectuses. At any particular time, this initial registration statement, in the form then on file with the Commission, including all information contained in the registration statement (if any) pursuant to Rule 462(b) and then deemed to be a part of the initial registration statement, and all 430A Information and all 430C Information, that in any case has not then been superseded or modified, shall be referred to as the Initial Registration Statement. The Company may also have filed, or may file with the Commission, a Rule 462(b) registration statement covering the registration of Offered Securities. At any particular time, this Rule 462(b) registration statement,
in the form then on file with the Commission, including the contents of the Initial Registration Statement incorporated by reference therein and including all 430A Information and all 430C Information, that in any case has not then been superseded or modified, shall be referred to as the Additional Registration Statement.
As of the time of execution and delivery of this Agreement, the Initial Registration Statement has been declared effective under the Act and is not proposed to be amended. Any Additional Registration Statement has or will become effective upon filing with the Commission pursuant to Rule 462(b) and is not proposed to be amended. The Offered Securities all have been or will be registered under the Act pursuant to the Initial Registration Statement and, if applicable, the Additional Registration Statement.
For purposes of this Agreement:
430A Information, with respect to any registration statement, means information included in a prospectus and retroactively deemed to be a part of such registration statement pursuant to Rule 430A(b).
430C Information, with respect to any registration statement, means information included in a prospectus then deemed to be a part of such registration statement pursuant to Rule 430C.
Act means the Securities Act of 1933, as amended.
Applicable Time means [·] [a.m.][p.m.] (Eastern time) on the date of this Agreement.
Closing Date has the meaning defined in Section 3 hereof.
Commission means the Securities and Exchange Commission.
Effective Time with respect to the Initial Registration Statement or, if filed prior to the execution and delivery of this Agreement, the Additional Registration Statement, means the date and time as of which such Registration Statement was declared effective by the Commission or has become effective upon filing pursuant to Rule 462(c). If an Additional Registration Statement has not been filed prior to the execution and delivery of this Agreement but the Company has advised the Representatives that it proposes to file one, Effective Time with respect to such Additional Registration Statement means the date and time as of which such Registration Statement is filed and becomes effective pursuant to Rule 462(b).
Exchange Act means the Securities Exchange Act of 1934, as amended.
Final Prospectus means the Statutory Prospectus that discloses the public offering price, other 430A Information and other final terms of the Offered Securities and otherwise satisfies Section 10(a) of the Act.
General Use Issuer Free Writing Prospectus means any Issuer Free Writing Prospectus that is intended for general distribution to prospective investors, as evidenced by its being so specified in Schedule C to this Agreement.
Issuer Free Writing Prospectus means any issuer free writing prospectus, as defined in Rule 433, relating to the Offered Securities in the form filed or required to be filed with the Commission or, if not required to be filed, in the form retained in the Companys records pursuant to Rule 433(g).
Limited Use Issuer Free Writing Prospectus means any Issuer Free Writing Prospectus that is not a General Use Issuer Free Writing Prospectus.
The Initial Registration Statement and the Additional Registration Statement are referred to collectively as the Registration Statements and each individually as a Registration Statement. A Registration Statement with reference to a particular time means the Initial Registration Statement and any Additional Registration Statement as of such time. A Registration Statement without reference to a time means such Registration Statement as of its
Effective Time. For purposes of the foregoing definitions, 430A Information with respect to a Registration Statement shall be considered to be included in such Registration Statement as of the time specified in Rule 430A.
Rules and Regulations means the rules and regulations of the Commission.
Securities Laws means, collectively, the Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley), the Act, the Exchange Act, the Rules and Regulations, the auditing principles, rules, standards and practices applicable to auditors of issuers (as defined in Sarbanes-Oxley) promulgated or approved by the Public Company Accounting Oversight Board and, as applicable, the rules of the New York Stock Exchange and the NASDAQ Stock Market (Exchange Rules).
Statutory Prospectus with reference to a particular time means the prospectus included in a Registration Statement immediately prior to that time, including any 430A Information or 430C Information with respect to such Registration Statement. For purposes of the foregoing definition, 430A Information shall be considered to be included in the Statutory Prospectus as of the actual time that form of prospectus is filed with the Commission pursuant to Rule 424(b) or Rule 462(c) and not retroactively.
Testing-the-Waters Communication means any oral or written communication with potential investors undertaken in reliance on Section 5(d) of the Act.
Written Testing-the-Waters Communication means any Testing-the-Waters Communication that is a written communication within the meaning of Rule 405 under the Act.
Unless otherwise specified, a reference to a rule is to the indicated rule under the Act.
(ii) Compliance with Securities Act Requirements. (i) (A) At their respective Effective Times, (B) on the date of this Agreement and (C) on each Closing Date, each of the Initial Registration Statement and the Additional Registration Statement (if any) conformed and will conform in all material respects to the requirements of the Act and the Rules and Regulations, (ii) at their respective Effective Times, each of the Registration Statements did not and, as amended or supplemented, as applicable, will not, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and (iii) on its date, at the time of filing of the Final Prospectus pursuant to Rule 424(b) or (if no such filing is required) at the Effective Time of the Additional Registration Statement in which the Final Prospectus is included, and on each Closing Date, the Final Prospectus will conform in all respects to the requirements of the Act and the Rules and Regulations and will not include any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. The preceding sentence does not apply to statements in or omissions from any such document based upon written information furnished to the Company by any Underwriter through the Representatives specifically for use therein, it being understood and agreed that the only such information is that described as such in Section 8(b) hereof.
(iii) Ineligible Issuer Status. (i) At the time of the initial filing of the Initial Registration Statement and (ii) at the date of this Agreement, the Company was not and is not an ineligible issuer, as defined in Rule 405.
(iv) Emerging Growth Company Status. From the time of the initial confidential submission of the Initial Registration Statement to the Commission (or, if earlier, the first date on which the Company engaged directly or through any person authorized to act on its behalf in any Testing-the-Waters Communication) through the date hereof, the Company has been and is an emerging growth company, as defined in Section 2(a) of the Act (an Emerging Growth Company).
(v) General Disclosure Package. As of the Applicable Time, neither (i) the General Use Issuer Free Writing Prospectus(es) issued at or prior to the Applicable Time, the preliminary
prospectus, dated [·], 2017 (the Preliminary Prospectus) (which is the most recent Statutory Prospectus distributed to investors generally) and the other information, if any, stated in Schedule C to this Agreement to be included in the General Disclosure Package, all considered together (collectively, the General Disclosure Package), (ii) any individual Limited Use Issuer Free Writing Prospectus, when considered together with the General Disclosure Package, nor (iii) any individual Written Testing-the-Waters Communication, when considered together with the General Disclosure Package, included any untrue statement of a material fact or omitted to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. The preceding sentence does not apply to statements in or omissions from any Statutory Prospectus, any Issuer Free Writing Prospectus, or any Written Testing-the-Waters Communication in reliance upon and in conformity with written information furnished to the Company by any Underwriter through the Representatives specifically for use therein, it being understood and agreed that the only such information furnished by any Underwriter consists of the information described as such in Section 8(c) hereof.
(vi) Issuer Free Writing Prospectuses. Each Issuer Free Writing Prospectus, as of its issue date and at all subsequent times through the completion of the public offer and sale of the Offered Securities or until any earlier date that the Company notified or notifies the Representatives as described in the next sentence, did not, does not and will not include any information that conflicted, conflicts or will conflict with the information then contained in the Registration Statement. If at any time following issuance of an Issuer Free Writing Prospectus, at a time when a prospectus relating to the Offered Securities is (or but for the exemption of Rule 172 would be) required to be delivered under the Act by any Underwriter or dealer, there occurred or occurs an event or development as a result of which such Issuer Free Writing Prospectus conflicted or would conflict with the information then contained in the Registration Statement or as a result of which such Issuer Free Writing Prospectus, if republished immediately following such event or development, would include an untrue statement of a material fact or omitted or would omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, the Company will promptly notify the Representatives and will promptly amend or supplement such Issuer Free Writing Prospectus to eliminate or correct such conflict, untrue statement or omission.
(vii) Testing-the-Waters Communication. The Company (a) has not alone engaged in any Testing-the-Waters Communication and (b) has not authorized anyone other than the Representatives to engage in Testing-the-Waters Communications. The Company reconfirms that the Representatives have been authorized to act on its behalf in undertaking Testing-the-Waters Communication. The Company has not distributed any Written Testing-the-Waters Communication.
(viii) Good Standing of the Company. The Company has been duly incorporated and is existing and in good standing under the laws of the State of Delaware, with power and authority (corporate and other) to own its properties and conduct its business as described in the General Disclosure Package and the Final Prospectus; and the Company is duly qualified to do business as a foreign corporation in good standing in all other jurisdictions in which its ownership or lease of property or the conduct of its business requires such qualification, except where the failure to be duly qualified or in good standing would not, individually or in the aggregate, reasonably be expected to have a material adverse effect on the management, condition (financial or other), results of operations, business, properties or prospects of the Company and its subsidiaries taken as a whole (a Material Adverse Effect); all such jurisdictions are listed on Schedule D hereto.
(ix) Subsidiaries. Prior to giving effect to the transactions contemplated by this Agreement, the Company owns 25.9% of the issued and outstanding Solaris Units and the entities listed on Schedule E hereto are the only direct or indirect subsidiaries (as defined in Rule 1-02(w) of Regulation S-X) of the Company (references herein to Subsidiaries refer to
the Companys indirect and direct subsidiaries as listed on Schedule E). Each such subsidiary has been duly incorporated or formed and is existing and in good standing under the laws of the jurisdiction of its incorporation or formation, with corporate, limited liability company, limited partnership, and/or other similar power and authority to own its properties and conduct its business as described in the General Disclosure Package and the Final Prospectus; and each subsidiary listed on Schedule E hereto is duly qualified to do business as a foreign corporation or other entity in good standing in all other jurisdictions in which its ownership or lease of property or the conduct of its business requires such qualification, except where the failure to be duly qualified or in good standing would not, individually or in the aggregate, have a Material Adverse Effect; all such jurisdictions are listed on Schedule E hereto; all of the issued and outstanding capital stock or other ownership interests of each such Subsidiary has been duly authorized and validly issued and, in the case of any such corporation, is fully paid and nonassessable; and the capital stock or other ownership interests of each such Subsidiary owned by the Company, directly or indirectly, is owned free from liens, encumbrances and defects, other than those arising under the Credit Agreement, dated as of December 1, 2016, among Solaris LLC, the lenders thereto and Woodforest National Bank, as administrative agent, as amended by Amendment No. 1 thereto, dated as of May 17, 2017 (the Credit Agreement).
(x) Offered Securities. The Offered Securities and all other outstanding shares of capital stock of the Company, have been duly authorized; the authorized equity capitalization of the Company is as set forth in the General Disclosure Package and the Final Prospectus under the heading Capitalization; all outstanding shares of capital stock of the Company have been, and, when the Offered Securities have been delivered and paid for in accordance with this Agreement on each Closing Date, such Offered Securities will be, validly issued, fully paid and nonassessable, and will conform to the information in the General Disclosure Package and to the description of such Offered Securities contained in the Final Prospectus in all material respects; the stockholders of the Company have no preemptive rights with respect to the Securities; and none of the outstanding shares of capital stock of the Company have been issued in violation of any preemptive or similar rights of any security holder. Except as disclosed in the Registration Statement, the General Disclosure Package and the Final Prospectus there are no outstanding (A) securities or obligations of the Company convertible into or exchangeable for any capital stock of the Company, (B) warrants, rights or options to subscribe for or purchase from the Company any such capital stock or any such convertible or exchangeable securities or obligations or (C) obligations of the Company to issue or sell any shares of capital stock, any such convertible or exchangeable securities or obligations or any such warrants, rights or options. The Company has not, directly or indirectly, offered or sold any of the Offered Securities by means of any prospectus (within the meaning of the Act and the Rules and Regulations) or used any prospectus or made any offer (within the meaning of the Act and the Rules and Regulations) in connection with the offer or sale of the Offered Securities, in each case other than through any Preliminary Prospectus, the Final Prospectus or any Permitted Free Writing Prospectus.
(xi) No Finders Fee. Except as disclosed in the General Disclosure Package and the Final Prospectus, there are no contracts, agreements or understandings between the Company and any person that would give rise to a valid claim against the Company or any Underwriter for a brokerage commission, finders fee or other like payment in connection with this offering.
(xii) Registration Rights. Except as disclosed in the General Disclosure Package and the Final Prospectus and as set forth in the Registration Rights Agreement, dated May 17, 2017, by and among the Company, Solaris LLC and the other parties thereto, as filed with the Commission on May 23, 2017, as Exhibit 4.1 to the Companys Current Report on Form 8-K, there are no contracts, agreements or understandings between the Company and any person granting such person the right to require the Company to file a registration statement under the Act with respect to any securities of the Company owned or to be owned by such person or to require the Company to include such securities in the securities registered pursuant to a Registration Statement or in any securities being registered pursuant to any other registration statement filed by the Company under the Act (collectively, registration rights), and any person to whom the
Company has granted registration rights has agreed not to exercise such rights until after the expiration of the Lock-Up Period referred to in Section 5(l) hereof.
(xiii) Listing. Application has been made to the New York Stock Exchange for listing of the Offered Securities, and, on or before the First Closing Date, the Offered Securities will have been approved for listing on the New York Stock Exchange, subject to official notice of issuance.
(xiv) Absence of Further Requirements. No consent, approval, authorization, or order of, or filing or registration with, any person (including any governmental agency or body or any court) is required to be obtained or made by the Company for the consummation of the transactions contemplated by this Agreement in connection with the sale of the Offered Securities, except (i) such as have been obtained, (ii) where the failure of the Company to obtain or make any such consent, approval, authorization, order, filing or registration would not reasonably be expected to have a Material Adverse Effect, or (iii) such as have been made or as may be required under state or foreign securities or Blue Sky laws or by the Financial Industry Regulatory Authority (FINRA).
(xv) Title to Property. Except as otherwise disclosed in the General Disclosure Package and the Final Prospectus, the Company and each of its Subsidiaries have good and marketable title to all the real property (exclusive of easements, rights of way and other similar instruments) and the personal property reflected as owned in the financial statements referred to in Section 2(xxvi) hereof, in each case free and clear of any security interests, mortgages, liens, encumbrances, equities, claims and other defects, except (i) as disclosed in the General Disclosure Package and the Final Prospectus, (ii) as exist pursuant to the Credit Agreement, (iii) liens for real property taxes, assessments and other governmental charges that are not delinquencies or that are currently being contested in good faith by appropriate proceedings and (iv) such as do not materially interfere with the use made or proposed to be made of such property by the Company or such Subsidiary. The real property, improvements, equipment and personal property held under lease by the Company or any Subsidiary are held under valid and enforceable leases with no terms or provisions that would materially interfere with the use made or to be made thereof by them.
(xvi) Absence of Defaults and Conflicts Resulting from Transaction. The execution, delivery and performance of this Agreement, the issuance and sale of the Offered Securities and the application of the net proceeds therefrom as set forth in the General Disclosure Package and the Final Prospectus will not result in a breach or violation of any of the terms and provisions of, or constitute, or with the giving of notice or lapse of time, would constitute, a default under, or result in the imposition of any lien, charge or encumbrance upon any property or assets of the Company or any of its Subsidiaries pursuant to, (i) their respective certificate of formation, limited liability company agreement, limited partnership agreement, charter, or by-laws or similar organizational documents of the Company or any of its Subsidiaries, (ii) any statute, rule, regulation or order of any governmental agency or body or any court, domestic or foreign, having jurisdiction over the Company or any of its Subsidiaries or any of their properties, or (iii) any agreement or instrument to which the Company or any of its Subsidiaries is a party or by which the Company or any of its Subsidiaries is bound or to which any of the properties of the Company or any of its Subsidiaries is subject, except in the case of clauses (ii) and (iii) as would not reasonably be expected to have a Material Adverse Effect.
(xvii) Absence of Existing Defaults and Conflicts. Neither the Company nor any of its Subsidiaries is (i) in violation of its respective certificate of formation, limited liability company agreement, limited partnership agreement, charter, by-laws or similar organizational documents, (ii) in default (or with the giving of notice or lapse of time would be in default) under any existing obligation, agreement, covenant or condition contained in any indenture, loan agreement, mortgage, lease or other agreement or instrument to which any of them is a party or by which any of them is bound or to which any of the properties of any of them is subject, or (iii) in violation of any law or statute or any judgment, order, rule or regulation of any court or arbitrator or
governmental or regulatory authority, except, in the case of clauses (ii) and (iii) above, for any such default or violation that would not reasonably be expected to have a Material Adverse Effect.
(xviii) Authorization of Agreement. This Agreement has been duly authorized, executed and delivered by the Company.
(xix) Possession of Licenses and Permits. The Company and its Subsidiaries possess, and are in compliance with the terms of, all adequate certificates, authorizations, franchises, licenses and permits issued by appropriate federal, state, local or foreign regulatory bodies (collectively, Licenses) necessary or material to the conduct of the business in the manner described in the General Disclosure Package and the Final Prospectus to be conducted by them, except where the failure to have obtained the same would not reasonably be expected to have a Material Adverse Effect. The Company and its Subsidiaries are in compliance with the terms and conditions of all such Licenses, except where the failure to so comply would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect, and have not received any notice of proceedings relating to the revocation or modification of any Licenses that, if determined adversely to the Company or any of its Subsidiaries, would, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.
(xx) Absence of Labor Dispute. No labor dispute with the employees of the Company or any of its Subsidiaries exists or, to the knowledge of the Company, is imminent that would reasonably be expected to have a Material Adverse Effect or except as described in the General Disclosure Package and the Final Prospectus.
(xxi) Possession of Intellectual Property. The Company and its Subsidiaries own, possess or can acquire on reasonable terms sufficient rights to trademarks, trade names, patent rights, copyrights, domain names, trade secrets, know-how, rights in confidential information and other intellectual property and similar rights, including registrations and applications for registration thereof (collectively, Intellectual Property Rights) necessary or material to the conduct of the business now conducted or proposed to be conducted by them as described in the General Disclosure Package or the Final Prospectus, and the expected expiration of any such Intellectual Property Rights would not, individually or in the aggregate, have a Material Adverse Effect. Except as disclosed in the General Disclosure Package or the Final Prospectus (i) there is no material infringement, misappropriation or other violation of a third partys Intellectual Property Rights by the Company or its Subsidiaries; (ii) there is no pending or, to the knowledge of the Company, threatened action, suit, proceeding or claim by others challenging the Companys or any Subsidiarys rights in or to, or the violation of any of the terms of, any of their Intellectual Property Rights, and the Company is unaware of any facts which would form a reasonable basis for any such claim; (iii) there is no pending action, suit, proceeding or claim by others challenging the validity or enforceability of any Intellectual Property Rights owned by the Company, and the Company is unaware of any facts which would form a reasonable basis for any such action, suit, proceeding or claim; (iv) there is no pending or, to the knowledge of the Company, threatened action, suit, proceeding or claim by others that the Company or any Subsidiary infringes, misappropriates or otherwise violates or conflicts with any Intellectual Property Rights or other proprietary rights of others and the Company is unaware of any other fact which would form a reasonable basis for any such claim; and (v) none of the Intellectual Property Rights used by the Company or its Subsidiaries in their businesses has been obtained or is being used by the Company or its Subsidiaries in violation of any contractual obligation binding on the Company or any of its Subsidiaries in violation of the rights of any person, except in each case covered by clauses (i) through (v), except as would not, if determined adversely to the Company or any of its Subsidiaries, individually or in the aggregate, have a Material Adverse Effect.
(xxii) Environmental Laws. Except as disclosed in the General Disclosure Package and the Final Prospectus, (a)(i) neither the Company nor any of its Subsidiaries is in violation of, and does not have any liability under, any federal, state, local or non-U.S. statute, law, rule, regulation, ordinance, code, other requirement or rule of law (including common law), or decision
or order of any domestic or foreign governmental agency, governmental body or court, relating to pollution, to the use, handling, transportation, treatment, storage, discharge, disposal or release of Hazardous Substances (as defined below), to the protection or restoration of the environment or natural resources, to health and safety including as such relates to exposure to Hazardous Substances, and to natural resource damages (collectively, Environmental Laws) that would, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect, (ii) to the knowledge of the Company, neither the Company nor any of its Subsidiaries own, occupy, operate or use any real property contaminated with Hazardous Substances, (iii) neither the Company nor any of its Subsidiaries is conducting or funding any investigation, remediation, remedial action or monitoring of actual or suspected Hazardous Substances in the environment, (iv) to the knowledge of the Company, neither the Company nor any of its Subsidiaries is liable or allegedly liable for any release or threatened release of Hazardous Substances, including at any off site storage, treatment, or disposal site, (v) neither the Company nor any of its Subsidiaries is subject to any pending, or to the Companys knowledge, threatened, claim by any governmental agency or governmental body or person arising under Environmental Laws or relating to the release of or exposure to Hazardous Substances, and (vi) the Company and its Subsidiaries have received, are in compliance with all, and have no liability under any, permits, licenses, authorizations, identification numbers or other approvals required under applicable Environmental Laws to conduct their business, except in each case covered by clauses (ii) (vi) such as would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect; (b) to the knowledge of the Company and its Subsidiaries, there are no facts or circumstances that would reasonably be expected to result in a violation of, liability under, or claim pursuant to any Environmental Law that would reasonably be expected to have a Material Adverse Effect; and (c) in the ordinary course of its business, each of the Company and its Subsidiaries periodically evaluate the effect, including associated costs and liabilities, of Environmental Laws on the business, properties, results of operations and financial condition of the Company and its Subsidiaries, and, on the basis of such evaluation, the Company and its Subsidiaries have reasonably concluded that such Environmental Laws are not, individually or in the aggregate, reasonably expected to have a Material Adverse Effect. For purposes of this subsection Hazardous Substances means (A) petroleum and petroleum products, by-products or breakdown products, radioactive materials, asbestos-containing materials, and polychlorinated biphenyls, and (B) any other chemical, material or substance defined or regulated as toxic or hazardous or as a pollutant, contaminant or waste under Environmental Laws.
(xxiii) Accurate Disclosure. The statements in the General Disclosure Package and the Final Prospectus under the headings Certain Relationships and Related Party Transactions, Description of Capital Stock, BusinessLegal Proceedings, BusinessEnvironmental and Occupational Health and Safety Regulations, BusinessIntellectual Property, and Material U.S. Federal Income Tax Considerations For Non-U.S. Holders, insofar as such statements summarize legal matters, agreements, documents or proceedings discussed therein, are correct in all material respects. There are no contracts or documents which are required to be described in the Registration Statement or the Preliminary Prospectus pursuant to Form S-1 or to be filed as exhibits to the Registration Statement pursuant to Item 601 of Regulation S-K which have not been so described or filed as required, except for where the failure to describe or file such exhibits would not have a Material Adverse Effect.
(xxiv) Absence of Manipulation. The Company has not taken, directly or indirectly, any action that is designed to or that has constituted or that would reasonably be expected to cause or result in the stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Offered Securities.
(xxv) Statistical and Market-Related Data. Any third-party statistical and market-related data included in a Registration Statement, a Statutory Prospectus, or the General Disclosure Package, any Written Testing-the-Waters Communication or the Final Prospectus are based on or derived from sources that the Company believes to be reliable and accurate.
(xxvi) Internal Controls and Compliance with the Sarbanes-Oxley Act. Except as set forth in the General Disclosure Package and the Final Prospectus, the Company, its subsidiaries and the Companys Board of Directors (the Board) are in compliance with Sarbanes-Oxley and all applicable Exchange Rules. The Company maintains a system of internal controls, including, but not limited to, disclosure controls and procedures, internal controls over accounting matters and financial reporting, an internal audit function and legal and regulatory compliance controls (collectively, Internal Controls) that comply with the Securities Laws and are sufficient to provide reasonable assurances that (i) transactions are executed in accordance with managements general or specific authorizations, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with U.S. General Accepted Accounting Principles (GAAP) and to maintain accountability for assets, (iii) access to assets is permitted only in accordance with managements general or specific authorization, and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. The Internal Controls are overseen by the Audit Committee (the Audit Committee) of the Board in accordance with Exchange Rules. The Company has not disclosed or reported to the Audit Committee or the Board a significant deficiency, material weakness, change in Internal Controls or fraud involving management or other employees who have a significant role in Internal Controls on any violation of, or failure to comply with, the Securities Laws.
(xxvii) Litigation. Except as disclosed in the General Disclosure Package and the Final Prospectus, there are no pending actions, suits or proceedings (including any inquiries or investigations by any court or governmental agency or body, domestic or foreign) against or affecting the Company, any of its Subsidiaries or any of their respective properties that, if determined adversely to the Company or any of its Subsidiaries, would, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect, or would materially and adversely affect the ability of the Company to perform its obligations under this Agreement; and no such actions, suits or proceedings (including any inquiries or investigations by any court or governmental agency or body, domestic or foreign) are threatened or, to the Companys knowledge, contemplated.
(xxviii) Financial Statements. The historical financial statements included in each Registration Statement, the General Disclosure Package and the Final Prospectus present fairly in all material respects the financial position of the Company and its consolidated Subsidiaries as of the dates shown and their results of operations and cash flows of the Company and its Subsidiaries for the periods shown. Except as disclosed in the General Disclosure Package and the Final Prospectus, such financial statements comply as to form in all material respects with the applicable accounting requirements of Regulation S-X and have been prepared in all material respects in conformity with GAAP applied on a consistent basis throughout the periods involved except as otherwise stated therein. The unaudited pro forma financial statements and the related notes thereto included under the heading Unaudited Pro Forma Consolidated Financial Statements in the Preliminary Prospectus present fairly in all material respects the information contained therein and have been properly presented on the bases described therein, and the assumptions used in the preparation thereof are reasonable and the adjustment used therein are appropriate to give effect to the transactions and circumstances referred to therein. The pro forma adjustments comply as to form in all material respects with the applicable accounting requirements of Rule 11-02 of Regulation S-X under the Securities Act and the pro forma adjustments have been properly applied to the historical amounts in the compilation of those statements. BDO USA, LLP has certified the audited financial statements of the Company included in the Registration Statement, General Disclosure Package and the Final Prospectus, and is an independent registered public accounting firm with respect to the Company and its Subsidiaries within the Rules and Regulations and as required by the Act and the applicable rules and guidance from the Public Company Accounting Oversight Board (United States). The other financial and statistical data included in the Registration Statement, the General Disclosure Package and the Final Prospectus under the captions Summary Historical Consolidated Financial and Operating Data and Selected Historical Consolidated Financial and Operating Data present fairly, in all material
respects, the information shown therein and such data has been compiled on a basis consistent with the financial statements presented therein and the books and records of the Company. The Company does not have any material liabilities or obligations, direct or contingent (including any off-balance sheet obligations or any variable interest entities within the meaning of Financial Accounting Standards Board Interpretation No. 46), not disclosed in the Registration Statement, the General Disclosure Package and the Final Prospectus.
(xxix) Accounting Controls. The interactive data in eXtensible Business Reporting Language included or incorporated by reference in the General Disclosure Package and the Final Prospectus fairly present the information called for in all material respects and are prepared in accordance with the Commissions rules and guidelines applicable thereto.
(xxx) No Material Adverse Change in Business. Except as disclosed in the General Disclosure Package and the Final Prospectus, since the end of the period covered by the latest audited financial statements included in the General Disclosure Package and the Final Prospectus (i) there has been no change, nor any development or event involving a prospective change, in the condition (financial or otherwise), results of operations, business, properties or prospects of the Company and its Subsidiaries, taken as a whole, that is material and adverse, (ii) there has been no dividend or distribution of any kind declared, paid or made by the Company on any class of its capital stock, (iii) there has been no material adverse change in the capital stock, short-term indebtedness, long-term indebtedness, net current assets or net assets of the Company or any of its Subsidiaries, (iv) there has been no obligation, direct or contingent, that is material to the Company or any of its Subsidiaries taken as a whole, incurred by the Company or any of its Subsidiaries, except obligations incurred in the ordinary course of business and (v) neither the Company nor any of its Subsidiaries has sustained any material loss or interference with its business from fire, explosion, flood or other calamity, whether or not covered by insurance, or from any labor disturbance or dispute or any action, order or decree of any court or arbitrator or governmental or regulatory authority.
(xxxi) Investment Company Act. The Company is not and, after giving effect to the offering and sale of the Offered Securities and the application of the proceeds thereof as described in the General Disclosure Package and the Final Prospectus, will not be an investment company as defined in the Investment Company Act of 1940 (the Investment Company Act).
(xxxii) Ratings. No nationally recognized statistical rating organization as such term is defined for purposes of Section 3(a)(62) of the Exchange Act has imposed (or has informed the Company or any of its Subsidiaries that it is considering imposing) any condition (financial or otherwise) on the Companys or any of its Subsidiaries retaining any rating assigned to the Company or any of its Subsidiaries or any securities of the Company or any of its Subsidiaries or (ii) has indicated to the Company or any of its Subsidiaries that it is considering any of the actions described in Section 7(c)(ii) hereof.
(xxxiii) Insurance. Except as disclosed in the Registration Statement, the General Disclosure Package and the Final Prospectus, the Company and its Subsidiaries are insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as the Company reasonably believes are adequate for the conduct of their business. All such policies of insurance insuring the Company or any of its Subsidiaries or their respective businesses, assets, employees, officers and directors are in full force and effect. The Company and its Subsidiaries are in compliance with the terms of such policies and instruments in all material respects; and there are no material claims by the Company or its Subsidiaries under any such policy or instrument as to which any insurance company is denying liability or defending under a reservation of rights clause. Neither the Company nor any such Subsidiary has been refused any insurance coverage sought or applied for; neither the Company nor any such Subsidiary has any reason to believe that any of them will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not reasonably be expected to have a
Material Adverse Effect, except as disclosed in the Registration Statement, the General Disclosure Package and the Final Prospectus.
(xxxiv) Tax Returns. The Company and its Subsidiaries have filed all federal, state, local and non-U.S. tax returns that are required to be filed or have requested extensions thereof (except in any case in which the failure so to file would not reasonably be expected to have a Material Adverse Effect); and, except as set forth in the General Disclosure Package and the Final Prospectus, the Company and its Subsidiaries have paid all taxes (including any assessments, fines or penalties) required to be paid by them, except for any such taxes, assessments, fines or penalties currently being contested in good faith or as would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.
(xxxv) Certain Relationships and Related Party Transactions. No relationship, direct or indirect, exists between or among the Company or its Subsidiaries on the one hand, and the directors, officers, stockholders, customers or suppliers of the Company or its Subsidiaries on the other hand, which is required to be described in the General Disclosure Package which is not so described therein. The Final Prospectus will contain the same description of the matters set forth in the preceding sentence contained in the General Disclosure Package.
(xxxvi) Anti-Corruption. Neither the Company nor any of its Subsidiaries or affiliates, nor any director, officer or employee, nor, to the Companys knowledge, any agent or representative of the Company or of any of its Subsidiaries or affiliates, has taken or will take any action in furtherance of an offer, payment, promise to pay, or authorization or approval of the payment or giving of money, property, gifts or anything else of value, directly or indirectly, to any government official (including any officer or employee of a government or government-owned or controlled entity or of a public international organization, or any person acting in an official capacity for or on behalf of any of the foregoing, or any political party or party official or candidate for political office) to influence official action or secure an improper advantage; and the Company and its Subsidiaries and affiliates have conducted their businesses in compliance with applicable anti-corruption laws and will maintain policies and procedures designed to promote and achieve compliance with such laws and with the representation and warranty contained herein.
(xxxvii) Anti-Money Laundering. The operations of the Company and its Subsidiaries are and have been conducted at all times in compliance with all applicable financial recordkeeping and reporting requirements, including those of the Bank Secrecy Act, as amended by Title III of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (USA PATRIOT Act), and the applicable anti-money laundering statutes of jurisdictions where the Company and its Subsidiaries conduct business, the rules and regulations thereunder and any related or similar rules, regulations or guidelines, issued, administered or enforced by any governmental agency (collectively, the Anti-Money Laundering Laws), and no action, suit or proceeding by or before any court or governmental agency, authority or body or any arbitrator involving the Company or any of its Subsidiaries with respect to the Anti-Money Laundering Laws is pending or, to the best knowledge of the Company, threatened.
(xxxviii) Economic Sanctions.
A. Neither the Company nor any of its Subsidiaries, nor any director, officer, or employee thereof, nor, to the Companys knowledge, any agent, affiliate or representative of the Company or any of its Subsidiaries, is an individual or entity (Person) that is, or is owned or controlled by a Person that is:
1) the subject of any sanctions administered or enforced by the U.S. Department of Treasurys Office of Foreign Assets Control (OFAC), the United Nations Security Council (UN), the European Union (EU), Her Majestys Treasury (UK HMT), the Swiss Secretariat of Economic
Affairs (SECO), the Hong Kong Monetary Authority (HKMA), the Monetary Authority of Singapore (MAS), or other relevant sanctions authority (collectively, Sanctions), nor
2) located, organized or resident in a country or territory that is the subject of Sanctions (including, without limitation, Burma/Myanmar, Cuba, Iran, North Korea, Sudan and Syria).
B. The Company will not, directly or indirectly, use the proceeds of the offering, or lend, contribute or otherwise make available such proceeds to any subsidiary, joint venture partner or other Person:
1) to fund or facilitate any activities or business of or with any Person or in any country or territory that, at the time of such funding or facilitation, is the subject of Sanctions; or
2) in any other manner that will result in a violation of Sanctions by any Person (including any Person participating in the offering, whether as underwriter, advisor, investor or otherwise).
C. For the past five years, the Company and its Subsidiaries have not knowingly engaged in, are not now knowingly engaged in, and will not engage in, any dealings or transactions with any Person, or in any country or territory, that at the time of the dealing or transaction is or was the subject of Sanctions.
(xxxix) ERISA. Except, in each case, as would not, individually or in the aggregate, have a Material Adverse Effect, (i) the minimum funding standard under Section 302 of the Employee Retirement Income Security Act of 1974, as amended, and the regulations and published interpretations thereunder (ERISA), has been satisfied by each employee benefit plan (as defined in Section 3(3) of ERISA)with respect to which the Company or any of its Subsidiaries could have any liability (each an Employee Benefit Plan), and the trust forming part of each such plan which is intended to be qualified under Section 401 of the Internal Revenue Code of 1986, as amended (the Code), is so qualified and nothing has occurred since the date of such qualification which could reasonably be expected to result in the loss of such qualification; (ii) each of the Company and its Subsidiaries has fulfilled its obligations, if any, under Section 515 of ERISA; (iii) neither the Company nor any of its Subsidiaries maintain or are required to contribute to a welfare plan (as defined in Section 3(1) of ERISA) which provides retiree or other post-employment welfare benefits or insurance coverage (other than continuation coverage (as defined in Section 602 of ERISA)); (iv) each Employee Benefit Plan is in and has been operated in compliance with all applicable laws, including but not limited to ERISA and the Code; (v) no event has occurred (including a reportable event as such term is defined in Section 4043 of ERISA) and no condition exists with respect to each Employee Benefit Plan that would subject the Company or any of its Subsidiaries to any tax, fine, lien, penalty or liability imposed by ERISA or the Code; (vi) no non-exempt prohibited transaction as defined under Section 406 of ERISA or Section 4975 of the Code has occurred with respect to any Employee Benefit Plan; and (vii) neither the Company nor any of its Subsidiaries have incurred or would reasonably be expected to incur any liability under Title IV of ERISA.
(xl) Forward-Looking Statements. No forward-looking statement (within the meaning of Section 27A of the Act and Section 21E of the Exchange Act) contained in the Registration Statement, the Preliminary Prospectus or the Final Prospectus has been made or reaffirmed by the Company without a reasonable basis or has been disclosed by the Company other than in good faith.
(xli) Distributions. No Subsidiary of the Company is prohibited, directly or indirectly, from paying any dividends to the Company, from making any other distribution on such Subsidiarys capital stock, from repaying to the Company any loans or advances to such
Subsidiary from the Company or from transferring any of such Subsidiarys property or assets to the Company or any other Subsidiary of the Company, except as described in or contemplated by the Registration Statement, the General Disclosure Package and the Preliminary Prospectus or the Final Prospectus (exclusive of any amendment or supplement thereto).
(xlii) Contracts. Each contract, document or other agreement described or referred to in the Registration Statement, the Preliminary Prospectus and the Final Prospectus is in full force and effect and (assuming that such contracts and documents constitute the legal, valid and binding obligation of the other persons party thereto) is valid and enforceable by and against the parties thereto in accordance with its terms except as the enforceability thereof may be limited by (A) bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and similar laws relating to or affecting creditors rights generally and by general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law) and (B) public policy, applicable law relating to fiduciary duties and indemnification and an implied covenant of good faith and fair dealing, and except as would not reasonably be expected to have a Material Adverse Effect. Neither the Company nor, to the knowledge of the Company, any other party is in default in the observance or performance of any material term or obligation to be performed by it under any such agreement.
(xliii) FINRA. To the knowledge of the Company, there are no affiliations or associations between any member of FINRA and the Company, any of the Companys directors and executive officers or, as of the date hereof, the Companys 5% or greater securityholders, except as described in the Registration Statement, the Preliminary Prospectus or the Final Prospectus.
(xliv) Transfer Taxes. There are no transfer taxes or other similar fees or charges under Federal law or the laws of any state, or any political subdivision thereof, required to be paid in connection with the execution and delivery of this Agreement or the issuance by the Company or sale by the Company of the Securities.
(b) Each Selling Stockholder, severally and not jointly, represents and warrants to, and agrees with, the several Underwriters that:
(i) Title to Securities. Upon completion of the Redemption Transactions, and immediately prior to any Closing Date on which such Selling Stockholder is selling the Offered Securities, such Selling Stockholder will be the record and beneficial owner of the Offered Securities to be delivered by such Selling Stockholder on such Closing Date free and clear of all liens, encumbrances, restrictions on transfer or claims other than those arising under the Delaware General Corporation Law (the DGCL).
(ii) Valid Security Entitlement. Upon payment for the Offered Securities to be sold by such Selling Stockholder pursuant to this Agreement, delivery of such Offered Securities, as directed by the Underwriters, to Cede & Co. (Cede) or such other nominee as may be designated by The Depository Trust Company (DTC), registration of such Offered Securities in the name of Cede or such other nominee and the crediting of such Offered Securities on the books of DTC to securities accounts of the Underwriters (i) DTC shall be a protected purchaser of such Offered Securities within the meaning of Section 8-303 of the New York Uniform Commercial Code (the UCC), (ii) under Section 8-501 of the UCC, the Underwriters will acquire a valid security entitlement in respect of such Offered Securities, and (iii) an action based on an adverse claim (within the meaning of Sections 8-102 and 8-105 of the UCC) to such securities entitlement, whether framed in conversion, replevin, constructive trust, equitable lien or other theory may not be asserted against the Underwriters with respect to such security entitlement (assuming that the Underwriters are purchasing such Offered Securities without, and DTC has no, notice of any adverse claim). For purposes of this representation, such Selling Stockholder may assume that when such payment, delivery and crediting occur, (w) the securities intermediarys jurisdiction under Section 8-501 of the UCC with respect to DTC is the State of New York, (x) such Offered Securities will have been registered in the name of Cede or another nominee designated by DTC, in each case on the Companys share registry in accordance with its certificate of incorporation, bylaws and applicable law, (y) DTC will be registered as a clearing corporation within the meaning of Section 8-102 of the UCC, and (z) each Underwriter maintains a securities account with DTC and appropriate entries to those accounts of the several Underwriters on the records of DTC will have been made pursuant to the UCC.
(iii) Absence of Further Requirements. No consent, approval, authorization or order of, or filing with, any governmental agency or body or any court having jurisdiction over such Selling Stockholder or the property or assets of such Selling Stockholder is required to be obtained or made by such Selling Stockholder for the consummation of the transactions contemplated by this Agreement in connection with the offering and sale of the Offered Securities sold by the Selling Stockholders, except (A) such as have been or, prior to the First Closing Date will be, obtained or made, (B) for the registration of the Offered Securities under the Act and such consents, approvals, authorizations, orders, filings, registrations or qualifications as may be required under the Exchange Act and applicable state securities laws in connection with the purchase and sale of the Offered Securities by the Underwriters, (C) for such that, if not obtained, have not or would not, in the aggregate, reasonably be expected to have a material adverse effect on the ability of such Selling Stockholder to consummate the transactions contemplated by this Agreement and (D) as described in the Registration Statement, the General Disclosure Package and the Final Prospectus.
(iv) Absence of Defaults and Conflicts Resulting from Transaction. The execution, delivery and performance of this Agreement and the consummation of the transactions therein and herein contemplated will not result in a breach or violation of any of the terms and provisions of, or constitute a default under, or result in the imposition of any lien, charge or encumbrance upon any Offered Securities to be sold by such Selling Stockholder pursuant to, (i) any statute, any rule, regulation or order of any governmental agency or body or any court having jurisdiction over such Selling Stockholder or any agreement or instrument to which such Selling Stockholder is a party or by which such Selling Stockholder is bound, or (ii) the charter or by-laws of such Selling Stockholder (if a corporation) or the constituent documents of such Selling Stockholder (if not a natural person or a corporation), except in the case of clause (i) above, for any default or violation that would not, in the aggregate, reasonably be expected to have a material adverse effect on the ability of such Selling Stockholder to consummate the transactions contemplated by this Agreement.
(v) Final Prospectus. On its date, at the time of filing of the Final Prospectus pursuant to Rule 424(b) or (if no such filing is required) at the Effective Time of the Additional Registration Statement in which the Final Prospectus is included, and on each Closing Date, the Final Prospectus will not include any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading. The preceding sentence applies only to written information furnished to the Company by such Selling Stockholder specifically for use in the Final Prospectus, it being understood and agreed that the only such information is that described as such in Section 8(b) hereof.
(vi) General Disclosure Package. As of the Applicable Time, neither (i) the General Use Issuer Free Writing Prospectus(es) issued at or prior to the Applicable Time, the General Disclosure Package), (ii) any individual Limited Use Issuer Free Writing Prospectus, when considered together with the General Disclosure Package, nor (iii) any individual Written Testing-the-Waters Communication, when considered together with the General Disclosure Package, included any untrue statement of a material fact or omitted to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. The preceding sentence applies only to written information furnished to the Company by such Selling Stockholder specifically for use in the General Disclosure Package, any individual Limited Use Issuer Free Writing Prospectus or any Testing-the-Waters Communication, it being understood and agreed that the only such information is that described as such in Section 8(b) hereof.
(vii) Authorization of Agreement. This Agreement has been duly authorized, executed and delivered by such Selling Stockholder.
(viii) No Finders Fee. Except as disclosed in the General Disclosure Package and the Final Prospectus, there are no contracts, agreements or understandings between such Selling Stockholder and any person that would give rise to a valid claim against such Selling Stockholder or any Underwriter for a brokerage commission, finders fee or other like payment in connection with this offering.
(ix) Absence of Manipulation. Such Selling Stockholder has not taken, directly or indirectly, any action that is designed to or that has constituted or that would reasonably be expected to cause or result in the stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Offered Securities.
(x) No Distribution of Offering Material. Such Selling Stockholder has not distributed and will not distribute any prospectus or other offering material in connection with the offering and sale of the Offered Securities.
(xi) ERISA. Such Selling Stockholder is not (i) an employee benefit plan subject to Title I of the Employee Retirement Income Security Act of 1974, as amended (ERISA), (ii) a plan or account subject to Section 4975 of the Code or (iii) an entity deemed to hold plan assets of any such plan or account under Section 3(42) of ERISA, 29 C.F.R. 2510.3-101, or otherwise.
(xii) Testing-the-Waters Communication. Such Selling Stockholder has not alone engaged in any Testing-the-Waters Communication.
(xiii) No Undisclosed Material Information. The sale of the Offered Securities by such Selling Stockholder pursuant to this Agreement is not prompted by any material information concerning the Company or any of its subsidiaries that is not set forth the General Disclosure Package and the Final Prospectus.
3. Purchase, Sale and Delivery of Offered Securities. On the basis of the representations, warranties and agreements and subject to the terms and conditions set forth herein, the Company and each Selling Stockholder agree, severally and not jointly, to sell to each Underwriter, and each Underwriter agrees, severally and not jointly, to purchase from the Company and each Selling Stockholder, at a purchase price of $[·] per share, that number of Firm Securities (subject to adjustment by the Representatives in their discretion to eliminate fractions) obtained by multiplying 3,000,000 Firm Securities in the case of the Company and the number of Firm Securities set forth opposite the name of such Selling Stockholder in Schedule A hereto, in the case of a Selling Stockholder, in each case by a fraction the numerator of which is the number of Firm Securities set forth opposite the name of such Underwriter in Schedule B hereto and the denominator of which is the total number of Firm Securities.
The Company and the Selling Stockholders will deliver the Firm Securities to or as instructed by the Representatives for the accounts of the several Underwriters in a form reasonably acceptable to the Representatives against payment of the purchase price in Federal (same day) funds by official bank check or checks or wire transfer to an account at a bank acceptable to the Representatives drawn to the order of the Company, at the office of Latham & Watkins LLP, 811 Main Street, Suite 3700, Houston, Texas 77002, at 9:00 am (Eastern Time), on [·], 2017, or at such other time not later than seven full business days thereafter as the Representatives and the Company determine, such time being herein referred to as the First Closing Date. For purposes of Rule 15c6-1 under the Securities Exchange Act of 1934, the First Closing Date (if later than the otherwise applicable settlement date) shall be the settlement date for payment of funds and delivery of securities for all the Offered Securities sold pursuant to the offering. Delivery of the Firm Securities will be made through the facilities of the DTC unless the Representatives shall otherwise instruct.
In addition, upon written notice from the Representatives given to the Company and the Selling Stockholders from time to time not more than 30 days subsequent to the date of the Final Prospectus, the Underwriters may purchase all or less than all of the Optional Securities at the purchase price per Security to be paid for the Firm Securities. Such notice shall set forth (i) the aggregate number of shares of Optional Securities to be sold by the Company as to which the Underwriters are exercising the option and (ii) the time, date and place at which the Optional Securities will be delivered (each time for the delivery of and payment for the Optional Securities being herein referred to as an Optional Closing Date, which may be the First Closing Date) (the First Closing Date and each Optional Closing Date, if any, being sometimes referred to as a Closing Date). Each Selling Stockholder agrees to sell to the Underwriters the number of shares set forth opposite the names of such Selling Stockholder in Schedule A hereto under the caption Number of Optional Securities to be Sold. Such Optional Securities shall be purchased from the Selling Stockholders, severally and not jointly, for the account of each Underwriter in the same proportion as the number of Firm Securities set forth opposite such Underwriters name bears to the total number of Firm Securities (subject to adjustment by the Representatives to eliminate fractions). No Optional Securities shall be sold or delivered unless the Firm Securities previously have been, or simultaneously are, sold and delivered. The right to purchase the Optional Securities or any portion thereof may be exercised from time to time and to the extent not previously exercised may be surrendered and terminated at any time upon notice by the Representatives to the Company and the Selling Stockholders.
Each Optional Closing Date shall be determined by the Representatives but shall be not later than five full business days after written notice of election to purchase Optional Securities is given. The Selling Stockholders will deliver the Optional Securities being purchased on each Optional Closing Date to or as instructed by the Representatives for the accounts of the several Underwriters in a form reasonably acceptable to the Representatives, against payment of the purchase price therefor in Federal (same day) funds by official
bank check or checks or wire transfer to an account at a bank acceptable to the Representatives drawn to the order of the Company, at the above office of Latham & Watkins LLP. The delivery of any Optional Securities will be made through the facilities of the DTC unless the Representatives shall otherwise instruct.
4. Offering by Underwriters. It is understood that the several Underwriters propose to offer the Offered Securities for sale to the public as set forth in the Final Prospectus.
5. Certain Agreements of the Company and the Selling Stockholders. The Company and each of the Selling Stockholders agrees with the several Underwriters that:
(a) Additional Filings. The Company will file the Final Prospectus, in a form approved by the Representatives, with the Commission pursuant to and in accordance with subparagraph (1) (or, if applicable and if consented to by the Representatives, subparagraph (4)) of Rule 424(b) not later than the earlier of (A) the second business day following the execution and delivery of this Agreement or (B) the fifteenth business day after the Effective Time of the Initial Registration Statement. The Company will advise the Representatives promptly of any such filing pursuant to Rule 424(b) and provide satisfactory evidence to the Representatives of such timely filing. If an Additional Registration Statement is necessary to register a portion of the Offered Securities under the Act but the Effective Time thereof has not occurred as of the execution and delivery of this Agreement, the Company will file the additional registration statement or, if filed, will file a post-effective amendment thereto with the Commission pursuant to and in accordance with Rule 462(b) on or prior to 10:00 P.M., New York time, on the date of this Agreement or, if earlier, on or prior to the time the Final Prospectus is finalized and distributed to any Underwriter, or will make such filing at such later date as shall have been consented to by the Representatives.
(b) Filing of Amendments: Response to Commission Requests. The Company will promptly advise the Representatives of any proposal to amend or supplement at any time the Initial Registration Statement, any Additional Registration Statement or any Statutory Prospectus and will not effect such amendment or supplementation without the Representatives consent; and the Company will also advise the Representatives promptly of (i) the effectiveness of any Additional Registration Statement (if its Effective Time is subsequent to the execution and delivery of this Agreement), (ii) any amendment or supplementation of a Registration Statement or any Statutory Prospectus, (iii) any request by the Commission or its staff for any amendment to any Registration Statement, for any supplement to any Statutory Prospectus or for any additional information, (iv) the institution by the Commission of any stop order proceedings in respect of a Registration Statement or the threatening of any proceeding for that purpose, and (v) the receipt by the Company of any notification with respect to the suspension of the qualification of the Offered Securities in any jurisdiction or the institution or threatening of any proceedings for such purpose. The Company will use its best efforts to prevent the issuance of any such stop order or the suspension of any such qualification and, if issued, to obtain as soon as possible the withdrawal thereof.
(c) Continued Compliance with Securities Laws. If, at any time when a prospectus relating to the Offered Securities is (or but for the exemption in Rule 172 would be) required to be delivered under the Act by any Underwriter or dealer, any event occurs as a result of which the Final Prospectus as then amended or supplemented would include an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, or if it is necessary at any time to amend the Registration Statement or supplement the Final Prospectus to comply with the Act, the Company will promptly notify the Representatives of such event and will promptly prepare and file with the Commission and furnish, at its own expense, to the Underwriters and the dealers and any other dealers upon request of the Representatives, an amendment or supplement which will correct such statement or omission or an amendment which will effect such compliance. Neither the Representatives consent to, nor the Underwriters delivery of, any such amendment or supplement shall constitute a waiver of any of the conditions set forth in Section 7 hereof.
(d) Testing-the-Waters Communication. If at any time following the distribution of any Written Testing-the-Waters Communication there occurred or occurs an event or development as a result of which such Written Testing-the-Waters Communication included or would include an untrue statement of a material fact or omitted or would omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances existing at that subsequent time, not misleading, the Company will promptly notify the Representatives and will promptly amend or supplement, at its own expense, such Written Testing-the-Waters Communication to eliminate or correct such statement or omission.
(e) Rule 158. As soon as practicable, but not later than the Availability Date (as defined below), the Company will make generally available to its security holders an earnings statement covering a period of at least 12 months beginning after the Effective Time of the Initial Registration Statement (or, if later, the Effective Time of the Additional Registration Statement) which will satisfy the provisions of Section 11(a) of the Act and Rule 158 under the Act. For the purpose of the preceding sentence, Availability Date means the day after the end of the fourth fiscal quarter following the fiscal quarter that includes such Effective Time on which the Company is required to file its Form 10-Q for such fiscal quarter except that, if such fourth fiscal quarter is the last quarter of the Companys fiscal year, Availability Date means the day after the end of such fourth fiscal quarter on which the Company is required to file its Form 10-K.
(f) Furnishing of Prospectuses. The Company will furnish to the Representatives copies of each Registration Statement (three of which will be signed and will include all exhibits), each related Statutory Prospectus, and, so long as a prospectus relating to the Offered Securities is (or but for the exemption in Rule 172 would be) required to be delivered under the Act, the Final Prospectus and all amendments and supplements to such documents, in each case in such quantities as the Representatives request. The Final Prospectus shall be so furnished within two business days following the execution and delivery of this agreement, unless otherwise agreed by the Company and the Representatives. All other such documents shall be so furnished as soon as available, unless otherwise agreed by the Company and the Representatives. The Company will pay the expenses of printing and distributing to the Underwriters all such documents.
(g) Blue Sky Qualifications. The Company shall cooperate with the Underwriters and counsel for the Underwriters to qualify or register the Offered Securities for resale under (or obtain exemptions from the application of) the state securities or Blue Sky laws of those jurisdictions designated by the Underwriters, shall comply with such laws and shall continue such qualifications, registrations and exemptions in effect so long as required for the distribution of the Offered Securities. Notwithstanding the foregoing, the Company shall not be required to qualify as a foreign corporation or to take any action that would subject it to general service of process or taxation in any such jurisdiction where it is not presently qualified or subject to taxation.
(h) Reporting Requirements. During the period of five years hereafter, the Company will furnish to the Representatives and, upon request, to each of the other Underwriters, as soon as practicable after the end of each fiscal year, a copy of its annual report to stockholders for such year; and the Company will furnish to the Representatives (i) as soon as available, a copy of each report and any definitive proxy statement of the Company filed with the Commission under the Exchange Act or mailed to stockholders, and (ii) from time to time, such other information concerning the Company as the Representatives may reasonably request. However, so long as the Company is subject to the reporting requirements of either Section 13 or Section 15(d) of the Exchange Act and is timely filing reports with the Commission on its Electronic Data Gathering, Analysis and Retrieval system (EDGAR), it is not required to furnish such reports or statements to the Underwriters.
(i) Payment of Expenses. The Company agrees with the several Underwriters that the Company will pay all expenses incident to the performance of the obligations of the Company under this Agreement, including but not limited to (i) any filing fees and reasonable attorneys fees and expenses incurred by the Company or the Underwriters in connection with qualifying or registering (or obtaining exemptions from the qualification or registration of) all or any part of the Offered Securities
for offer and sale under the state securities or Blue Sky laws of such jurisdictions as the Representatives designate and the preparation and printing of memoranda relating thereto, (ii) the filing fees incident to, and the reasonable fees and expenses of counsel for the Underwriters up to $30,000, in connection with FINRAs review and approval of the Underwriters participation in the offering and distribution of the Offered Securities, (iii) fees and expenses incident to listing the Offered Securities on the New York Stock Exchange, (iv) fees and expenses in connection with the registration of the Offered Securities under the Exchange Act, (v) expenses incurred in distributing preliminary prospectuses, the Final Prospectus (including any amendments and supplements thereto) and the Registration Statement and exhibits thereto to the Underwriters and expenses incurred for preparing, printing and distributing any Issuer Free Writing Prospectuses to investors or prospective investors and (vi) all other fees, costs and expenses referred to in Item 13 of Part II of the Registration Statement. The Company will also pay or reimburse the Underwriters (to the extent incurred by them) for costs and expenses of the Companys officers and employees and any other expenses of the Company relating to investor presentations or any road show in connection with the offering and sale of the Offered Securities including, without limitation, any travel expenses of the Companys officers and employees and any other expenses of the Company, including 50% of the cost of the chartering of airplanes. It is understood, however, that except as provided in this Section 5(i) and Sections 8 and 10 hereof, the Underwriters will pay all of their own costs and expenses, including the fees of their counsel and any road show expenses incurred by them (other than costs and expenses incurred by the Underwriters on behalf of the Company).
(j) Use of Proceeds. The Company will use the net proceeds received by it in connection with this offering in the manner described in the Use of Proceeds section of the General Disclosure Package and the Final Prospectus and, except as disclosed in the General Disclosure Package and the Final Prospectus, the Company does not intend to use any of the proceeds from the sale of the Offered Securities hereunder to repay any outstanding debt owed to any affiliate of any Underwriter.
(k) Absence of Manipulation. The Company and the Selling Stockholders severally and not jointly agree that they will not take, directly or indirectly, any action designed to or that would constitute or that might reasonably be expected to cause or result in, stabilization or manipulation of the price of any securities of the Company to facilitate the sale or resale of the Offered Securities.
(l) Restriction on Sale of Securities by the Company. For the period specified below (the Lock-Up Period), the Company will not, directly or indirectly, take any of the following actions with respect to its Securities or any securities convertible into or exchangeable or exercisable for any of its Securities (Lock-Up Securities): (i) offer, sell, issue, contract to sell, pledge or otherwise dispose of Lock-Up Securities (other than the Offered Securities and shares issued pursuant to employee benefit plans, qualified stock option plans or other employee compensation plans existing on the date hereof and described in the Preliminary Prospectus or the General Disclosure Package), (ii) offer, sell, issue, contract to sell, contract to purchase or grant any option, right or warrant to purchase Lock-Up Securities (other than the grant of options pursuant to employee benefit plans, option plans, qualified stock option plans or other employee compensation plans existing on the date hereof and described in the Preliminary Prospectus or the General Disclosure Package), (iii) enter into any swap, hedge or any other agreement that transfers, in whole or in part, the economic consequences of ownership of Lock-Up Securities, (iv) establish or increase a put equivalent position or liquidate or decrease a call equivalent position in Lock-Up Securities within the meaning of Section 16 of the Exchange Act, (v) file with the Commission a registration statement under the Act relating to Lock-Up Securities, or publicly disclose the intention to take any such action, without the prior written consent of the Representatives, except (x) issuances of Lock-Up Securities pursuant to the conversion or exchange of convertible or exchangeable securities or the exercise of warrants or options, in each case outstanding on the date hereof, (y) the filing of a registration statement on Form S-8 relating to, and the issuance and sale of Lock-Up Securities pursuant to, the terms of a plan described in the General Disclosure Package and the Final Prospectus, and (z) issuances of Lock-Up Securities issued as consideration for the acquisition of equity interests or assets of any person, or the acquiring by the Company by any other manner of any business, properties, assets, or persons, in one transaction or a series of related transactions or the filing of a registration statement related to such Lock-Up Securities;
provided that (A) no more than an aggregate of 10% of the number of shares of the Companys capital stock outstanding as of the First Closing Date are issued as consideration in connection with all such acquisitions and (B) prior to the issuance of such shares of the Companys capital stock each recipient of such shares agrees in writing to be subject to the lock-up described in this Section 5(l) for the remaining term of the Lock-Up Period. The initial Lock-Up Period will commence on the date hereof and continue for 90 days after the date hereof or such earlier date that the Representatives consent to in writing.
6. Free Writing Prospectuses. The Company represents and agrees that, unless it obtains the prior consent of the Representatives, and each Underwriter represents and agrees that, unless it obtains the prior consent of the Company and the Representatives, it has not made and will not make any offer relating to the Offered Securities that would constitute an Issuer Free Writing Prospectus, or that would otherwise constitute a free writing prospectus, as defined in Rule 405, required to be filed with the Commission. Any such free writing prospectus consented to by the Company and the Representatives is hereinafter referred to as a Permitted Free Writing Prospectus. The Company and the Representatives agree that any such Permitted Free Writing Prospectus is listed on Schedule C hereto. The Company represents that it has treated and agrees that it will treat each Permitted Free Writing Prospectus as an issuer free writing prospectus, as defined in Rule 433, and has complied and will comply with the requirements of Rules 164 and 433 applicable to any Permitted Free Writing Prospectus, including timely Commission filing where required, legending and record keeping. The Company represents that it has satisfied and agrees that it will satisfy the conditions in Rule 433 to avoid a requirement to file with the Commission any electronic road show.
7. Conditions of the Obligations of the Underwriters. The obligations of the several Underwriters to purchase and pay for the Firm Securities on the First Closing Date and the Optional Securities to be purchased on each Optional Closing Date will be subject to the accuracy of the representations and warranties of the Company and the Selling Stockholders herein (as though made on such Closing Date), to the accuracy of the statements of Company officers made pursuant to the provisions hereof, to the performance by the Company and the Selling Stockholders of their obligations hereunder and to the following additional conditions precedent:
(a) BDO Comfort Letter. The Representatives shall have received a comfort letter, dated the date hereof, of BDO USA, LLP in form and substance satisfactory to the Representatives, covering the financial information in the Registration Statements, the General Disclosure Package and the Final Prospectus and other customary matters. In addition, on each Closing Date, the Underwriters shall have received from such accountant a bring-down comfort letter dated such Closing Date addressed to the Underwriters, in form and substance satisfactory to the Representatives, in the form of the comfort letter delivered on the date hereof, except that (i) it shall cover the financial information in the Registration Statement and the Final Prospectus and any amendment or supplement thereto and (ii) procedures shall be brought down to a date no more than three (3) days prior to such Closing Date.
(b) Effectiveness of Registration Statement. If the Effective Time of the Additional Registration Statement (if any) is not prior to the execution and delivery of this Agreement, such Effective Time shall have occurred not later than 10:00 P.M., New York time, on the date of this Agreement or, if earlier, the time the Final Prospectus is finalized and distributed to any Underwriter, or shall have occurred at such later time as shall have been consented to by the Representatives. The Final Prospectus shall have been filed with the Commission in accordance with the Rules and Regulations and Section 5(a) hereof. Prior to such Closing Date, no stop order suspending the effectiveness of a Registration Statement shall have been issued and no proceedings for that purpose shall have been instituted or, to the knowledge of the Company or the Representatives, shall be contemplated by the Commission.
(c) No Material Adverse Change. Subsequent to the execution and delivery of this Agreement, there shall not have occurred (i) any change, or any development or event involving a prospective change, in the condition (financial or otherwise), results of operations, business, properties or prospects of the Company and its Subsidiaries taken as a whole which, in the judgment of the Representatives, is
material and adverse and makes it impractical or inadvisable to market the Offered Securities; (ii) any downgrading in the rating of any debt securities of the Company by any nationally recognized statistical rating organization (as defined in Section 3(a)(62) of the Exchange Act), or any public announcement that any such organization has under surveillance or review its rating of any debt securities of the Company (other than an announcement with positive implications of a possible upgrading, and no implication of a possible downgrading, of such rating) or any announcement that the Company has been placed on negative outlook; (iii) any change in U.S. or international financial, political or economic conditions or currency exchange rates or exchange controls the effect of which is such as to make it, in the judgment of the Representatives, impractical to market or to enforce contracts for the sale of the Offered Securities, whether in the primary market or in respect of dealings in the secondary market; (iv) any suspension or material limitation of trading in securities generally on the New York Stock Exchange, or any setting of minimum or maximum prices for trading on such exchange; (v) or any suspension of trading of any securities of the Company on any exchange or in the over-the-counter market; (vi) any banking moratorium declared by any U.S. federal or New York authorities; (vii) any major disruption of settlements of securities, payment or clearance services in the United States or any other country where such securities are listed or (viii) any attack on, outbreak or escalation of hostilities or act of terrorism involving the United States, any declaration of war by Congress or any other national or international calamity or emergency if, in the judgment of the Representatives, the effect of any such attack, outbreak, escalation, act, declaration, calamity or emergency is such as to make it impractical or inadvisable to market the Offered Securities or to enforce contracts for the sale of the Offered Securities.
(d) Opinion of Counsel for the Company. The Representatives shall have received an opinion, dated such Closing Date, of Vinson & Elkins L.L.P., as to the matters described in Schedule F hereto
(e) Opinion of Counsel for the Selling Stockholders. The Representatives shall have received an opinion, dated such Closing Date, of (i) the respective counsel for each of the Selling Stockholders (other than Yorktown Energy Partners X, L.P.), as to the matters described in Schedule G hereto and (ii) Thompson & Knight LLP, counsel for Yorktown Energy Partners X, L.P., as to the matters described in Schedule H hereto.
(f) Opinion of Counsel for Underwriters. The Representatives shall have received from Latham & Watkins LLP, counsel for the Underwriters, such opinion or opinions, dated such Closing Date, with respect to such matters as the Representatives may require, and the Selling Stockholders and the Company shall have furnished to such counsel such documents as they request for the purpose of enabling them to pass upon such matters.
(g) Officers Certificate. The Representatives shall have received a certificate, dated such Closing Date,: (i) of an executive officer of the Company and a principal financial or accounting officer of the Company in which such officers shall state that: the representations and warranties of the Company in this Agreement are true and correct; the Company has complied with all agreements and satisfied all conditions on its part to be performed or satisfied hereunder at or prior to such Closing Date; no stop order suspending the effectiveness of any Registration Statement has been issued and no proceedings for that purpose have been instituted or, to the best of their knowledge and after reasonable investigation, are contemplated by the Commission; the Additional Registration Statement (if any) satisfying the requirements of subparagraphs (1) and (3) of Rule 462(b) was timely filed pursuant to Rule 462(b), including payment of the applicable filing fee in accordance with Rule 111(a) or (b) of Regulation S-T of the Commission; and, subsequent to the date of the most recent financial statements in the General Disclosure Package and the Final Prospectus, there has been no material adverse change, nor any development or event involving a prospective material adverse change, in the condition (financial or otherwise), results of operations, business, properties or prospects of the Company and its Subsidiaries taken as a whole except as set forth in the General Disclosure Package, the Final Prospectus or as described in such certificate. (ii) of an authorized officer of each Selling Stockholder in which such officer, in such capacity, shall state that (i) the representations and warranties of each Selling Stockholder set forth in Section 2(b) are true and correct on and as of such Closing Date and (ii) each Selling Stockholder has complied with all its agreements contained herein and has satisfied all the conditions on its part to be performed or satisfied hereunder at or prior to such Closing Date.
(h) Lock-Up Agreements. On or prior to the date hereof, the Representatives shall have received lockup letters in the form of Exhibit A from each of the parties listed on Schedule G hereto.
The Selling Stockholders and Company will furnish the Representatives with any additional opinions, certificates, letters and documents as the Representatives reasonably request and conformed copies of documents delivered pursuant to this Section 7. The Representatives may in their sole discretion waive on behalf of the Underwriters compliance with any conditions to the obligations of the Underwriters hereunder, whether in respect of an Optional Closing Date or otherwise.
8. Indemnification and Contribution.
(a) Indemnification of Underwriters by the Company. The Company will indemnify and hold harmless each Underwriter, its partners, members, directors, officers, employees, agents, affiliates and each person, if any, who controls such Underwriter within the meaning of Section 15 of the Act or Section 20 of the Exchange Act (each an Indemnified Party), against any and all losses, claims, damages or liabilities, joint or several, to which such Indemnified Party may become subject, under the Act, the Exchange Act, other Federal or state statutory law or regulation or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any part of any Registration Statement at any time, any Statutory Prospectus as of any time, the Final Prospectus, any Issuer Free Writing Prospectus or any Written Testing-the-Waters Communication, or arise out of or are based upon the omission or alleged omission of a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse each Indemnified Party for any legal or other expenses reasonably incurred by such Indemnified Party in connection with investigating or defending against any loss, claim, damage, liability, action, litigation, investigation or proceeding whatsoever (whether or not such Indemnified Party is a party thereto), whether threatened or commenced, and in connection with the enforcement of this provision with respect to any of the above as such expenses are incurred; provided, however, that the Company will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement in or omission or alleged omission from any of such documents in reliance upon and in conformity with written information furnished to the Company by any Underwriter through the Representatives specifically for use therein, it being understood and agreed that the only such information furnished by any Underwriter consists of the information described as such in subsection (c) below.
(b) Indemnification of Underwriters by Selling Stockholders. The Selling Stockholders, severally and not jointly, will indemnify and hold harmless each Underwriter, its partners, members, directors, officers, employees, agents, affiliates and each person, if any, who controls such Underwriter within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, against any and all losses, claims, damages or liabilities, joint or several, to which such Indemnified Party may become subject, under the Act, the Exchange Act, other Federal or state statutory law or regulation or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any part of any Registration Statement at any time, any Statutory Prospectus as of any time, the Final Prospectus, any Written Testing-the-Waters Communication or any Issuer Free Writing Prospectus, or arise out of or are based upon the omission or alleged omission of a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse each Indemnified Party for any legal or other expenses reasonably incurred by such Indemnified Party in connection with investigating or defending against any loss, claim, damage, liability, action, litigation, investigation or proceeding
whatsoever (whether or not such Indemnified Party is a party thereto), whether threatened or commenced, and in connection with the enforcement of this provision with respect to the above as such expenses are incurred; provided, however, that a Selling Stockholder will only be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement in or omission or alleged omission from any of such documents in reliance upon and in conformity with written information furnished to the Company by any such Selling Stockholder specifically for use therein, it being understood and agreed that the only such information furnished by any Selling Stockholder consists of the following information: each Selling Stockholders name and corresponding share amounts set forth in the table of Principal and Selling Stockholders in the Registration Statement and Final Prospectus under the heading Principal and Selling Stockholders and each Selling Stockholders address.
(c) Indemnification of Company and Selling Stockholders. Each Underwriter will severally and not jointly indemnify and hold harmless the Company, each of its directors and each of its officers who signs a Registration Statement, each person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, each Selling Stockholder and each person, if any, who controls any of the Selling Stockholders within the meaning of Section 15 of the Act or Section 20 of the Exchange Act (each, an Underwriter Indemnified Party) against any losses, claims, damages or liabilities to which such Underwriter Indemnified Party may become subject, under the Act, the Exchange Act, or other Federal or state statutory law or regulation or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any Registration Statement at any time, any Statutory Prospectus at any time, the Final Prospectus, any Issuer Free Writing Prospectus or any Written Testing-the-Waters Communication, or arise out of or are based upon the omission or the alleged omission of a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company by such Underwriter through the Representatives specifically for use therein, and will reimburse any legal or other expenses reasonably incurred by such Underwriter Indemnified Party in connection with investigating or defending against any such loss, claim, damage, liability, action, litigation, investigation or proceeding whatsoever (whether or not such Underwriter Indemnified Party is a party thereto), whether threatened or commenced, based upon any such untrue statement or omission, or any such alleged untrue statement or omission as such expenses are incurred, it being understood and agreed that the only such information furnished by any Underwriter consists of the following information in the Final Prospectus furnished on behalf of each Underwriter: (i) the concession and reallowance figures appearing in the fourth paragraph under the caption Underwriting and (ii) the paragraph relating to stabilization by the Underwriters under the caption Underwriting.
(d) Actions against Parties; Notification. Promptly after receipt by an indemnified party under this Section of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against an indemnifying party under subsection (a), (b) or (c) above, notify the indemnifying party of the commencement thereof; but the failure to notify the indemnifying party shall not relieve it from any liability that it may have under subsection (a), (b) or (c) above except to the extent that it has been materially prejudiced (through the forfeiture of substantive rights or defenses) by such failure; and provided further that the failure to notify the indemnifying party shall not relieve it from any liability that it may have to an indemnified party otherwise than under subsection (a), (b) or (c) above. In case any such action is brought against any indemnified party and it notifies an indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate therein and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party (who shall not, except with the consent of the indemnified party, be counsel to the indemnifying party), and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party will not be liable to such indemnified party under this Section for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation. No indemnifying party shall, without the
prior written consent of the indemnified party, effect any settlement of any pending or threatened action in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party unless such settlement (i) includes an unconditional release of such indemnified party from all liability on any claims that are the subject matter of such action and (ii) does not include a statement as to, or an admission of, fault, culpability or a failure to act by or on behalf of an indemnified party.
(e) Contribution. If the indemnification provided for in this Section is unavailable or insufficient to hold harmless an indemnified party under subsection (a), (b) or (c) above, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of the losses, claims, damages or liabilities referred to in subsection (a), (b) or (c) above (i) in such proportion as is appropriate to reflect the relative benefits received by the Company and the Selling Stockholders on the one hand and the Underwriters on the other from the offering of the Securities or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company and the Selling Stockholders on the one hand and the Underwriters on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities as well as any other relevant equitable considerations. The relative benefits received by the Company and the Selling Stockholders on the one hand and the Underwriters on the other shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Company and the Selling Stockholders bear to the total underwriting discounts and commissions received by the Underwriters. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company, the Selling Stockholders or the Underwriters and the parties relative intent, knowledge, access to information and opportunity to correct or prevent such untrue statement or omission. The amount paid by an indemnified party as a result of the losses, claims, damages or liabilities referred to in the first sentence of this subsection (e) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any action or claim which is the subject of this subsection (e). Notwithstanding the provisions of this subsection (e), no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Securities underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters obligations in this subsection (e) to contribute are several in proportion to their respective underwriting obligations and not joint. The Company, the Selling Stockholders and the Underwriters agree that it would not be just and equitable if contribution pursuant to this Section 8(d) were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to in this Section 8(d).
9. Default of Underwriters. If any Underwriter or Underwriters default in their obligations to purchase Offered Securities hereunder on either the First Closing Date or any Optional Closing Date and the aggregate number of shares of Offered Securities that such defaulting Underwriter or Underwriters agreed but failed to purchase does not exceed 10% of the total number of shares of Offered Securities that the Underwriters are obligated to purchase on such Closing Date, the Representatives may make arrangements satisfactory to the Company and the Selling Stockholders for the purchase of such Offered Securities by other persons, including any of the Underwriters, but if no such arrangements are made by such Closing Date, the non-defaulting Underwriters shall be obligated severally, in proportion to their respective commitments hereunder, to purchase the Offered Securities that such defaulting Underwriters agreed but failed to purchase on such Closing Date. If any Underwriter or Underwriters so default and the aggregate number of shares of Offered Securities with respect to which such default or defaults occur exceeds 10% of the total number of shares of Offered Securities that the Underwriters are obligated to purchase on such Closing Date and arrangements satisfactory to the Representatives and the Company for
the purchase of such Offered Securities by other persons are not made within 36 hours after such default, this Agreement will terminate without liability on the part of any non-defaulting Underwriter, the Company or the Selling Stockholders, except as provided in Section 10 (provided that if such default occurs with respect to Optional Securities after the First Closing Date, this Agreement will not terminate as to the Firm Securities or any Optional Securities purchased prior to such termination). As used in this Agreement, the term Underwriter includes any person substituted for an Underwriter under this Section. Nothing herein will relieve a defaulting Underwriter from liability for its default.
10. Survival of Certain Representations and Obligations. The respective indemnities, agreements, representations, warranties and other statements of the Selling Stockholders, of the Company or its officers and of the several Underwriters set forth in or made pursuant to this Agreement will remain in full force and effect, regardless of any investigation, or statement as to the results thereof, made by or on behalf of any Underwriter, any Selling Stockholders, the Company or any of their respective representatives, officers or directors or any controlling person, and will survive delivery of and payment for the Offered Securities. If the purchase of the Offered Securities by the Underwriters is not consummated for any reason other than solely because of the termination of this Agreement pursuant to Section 9 or the occurrence of any event specified in clause (iv), (vi), (vii) or (viii) of Section 7(c) hereof, the Company will, reimburse the Underwriters for all out-of-pocket expenses (including reasonable documented fees and disbursements of counsel) reasonably incurred by them in connection with the offering of the Offered Securities, and the respective obligations of the Company, the Selling Stockholders and the Underwriters pursuant to Section 8 hereof shall remain in effect. In addition, if any Offered Securities have been purchased hereunder, the representations and warranties in Section 2 and all obligations under Section 5 shall also remain in effect.
11. Notices. All communications hereunder will be in writing and, if sent to the Underwriters, will be mailed, hand delivered or telecopied and confirmed to the Representatives at Credit Suisse Securities (USA) LLC, Eleven Madison Avenue, New York, New York 10010-3629, Attention: IBCM-Legal and Goldman Sachs & Co. LLC, 200 West Street, New York, New York 10282, if sent to the Company, will be mailed, hand delivered or telecopied and confirmed to it at 9811 Katy Freeway, Suite 900, Houston, Texas 77024 Attention: Chief Financial Officer, or if sent to any of the Selling Stockholders, will be mailed, hand delivered or telecopied and confirmed to such Selling Stockholder at the address for such Selling Stockholder set forth in Schedule A.; provided, however, that any notice to an Underwriter pursuant to Section 8 will be mailed, hand delivered or telecopied and confirmed to such Underwriter.
12. Successors. This Agreement will inure to the benefit of and be binding upon the parties hereto and their respective personal representatives and successors and the officers and directors and controlling persons referred to in Section 8, and no other person will have any right or obligation hereunder.
13. Representation of Underwriters. The Representatives will act for the several Underwriters in connection with the transactions contemplated by this Agreement, and any action under this Agreement taken by the Representatives jointly or by Credit Suisse Securities (USA) LLC will be binding upon all the Underwriters.
14. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but all such counterparts shall together constitute one and the same Agreement.
15. Absence of Fiduciary Relationship. The Company and the Selling Stockholders acknowledge and agree that:
(a) No Other Relationship. The Representatives have been retained solely to act as underwriters in connection with the sale of the Offered Securities and that no fiduciary, advisory or agency relationship between the Company and the Selling Stockholders, on the one hand, and the Representatives, on the other, has been created in respect of any of the transactions contemplated by
this Agreement or the Final Prospectus, irrespective of whether the Representatives have advised or are advising the Company or the Selling Stockholders on other matters;
(b) Arms-Length Negotiations. The price of the Offered Securities set forth in this Agreement was established by the Company and the Selling Stockholders following discussions and arms-length negotiations with the Representatives and the Company and the Selling Stockholders are capable of evaluating and understanding and understand and accept the terms, risks and conditions of the transactions contemplated by this Agreement;
(c) Absence of Obligation to Disclose. The Company and the Selling Stockholders have been advised that the Representatives and its affiliates are engaged in a broad range of transactions which may involve interests that differ from those of the Company or the Selling Stockholders and that the Representatives have no obligation to disclose such interests and transactions to the Company or the Selling Stockholders by virtue of any fiduciary, advisory or agency relationship; and
(d) Waiver. The Company and the Selling Stockholders waive, to the fullest extent permitted by law, any claims they may have against the Representatives for breach of fiduciary duty or alleged breach of fiduciary duty and agree that the Representatives shall have no liability (whether direct or indirect) to the Company or the Selling Stockholders in respect of such a fiduciary duty claim or to any person asserting a fiduciary duty claim on behalf of or in right of the Company, including stockholders, employees or creditors of the Company.
16. Applicable Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York.
The Company hereby submits to the non-exclusive jurisdiction of the Federal and state courts in the Borough of Manhattan in The City of New York in any suit or proceeding arising out of or relating to this Agreement or the transactions contemplated hereby. The Company irrevocably and unconditionally waives any objection to the laying of venue of any suit or proceeding arising out of or relating to this Agreement or the transactions contemplated hereby in Federal and state courts in the Borough of Manhattan in the City of New York and irrevocably and unconditionally waives and agrees not to plead or claim in any such court that any such suit or proceeding in any such court has been brought in an inconvenient forum.
17. Patriot Act. In accordance with the requirements of the USA Patriot Act (Title III of Pub. L. 107-56 (signed into law October 26, 2001)), the underwriters are required to obtain, verify and record information that identifies their respective clients, including the Company, which information may include the name and address of their respective clients, as well as other information that will allow the underwriters to properly identify their respective clients.
[Signature Pages Follows]
If the foregoing is in accordance with the Representatives understanding of our agreement, kindly sign and return to the Company one of the counterparts hereof, whereupon it will become a binding agreement among the Company and the several Underwriters in accordance with its terms.
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SOLARIS OILFIELD INFRASTRUCTURE, INC. | |
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Signature Page to Underwriting Agreement
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[SELLING STOCKHOLDER] | |
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Signature Page to Underwriting Agreement
The foregoing Underwriting Agreement is hereby confirmed and accepted as of the date first above written.
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CREDIT SUISSE SECURITIES (USA) LLC | |
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Acting on behalf of itself and as a Representative of the several Underwriters. |
Signature Page to Underwriting Agreement
SCHEDULE A
Name and Address of |
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Number of |
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Number of |
Yorktown Energy Partners X, L.P. |
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[·] |
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[·] |
William A. Zartler |
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[·] |
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[·] |
Solaris Energy Capital, LLC |
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Kyle S. Ramachandran |
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[·] |
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[·] |
Equity Trust Company, Custodian FBO Kyle Ramachandran IRA |
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[·] |
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[·] |
Cynthia M. Durrett |
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[·] |
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[·] |
James R. Burke |
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[·] |
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Wells Fargo Central Pacific Holdings, Inc. |
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[·] |
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Freebird Partners LP |
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[·] |
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Gregory Garcia |
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[·] |
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Brian Dobbs |
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[·] |
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Jonathan Scheiner |
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[·] |
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Chris Work |
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Alexander Hodosh, TTEE, FBO: Randall and Gail Gibbs |
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Jean K. Brown |
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Rory Burke |
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William Managan |
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Terry McIver |
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Privateer Energy Services, LLC |
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Ben Stocker |
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Williamsburg Enterprises |
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Signature Page to Underwriting Agreement
SCHEDULE B
Underwriter |
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Credit Suisse Securities (USA) LLC |
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Goldman Sachs & Co. LLC |
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Total |
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7,000,000 |
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SCHEDULE C
1. General Use Free Writing Prospectuses (included in the General Disclosure Package)
General Use Issuer Free Writing Prospectus includes each of the following documents:
1. None
2. Other Information Included in the General Disclosure Package
The following information is also included in the General Disclosure Package:
Price per share to the public: $[·]
SCHEDULE D
Jurisdictions
Entity |
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Jurisdiction |
Solaris Oilfield Infrastructure, Inc. |
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Delaware |
SCHEDULE E
Subsidiaries
Entity |
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Jurisdiction |
Solaris Oilfield Infrastructure, LLC |
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Delaware |
Solaris Oilfield Site Services Operating, LLC |
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Texas |
Solaris Oilfield Early Property, LLC |
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Texas |
Solaris Oilfield Site Services Personnel LLC |
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Delaware |
Solaris Logistics, LLC |
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Delaware |
SCHEDULE F
Form of Vinson & Elkins L.L.P. Opinion
1. The Company has been duly incorporated and is validly existing as a corporation, and is in good standing under the laws of the State of Delaware, with the corporate power and authority to own or lease, as the case may be, and to operate its properties and conduct its business as described in the Registration Statement, the General Disclosure Package and the Final Prospectus; and is duly qualified to do business as a foreign corporation and is in good standing in the State of Texas.
2. Solaris Oilfield Infrastructure, LLC (SOI) is validly existing as a limited liability company and in good standing under the laws of the State of Delaware, with the limited liability company power and authority to own or lease, as the case may be, and to operate its properties and conduct its business as described in the Registration Statement, the General Disclosure Package and the Final Prospectus, and is duly qualified to do business as a foreign limited liability company and is in good standing in the State of Texas.
3. The Company directly owns such limited liability company interests of Solaris Oilfield Infrastructure, LLC as are described in the Registration Statement, the General Disclosure Package and the Final Prospectus; such membership interests have been duly authorized and validly issued in accordance with the Second Amended and Restated Limited Liability Company Agreement of Solaris Oilfield Infrastructure, LLC (the Solaris LLC Agreement) and are fully paid (to the extent required) and non-assessable (except as such non-assessability may be limited by sections 18-303, 18-607 and 18-804 of the Delaware LLC Act); and the Company owns such membership interests free and clear of all liens, encumbrances, equities or claims (Liens) (other than Liens arising under or in connection with the Credit Agreement, as described in the Registration Statement, the General Disclosure Package, and the Final Prospectus) (A) in respect of which a financing statement under the Uniform Commercial Code of the State of Delaware naming the Company as debtor is on file in the office of the Secretary of State of the State of Delaware as of a recent date or (B) otherwise known to us, without independent investigation other than those created by or arising under the Delaware LLC Act.
4. Each of Solaris Oilfield Site Services Operating, LLC, Solaris Oilfield Early Property, LLC, Solaris Oilfield Site Services Personnel LLC and Solaris Logistics, LLC (each, a Subsidiary) is validly existing as a limited liability company and in good standing under the laws of its jurisdiction of formation; each Subsidiary has the limited liability company power and authority to own or lease, as the case may be, and to operate its properties and conduct its business as described in the Registration Statement, the General Disclosure Package, and the Final Prospectus; each Subsidiary is duly qualified and in good standing as a foreign limited liability company in all other jurisdictions in which its ownership or lease, as the case may be, and operation of its properties and the conduct of its business requires such qualification.
5. The Offered Securities to be issued and sold by the Company to the Underwriters under the Underwriting Agreement have been duly authorized in accordance with the Companys Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws (together, the Governing Documents) and, when issued and delivered by the Company to the Underwriters upon payment therefor in accordance with the Underwriting Agreement, will be validly issued in accordance with the Governing Documents, free of preemptive rights under federal law, the Delaware General Corporation Law (the DGCL) or the Governing Documents, fully paid and non-assessable.
6. All of the issued and outstanding limited liability company interests of SOI and each of the Subsidiaries have been duly authorized and issued in accordance with the limited liability company agreement of SOI or such Subsidiary, as applicable, and are fully paid (to the extent required under such limited liability company agreement) and non-assessable (except as such non-assessability may be limited by sections 18-303, 18-607 and 18-804 of the Delaware LLC Act) and, with respect to each Subsidiary, are owned directly or indirectly by the Company, free and clear of all material liens, encumbrances or claims, except (A) as provided in the Credit Agreement and (B) as described in the General Disclosure Package and the Final Prospectus.
7. Except as set forth in the General Disclosure Package and the Final Prospectus, there are no persons with registration rights or other similar rights described in or created pursuant to any agreement filed as an exhibit to
the Registration Statement to have any securities registered pursuant to the Registration Statement or registered by the Company under the Securities Act or otherwise.
8. The execution and delivery of the Underwriting Agreement by the Company does not, and the performance by the Company of its obligations under the Underwriting Agreement, the offering, issuance and sale of the Offered Securities pursuant to the terms of the Underwriting Agreement and the application of the proceeds from the sale of the Offered Securities as described under Use of Proceeds in the Prospectus will not, (a) result in a breach or default (or an event that, with notice or lapse of time or both, would constitute such an event) under any agreement that is filed as an exhibit to the Registration Statement; (b) violate the provisions of the Governing Documents or the similar organizational documents of the Companys subsidiaries; (c) violate any federal, New York or Texas statute, rule or regulation applicable to the Company or the DGCL or the Delaware LLC Act, or (d) result in the creation of any additional lien upon any property or assets of the Company or its subsidiaries under the Credit Agreement except, with respect to clauses (c) and (d), as would not, individually or in the aggregate, reasonably be expected to materially impair the ability of the Company and its subsidiaries to consummate the transactions contemplated by the Underwriting Agreement in connection with the offering, issuance and sale of the Offered Securities by the Company (a Material Adverse Effect); it being understood that we express no opinion in clause (c) of this paragraph (5) with respect to any federal or state securities, Blue Sky or anti-fraud laws, rules or regulations.
9. The Underwriting Agreement has been duly authorized, executed and delivered by the Company.
10. No consent, approval, authorization or order of, registration or qualification with any federal, Texas or New York court or governmental agency or any Delaware court or governmental agency acting pursuant to the DGCL is required to be obtained or made by the Company or its subsidiaries for the execution, delivery and performance by the Company of the Underwriting Agreement, the compliance by the Company with the terms thereof and the issuance and sale of the Offered Securities by the Company being delivered on the date hereof pursuant to the Underwriting Agreement, except (i) as have been obtained or made, (ii) for the registration of the offering and sale of the Offered Securities under the Securities Act, (iii) for such consents, approvals, authorizations, orders, registrations or qualifications as may be required under applicable federal or state securities or Blue Sky laws and the approval by FINRA of the underwriting terms and arrangements in connection with the purchase and distribution of the Offered Securities by the Underwriters or (iv) for such consents that, if not obtained, have not or would not, in the aggregate, reasonably be expected to have a Material Adverse Effect.
11. The Registration Statement has been declared effective under the Act; to our knowledge, no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been instituted or threatened by the Commission; and any required filing of the Final Prospectus pursuant to Rule 424(b) under the Act has been made in the manner and within the time period required by such rule.
12. The statements set forth in the Final Prospectus under the headings BusinessEnvironmental and Occupational Health and Safety Regulations, Description of Capital Stock, Material U.S. Federal Income Tax Considerations for Non-U.S. Holders, and Shares Eligible for Future Sale and in the Registration Statement in Item 14, to the extent that they constitute descriptions or summaries of the terms of the Common Stock or the documents referred to therein, or refer to statements of federal law, the laws of the State of Delaware or legal conclusions, are accurate in all material respects.
13. The Company is not, and after giving effect to the offer and sale of the Offered Securities pursuant to the terms of the Underwriting Agreement and application of the net proceeds therefrom as described in the General Disclosure Package and the Final Prospectus under the caption Use of Proceeds, will not be, an investment company as defined in the Investment Company Act.
14. Each of the Registration Statement, at the time it was declared effective, the General Disclosure Package, as of the Applicable Time, and the Final Prospectus, when filed with the Commission pursuant to Rule 424(b) under the Securities Act and at the Closing Date (in each case other than (a) the financial statements and related schedules, including the notes and schedules thereto and the auditors report thereon and (b) the other financial data derived therefrom, in each case included in or omitted from the Registration Statement, the General
Disclosure Package and the Prospectus, as to which we express no opinion), appears on their face to comply as to form in all material respects with the requirements of the Securities Act.
15. The Solaris LLC Agreement constitutes a valid and legally binding agreement of each of the Company Parties, enforceable against each of the Company Parties in accordance with its terms, provided that the enforceability thereof may be limited by (i) bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws relating to or affecting creditors rights and remedies generally and by general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law), and (ii) public policy, applicable law relating to fiduciary duties and indemnification and an implied covenant of good faith and fair dealing.
We have participated in conferences with representatives of the Company and with representatives of its independent accountants and counsel for the Underwriters, at which conferences the contents of the Registration Statement, the General Disclosure Package and the Final Prospectus and any amendment and supplement thereto and related matters were discussed. Although we have not undertaken to determine independently, and do not assume any responsibility for, or express opinion regarding (other than listed in paragraph 13 above), the accuracy, completeness or fairness of the statements contained in the Registration Statement, the General Disclosure Package or the Prospectus, based upon the participation described above (relying as to factual matters upon statements of fact made to us by representatives of the Company), nothing has come to our attention to cause us to believe that:
(a) the Registration Statement, at the time it was declared effective (including the information, if any, deemed pursuant to Rule 430A to be part of the Registration Statement at the time of effectiveness), contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein not misleading;
(b) the General Disclosure Package, as of the Applicable Time, included an untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading; or
(c) the Final Prospectus, as of its date and as of the date hereof, included or includes an untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading;
except that in each case such counsel need not express any belief with respect to (i) the financial statements and related schedules, including the notes and schedules thereto and the auditors report thereon or (ii) any other financial or accounting information, in each case included in or omitted from the Registration Statement, the General Disclosure Package and the Prospectus.
SCHEDULE G
Form of Opinion of Counsel to the Selling Stockholders
1. Each Selling Stockholder that is not a natural person is validly existing as an entity under the laws of its state of organization;
2. No consent, approval, authorization or order of, or filing with, any governmental agency or body is required to be obtained or made by any Selling Stockholders for the consummation of the transactions contemplated by the Underwriting Agreement in connection with the offering and sale of the Offered Securities sold by the Selling Stockholders, except (i) as have been obtained or made, (ii) for the registration of the offering and sale of the Offered Securities under the Act or (iii) for such consents, approvals, authorizations, orders, registrations or qualifications as may be required under applicable federal or state securities or Blue Sky laws and the approval by FINRA of the underwriting terms and arrangements in connection with the purchase and distribution of the Offered Securities by the Underwriters;
3. The execution, delivery and performance of the Underwriting Agreement and the consummation of the transactions therein and herein contemplated will not result in a breach or violation of any statute, any rule, regulation or order of any governmental agency or body or any court having jurisdiction over any Selling Stockholder or the charter or by-laws of any Selling Stockholder that is a corporation or the constituent documents of any Selling Stockholder that is not a natural person or a corporation;
4. The Underwriting Agreement has been duly authorized by each Selling Stockholder that is an entity, and duly executed and delivered by each Selling Stockholder; and
5. Upon (a) payment for the Offered Securities to be sold by the Selling Stockholders pursuant to the Underwriting Agreement, (b) delivery of such Offered Securities (within the meaning of Section 8-301 of the of the New York Uniform Commercial Code (the UCC)), as directed by the Underwriters, to Cede & Co. (Cede) or such other nominee as may be designated by the Depository Trust Company (DTC), (c) registration of such Offered Securities in the name of DTC, Cede or such other nominee and (d) appropriate crediting (by book entry) of such Offered Securities on the books of DTC to securities accounts (within the meaning of Section 8-501 of the UCC) of the Underwriters maintained by the Underwriters with DTC (assuming that neither DTC nor any such Underwriter has notice of any adverse claim within the meaning of Section 8-105 of the UCC to such Offered Securities), (1) under Section 8-501 of the UCC, each Underwriter will acquire a valid security entitlement (within the meaning of Section 8-102 of the UCC) in respect of the Offered Securities purchased by such Underwriter and (2) no action based on any adverse claim (within the meaning of Section 8-502 of the UCC), whether framed in conversion, replevin, constructive trust, equitable lien or other theory, to such Offered Securities may be asserted against such Underwriter, as the holder of such security entitlement with respect to such Offered Securities. In giving this opinion, we have assumed that when such payment, delivery and crediting occur, (w) such Offered Securities will have been registered in the name of Cede or another nominee designated by DTC, in each case on the Companys share registry in accordance with its certificate of incorporation, bylaws and applicable law, (x) DTC will be registered as a clearing corporation within the meaning of Section 8-102 of the UCC and the State of New York is the securities intermediaries jurisdiction of DTC for purposes of Section 8-110 of the UCC, (y) appropriate book entries to the accounts of the several Underwriters on the records of DTC will have been made pursuant to the UCC, and (z) no rule adopted by DTC (in its capacity as a clearing corporation) governing the rights and obligations among DTC and its participants conflicts (within the meaning of Section 8-111 of the UCC) with the provisions of Article 8 of the UCC that apply to any of the transactions described in this paragraph.
SCHEDULE H
1. The Selling Shareholder is a limited partnership that is validly existing and in good standing under laws of the State of Delaware.
2. The Selling Shareholder has:
(a) the limited partnership power to execute and deliver, and to perform its obligations under, the Underwriting Agreement, and
(b) taken all limited partnership action necessary to authorize the execution and delivery of, and the performance of its obligations under, the Underwriting Agreement.
3. The Selling Shareholder has duly executed and delivered the Underwriting Agreement.
4. The execution and delivery by the Selling Shareholder of the Underwriting Agreement do not, and the performance by the Selling Shareholder of its obligations thereunder will not:
(a) violate its certificate of limited partnership or limited partnership agreement;
(b) breach or result in a default or the creation of any lien under any agreement or instrument identified to us by the Selling Shareholder and listed in Section A of Schedule I hereto (the Applicable Contracts) or any order, writ, judgment, injunction, decree, determination or award identified to us by the Selling Shareholder and listed in Schedule Section B of Schedule I hereto; or
(c) result in a violation by it of any Applicable Laws or the Delaware Revised Uniform Limited Partnership Act.
5. No authorization, approval or other action by, and no notice to or filing with, any United States federal or Delaware or New York governmental authority or regulatory body, or any third party that is a party to any Applicable Contract, is required under Applicable Laws the Delaware Revised Uniform Limited Partnership Act for the due execution or delivery by the Selling Shareholder of, or for the performance by the Selling Shareholder of its obligations under, the Underwriting Agreement.
6. Each Underwriter has acquired a security entitlement with respect to a number of shares of Common Stock equal to the number of Seller Shareholder Shares to be purchased by it pursuant to the Underwriting Agreement, and no action based on an adverse claim, within the meaning of Section 8-102(a)(1) of the New York UCC, may be asserted against such Underwriter with respect to such security entitlement.
SCHEDULE I
SECTION A.
APPLICABLE CONTRACTS
None.
SECTION B.
ORDERS, WRITS, JUDGMENTS, INJUNCTIONS, DECREES, DETERMINATIONS AND AWARDS
None.
SCHEDULE I
Parties Signing Lock-Up Agreement
Gregory A. Lanham
William A. Zartler
James R. Burke
Edgar R. Giesinger
W. Howard Keenan, Jr.
F. Gardner Parker
A. James Teague
Kelly L. Price
Lindsay R. Bourg
Christopher M. Powell
Yorktown Energy Partners X, L.P.
Solaris Energy Capital, LLC
Kyle S. Ramachandran
Cynthia M. Durrett
Wells Fargo Central Pacific Holdings, Inc.
Freebird Partners LP
Gregory Garcia
Brian Dobbs
Jonathan Scheiner
Chris Work
Alexander Hodosh, TTEE, FBO: Randall and Gail Gibbs
Jean K. Brown
Rory Burke
William Managan
Terry McIver
Privateer Energy Services, LLC
Ben Stocker
Williamsburg Enterprises
Exhibit A
Form of Lock-Up Letter
Solaris Oilfield Infrastructure, Inc.
9811 Katy Freeway, Suite 900
Houston, Texas 77024
Credit Suisse Securities (USA) LLC
Goldman Sachs & Co. LLC
As a representatives of the several Underwriters,
Eleven Madison Avenue,
New York, New York 10010-3629
Dear Sirs:
As an inducement to the Underwriters to execute the Underwriting Agreement (the Underwriting Agreement), pursuant to which an offering will be made that is intended to result in the establishment of a public market for the Class A common stock, par value $0.01 per share (the Securities), of Solaris Oilfield Infrastructure, Inc., and any successor (by merger or otherwise) thereto, (the Company), the undersigned hereby agrees that during the period specified in the following paragraph (the Lock-Up Period), the undersigned will not offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, any Securities or securities convertible into or exchangeable or exercisable for any Securities, enter into a transaction which would have the same effect, or enter into any swap, hedge or other arrangement that transfers, in whole or in part, any of the economic consequences of ownership of the Securities, whether any such aforementioned transaction is to be settled by delivery of the Securities or such other securities, in cash or otherwise, or publicly disclose the intention to make any such offer, sale, pledge or disposition, or to enter into any such transaction, swap, hedge or other arrangement, without, in each case, the prior written consent of Credit Suisse Securities (USA) LLC and Goldman Sachs & Co. LLC (the Representatives). In addition, the undersigned agrees that, without the prior written consent of the Representatives, it will not, during the Lock-Up Period, make any demand for or exercise any right with respect to, the registration of any Securities or any security convertible into or exercisable or exchangeable for the Securities.
The Lock-Up Period will commence on the date of this Lock-Up Agreement and continue and include the date 90 days after the public offering date set forth on the final prospectus used to sell the Securities (the Public Offering Date) pursuant to the Underwriting Agreement.
Any Securities received upon exercise of options or other securities of the Company granted to the undersigned and any Securities acquired by the undersigned in the open market will also be subject to this Lock-Up Agreement. Additionally, the restrictions in this Lock-Up Agreement shall not apply to (a) any transactions relating to Securities acquired in the open market after the closing of the offering, provided that with respect to any sale or other disposition of such Securities, no filing under the Securities Exchange Act of 1934 (the Exchange Act) (other than on Form 5) or other public announcement shall be required or shall be voluntarily made by any party in connection with subsequent sales of such Securities acquired in such open market transactions during the Lock-Up Period, (b) any exercise of options or vesting or exercise of any other equity-based award, in each case, outstanding on the Public Offering Date, and in each case under the Companys equity incentive plan or any other plan or agreement described in the prospectus included in the Registration Statement, provided that any Securities received upon such exercise or vesting will also be subject to this Lock-Up Agreement, (c) transfers as a bona fide gift or gifts, (d) transfers to a family member, trust, family limited partnership or family limited liability company for the direct or indirect benefit of the undersigned or his or her family members, (e) transfers by testate or intestate succession, provided that in each transfer pursuant to clauses (c) through (e) the transferee agrees to be bound in writing by the terms of this Lock-Up Agreement prior to such transfer, such transfer shall not involve a disposition for value and no filing or public announcement by any party (donor, donee, transferor or transferee) under the Exchange Act or
otherwise shall be required or shall be voluntarily made in connection with such transfer (other than a filing on a Form 5), or (f) the establishment of any written contract, instruction or plan that satisfies all of the requirements of Rule 10b5-1 (a Rule 10b5-1 Plan) under the Exchange Act; provided, however, that no sales of Securities or securities convertible into, or exchangeable or exercisable for, Securities, shall be made pursuant to a Rule 10b5-1 Plan prior to the expiration of the Lock-Up Period (as the same may be extended pursuant to the provisions hereof); and provided further, that no party is required to publicly announce, file, or report the establishment of such Rule 10b5-1 Plan in any public report, announcement, or filing with the Commission under the Exchange Act during the Lock-Up Period and does not otherwise voluntarily effect any such public report, announcement, or filing regarding such Rule 10b5-1 Plan.
In furtherance of the foregoing, the Company and its transfer agent and registrar are hereby authorized to decline to make any transfer of shares of Securities if such transfer would constitute a violation or breach of this Lock-Up Agreement.
If the undersigned is an officer or director of the Company, (i) the Representatives agree that, at least three business days before the effective date of any release or waiver of the foregoing restrictions in connection with a transfer of Securities, the Representatives will notify the Company of the impending release or waiver, and (ii) the Company has agreed in the Underwriting Agreement to announce the impending release or waiver by press release through a major news service at least two business days before the effective date of the release or waiver. Any release or waiver granted by the Representatives hereunder to any such officer or director shall only be effective two business days after the publication date of such press release. The provisions of this paragraph will not apply if (a) the release or waiver is effected solely to permit a transfer not for consideration and (b) the transferee has agreed in writing to be bound by the same terms described in this Lock-Up Agreement to the extent and for the duration that such terms remain in effect at the time of the transfer.
This Lock-Up Agreement shall be binding on the undersigned and the successors, heirs, personal representatives and assigns of the undersigned.
It is understood that if the Underwriting Agreement is executed yet terminates (other than the provisions thereof that survive termination) prior to payment for and delivery of the Offered Securities, the undersigned shall be released from all obligations under this Lock-Up Agreement. Further, this Lock-Up Agreement shall lapse and become null and void if the Public Offering Date shall not have occurred on or before December 31, 2017. This agreement shall be governed by, and construed in accordance with, the laws of the State of New York.
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Very truly yours, |
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[Name of officer, director or stockholder] |
November 7, 2017
Solaris
Oilfield Infrastructure, Inc.
9811 Katy Freeway, Suite 900
Houston, Texas 77024
Re: Registration Statement on Form S-1
Ladies and Gentlemen:
We have acted as counsel for Solaris Oilfield Infrastructure, Inc., a Delaware corporation (the "Company"), in connection with the proposed offer and sale (the "Offering") by the Company and certain selling stockholders of the Company (the "Selling Stockholders"), pursuant to a prospectus forming a part of a Registration Statement on Form S-1, originally filed with the Securities and Exchange Commission on November 7, 2017 (such Registration Statement, as amended at the effective date thereof, being referred to herein as the "Registration Statement"), of up to 7,000,000 shares of Class A common stock, par value $0.01 per share (the "Class A common stock"), of the Company (the "Firm Shares"), and up to an additional 1,050,000 shares of Class A common stock pursuant to the underwriters' option to purchase additional shares of Class A common stock (together with the Firm Shares, the "Common Shares"). The Common Shares to be offered by the Selling Stockholders consist of Common Shares that are issuable upon redemption of membership interests ("Solaris LLC Units") in Solaris Oilfield Infrastructure, LLC, a Delaware limited liability company ("Solaris LLC"), together with an equal number of shares of Class B common stock of the Company (the "Class B Common Stock"), pursuant to the Second Amended and Restated Limited Liability Company Agreement of Solaris LLC, dated as of May 11, 2017 (the "Solaris LLC Agreement").
In connection with this opinion, we have assumed that (i) the Registration Statement, and any amendments thereto (including post-effective amendments), will have become effective, (ii) the Common Shares will be issued and sold in the manner described in the Registration Statement and the prospectus relating thereto, (iii) a definitive underwriting agreement, in the form filed as an exhibit to the Registration Statement, with respect to the sale of the Common Shares will have been duly authorized and validly executed and delivered by the Company and the other parties thereto and (iv) any Common Shares issuable upon redemption of Solaris LLC Units and shares of Class B common stock will have been issued in accordance with the Solaris LLC Agreement.
In connection with the opinion expressed herein, we have examined, among other things, (i) the Amended and Restated Certificate of Incorporation of the Company and the Amended and Restated Bylaws of the Company, (ii) the Solaris LLC Agreement, (iii) the records of corporate proceedings that have occurred prior to the date hereof with respect to the Offering, (iv) the Registration Statement and (v) the form of underwriting agreement filed as an exhibit to the Registration Statement. We have also reviewed such questions of law as we have deemed necessary or appropriate. As to matters of fact relevant to the opinion expressed herein, and as to factual matters arising in connection with our examination of corporate documents, records and other documents and writings, we relied upon certificates and other communications of corporate officers of the Company, without further investigation as to the facts set forth therein. In making such examination and rendering the opinions set forth below, we have assumed without verification the genuineness of all signatures, the authenticity of all documents submitted to us as originals, the conformity to originals of all documents submitted to us as copies, and the legal capacity of all individuals executing any of the foregoing documents.
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November 7, 2017 Page 2 |
Based upon the foregoing, and subject to the qualifications and limitations stated herein, we are of the opinion that:
(a) with respect to the Common Shares to be issued and sold by the Company, when such Common Shares have been issued and delivered in accordance with a definitive underwriting agreement approved by the Board of Directors of the Company and upon payment of the consideration therefor provided for therein (not less than the par value of the Common Shares), such Common Shares will be duly authorized, validly issued, fully paid and nonassessable; and
(b) with respect to the Common Shares proposed to be sold by the Selling Stockholders, such Common Shares have been duly authorized and, when such Common Shares have been issued upon redemption and exchange of Solaris LLC Units and shares of Class B common stock for an equivalent amount of Common Shares in accordance with the Solaris LLC Agreement, will be validly issued, fully paid and nonassessable.
The foregoing opinions are limited in all respects to the General Corporation Law of the State of Delaware and the Delaware Limited Liability Company Act (including the applicable provisions of the Delaware Constitution and the reported judicial decisions interpreting these laws) and the federal laws of the United States of America, and we do not express any opinions as to the laws of any other jurisdiction. This opinion is being furnished in connection with the requirements of Item 601(b)(5) of Regulation S-K under the Securities Act of 1933, as amended, and the foregoing opinions are limited to the matters expressly stated herein, and no opinion is to be inferred or implied beyond the opinions expressly set forth herein. We undertake no, and hereby disclaim any, obligation to make any inquiry after the date hereof or to advise you of any changes in any matter set forth herein, whether based on a change in the law, a change in any fact relating to the Company or any other person or any other circumstance.
We hereby consent to the statements with respect to us under the heading "Legal Matters" in the prospectus forming a part of the Registration Statement and to the filing of this opinion as an exhibit to the Registration Statement. In giving this consent, we do not admit that we are within the category of persons whose consent is required under Section 7 of the Securities Act of 1933, as amended, and the rules and regulations thereunder.
Very truly yours, | ||
/s/ Vinson & Elkins L.L.P. |
Solaris Oilfield Infrastructure, Inc.
List of Subsidiaries
Name
|
Jurisdiction of Organization | |
---|---|---|
Solaris Oilfield Infrastructure, LLC | Delaware | |
Solaris Oilfield Site Services Operating, LLC | Texas | |
Solaris Oilfield Early Property, LLC | Texas | |
Solaris Oilfield Site Services Personnel LLC | Delaware | |
Solaris Logistics, LLC | Delaware |
Consent of Independent Registered Public Accounting Firm
Solaris Oilfield Infrastructure, Inc.
Houston, Texas
We hereby consent to the use in the Prospectus constituting a part of this Registration Statement of (i) our report dated February 9, 2017, relating to the balance sheet as of February 2, 2017 of Solaris Oilfield Infrastructure, Inc. and (ii) our report dated March 15, 2017, relating to the financial statements of Solaris Oilfield Infrastructure, LLC, which are contained in that Prospectus.
We also consent to the reference to us under the caption "Experts" in the Prospectus.
/s/ BDO USA, LLP
Houston, Texas
November 7, 2017
CONSENT TO BE NAMED IN REGISTRATION STATEMENT
The undersigned hereby consents to the references to our firm in the form and context in which they appear in this Registration Statement on Form S-1 and the related prospectus that is a part thereof. We hereby further consent to the use in such Registration Statement and prospectus of information contained in our "Hydraulic Fracturing Market 2006-2018" report published in the third quarter 2017.
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Spears & Associates | |||
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/s/ KATIE BEWLEY |
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Name: | Katie Bewley | ||
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Title: | Director of Client Relations |
November 7, 2017
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