Solaris Energy Infrastructure, Inc. (SEI)

Item 7.      Management’s Discussion and Analysis of Financial Condition and Results of Operations

Unless the context requires otherwise, references in this Annual Report to the "Company," "Solaris," "we," "us" and "our" refer to Solaris Energy Infrastructure, Inc. ("Solaris Inc.") and its consolidated subsidiaries, including Solaris Energy Infrastructure, LLC (“Solaris LLC”), our operating subsidiary. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the accompanying financial statements and related notes. This section of this Annual Report generally discusses 2024 and 2023 items and year-to-year comparisons between 2024 and 2023. Discussions of 2022 items and year-to-year comparisons between 2023 and 2022 that are not included in this Annual Report can be found in Part II, Item 7. “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 filed with the SEC on February 27, 2024. The following discussion contains “forward-looking statements” that reflect our plans, estimates, beliefs and expected performance. Our actual results may differ materially from those anticipated as discussed in these forward-looking statements as a result of a variety of risks and

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uncertainties, including those described above in “Cautionary Statement Regarding Forward-Looking Statements” and “Risk Factors” included elsewhere in this Annual Report, all of which are difficult to predict. In light of these risks, uncertainties and assumptions, the forward-looking events discussed may not occur. We assume no obligation to update any of these forward-looking statements except as otherwise required by law.

Executive Overview

We provide mobile and scalable equipment-based solutions for use in distributed power generation as well as the management of raw materials used in the completion of oil and natural gas wells. Headquartered in Houston, Texas, Solaris serves multiple U.S. end markets, including energy, data centers, and other commercial and industrial sectors.

We operate through two reportable business segments:

On September 11, 2024, we acquired MER, a company providing configurable, primarily natural gas-powered mobile turbines and ancillary equipment across energy, data center, and other commercial and industrial markets. This acquisition marks our entry into the scaled distributed power solutions market, strengthening our position as a mobile equipment and logistics solution provider in the oil and gas sector while diversifying our overall business.

Recent Developments

MER Acquisition

We successfully completed the acquisition of MER on September 11, 2024. The results of MER’s operations have been included in our consolidated financial statements from the acquisition date through December 31, 2024. For further details regarding the acquisition, please refer to Note 3. “MER Acquisition” in the notes to our consolidated financial statements.

Debt Financing

On September 11, 2024, we entered into a senior secured term loan agreement (the “Term Loan Agreement”) totaling $325.0 million, primarily to fund the acquisition of MER. The remaining proceeds are restricted for capital expenditures to support our growth initiatives. The senior secured term loan bears a variable interest rate with interest payments that began in October 2024. Repayments of 1.25% of the original principal amount are due in quarterly installments beginning on September 30, 2025. The term loan matures on September 11, 2029.

Additionally, on the same day, we extinguished our prior revolving credit facility using a portion of the term loan proceeds. On October 2, 2024, we established a new revolving credit facility that allows for borrowings up to $75.0 million, with a potential increase of up to an additional $50.0 million, contingent on certain conditions. This facility also includes provisions for up to $10.0 million in letters of credit. For further details regarding our debt agreements, please refer to Note 10. “Debt” in the notes to our consolidated financial statements.

Class A Common Stock Offering

On December 11, 2024, we completed an underwritten public offering in which we sold 6,500,000 shares of our Class A common stock, par value of $0.01 per share at a price of $24.75 per share. After deducting underwriting

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discounts and commissions of $4.8 million, we received net proceeds of approximately $156.0 million. These net proceeds are being used, and are expected to continue to be used, to fund growth capital for additional power generation equipment.

Market Trends and Outlook

Demand for our services varies across each of our business segments, Solaris Power Solutions and Solaris Logistics Solutions, due to differences in end market exposure.

For the Company’s Solaris Power Solutions segment, demand is predominantly influenced by accelerating needs for power in the U.S., juxtaposed against constrained electrical grid infrastructure, which is due to a number of factors including, but not limited to, aging transmission and distribution networks, extreme weather, and long lead times for various electric infrastructure equipment. Solaris’s turbine offerings are configurable and can be scaled to match power demand on a “behind-the-meter” basis in a shorter timeline than many grid-based providers can service.

Today, the Company’s Solaris Power Solutions segment’s primary customers include a large data center and several energy companies requiring power for hydrocarbon production, processing, transportation, and refining applications. Power demand for data centers has been accelerated due to growth in generative artificial intelligence (“AI”) computing applications. Power demand for energy customers is primarily driven by hydrocarbon production and processing operations in geographies where grid infrastructure may not be available or reliable or is prone to supply disruption. Many of our customers face multi-year delays to receive grid-based power and are turning to configurable, “behind-the-meter” solutions such as ours to bridge this gap. The availability of low-cost fuel as a result of the abundant supply of natural gas domestically enhances the cost-competitiveness of our mobile natural gas-powered turbine technology as compared to conventional grid-based power.

Our Solaris Power Solutions segment began upon the consummation of the MER Acquisition on September 11, 2024. As a result, our fourth quarter was the first full quarter of contribution from this segment. During the fourth quarter, Solaris Power Solutions generated revenue from an average of approximately 260 megawatts (“MW”) of generation capacity. Due to the continued market demand we forecast for behind-the-meter power generation, Solaris Power Solutions has secured deliveries for turbines and ancillary equipment that will significantly increase our operated power generation fleet to approximately 1,400 MW by the first half of 2027. The Company estimates approximately two thirds of total expected delivered capacity is currently committed to customers under commercial agreements that range in tenor from two to six years. Each of these commercial agreements include distinct product specifications, such as product type, quantity, delivery period, and price, as well as standard terms and conditions with respect to acceptance, delivery, transportation, inspection, assignment, taxes and performance failure.

We expect total company capital expenditures in 2025 of approximately $690 million. The majority of these capital expenditures are to support Solaris Power Solutions capital growth, with capital expenditures for Solaris Logistics Solutions representing approximately $10-15 million of our total expected capital expenditures over the next year. The majority of these capital expenditures are already reflected in committed purchase orders, and we are relying on our ability to secure appropriate financing to fund these commitments.

We intend to fund our current planned capital expenditures with available cash on our balance sheet as of December 31, 2024, cash flows we expect to generate from operations in 2025, and available capacity from our revolving credit facility. Additionally, while no assurance can be given, we may seek to issue additional securities through opportunistic capital market transactions, depending upon market conditions, and / or enter into additional debt financing agreements. Even if we are unable to secure the financing of our planned capital expenditures, we have the ability to pay cancellation fees for these committed purchase orders using cash from our balance sheet, cash flows from operations in 2025 and available capacity under our revolving credit facility.

The sustainability of this favorable supply-demand dynamic in the power sector will depend on multiple factors, including continued demand growth for generative AI computing applications, cloud computing, supply chain availability for electrical equipment, potential regulatory changes, overall economic activity levels, the level and pace at which the power industry can invest in power infrastructure, and the pace of continued electrification-driven demand growth.

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For our Solaris Logistics Solutions segment, demand is predominantly influenced by the level of oil and natural gas well drilling and completion activity in the U.S. During the year ended 2024, our fully utilized system count averaged 91 systems, which was down 17% from the average in 2023, which was in line with the decline in Baker Hughes U.S. Land Rig count. This decline was primarily driven by lower natural gas prices. In the first half of 2025, we expect our fully utilized system count to average between 90 and 100 systems, which is above 2024 average levels. The level of demand over the longer term will depend on multiple factors, including commodity price levels, customer consolidation that can drive activity and procurement strategy changes and industry efficiency gains, geopolitical risk, economic activity, potential regulatory changes and potential impacts from geopolitical disruptions.

Results of Operations

Year Ended December 31, 2024 Compared to Year Ended December 31, 2023

Revenues

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Solaris Logistics Solutions. Solaris Logistics Solutions revenue decreased $18.5 million, or 6%, to $274.5 million for the year ended December 31, 2024 compared to $292.9 million for the year ended December 31, 2023. The slight decrease was primarily due to a decrease in fully utilized systems, which decreased to 91 systems for the year ended December 31, 2024, compared to 109 systems in the year ended December 31, 2023. This decrease was partially offset by an increase in average revenue per system and an increase in average last mile tonnage during the year ended December 31, 2024 compared to the year ended December 31, 2023.

Solaris Power Solutions. Solaris Power Solutions revenue increased by $38.6 million in the year ended December 31, 2024, compared to nil for the year ended December 31, 2023. This increase was due to the assumption of MER revenues as a result of the MER Acquisition which closed on September 11, 2024.

Cost of Revenue, exclusive of depreciation and amortization

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Solaris Logistics Solutions. Solaris Logistics Solutions cost of revenue decreased $2.8 million, or 2%, to $175.0 million for the year ended December 31, 2024 compared to $177.8 million for the year ended December 31, 2023. This reduction was primarily due to a $7.1 million decrease due to lower system count and the $1.8 million reversal of accrued property taxes following settlement with Brown County Appraisal District. Refer to Note 17. “Commitments and Contingencies – Tax Matters” in the notes to our consolidated financial statements for additional information on the property tax settlement. This reduction was partially offset by a $6.1 million increase in last mile and ancillary service costs driven by an increase in last mile tonnage.

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Solaris Logistics Solutions cost of revenue (exclusive of depreciation and amortization) as a percentage of revenue was 64% and 61% for the years ended December 31, 2024 and 2023, respectively.

Solaris Power Solutions. Solaris Power Solutions cost of revenue increased by $9.9 million in the year ended December 31, 2024, compared to nil for the year ended December 31, 2023. The increase was due to the cost of revenues assumed as a result of the MER Acquisition which closed on September 11, 2024.

Solaris Power Solutions cost of revenue as a percentage of revenue (exclusive of depreciation and amortization) was 26% for the year ended December 31, 2024.

Non-Leasing Depreciation and Amortization

Non-leasing depreciation and amortization increased by $5.0 million, or 14%, to $41.2 million for the year ended December 31, 2024 compared to $36.2 million for the year ended December 31, 2023. This increase was primarily due to the addition of depreciable assets resulting from capital expenditures to develop and upgrade systems fleets for our Solaris Logistics Solutions segment.

Depreciation of Leasing Equipment

Solaris Power Solutions. Depreciation of leasing equipment increased by $6.0 million for the year ended December 31, 2024, compared to nil for the year ended December 31, 2023. This increase was due to the assumption of MER’s equipment as a result of the completion of the MER Acquisition which closed on September 11, 2024.

Gain on Sale of Kingfisher Facility

In the fourth quarter of 2024, we sold our rights to the 300-acre transload facility located in Kingfisher, Oklahoma, along with all associated assets, for total proceeds of $5.0 million. In connection with the sale, we terminated the lease associated with the facility, resulting in the extinguishment of the remaining lease liability of $2.5 million at the time of sale. All associated assets had zero net carrying value at the time of sale after a previous impairment recognized as of December 31, 2020. As a result of the sale and lease termination, we recognized a total gain of $7.5 million.

Gain on Reversal of Property Tax Contingency

On June 14, 2024, we reached a settlement agreement with Brown County Appraisal District in Texas, following a favorable ruling by the Eastland Court of Appeals on April 18, 2024. As a result, in the year ended December 31, 2024, we reversed $4.3 million of property tax expenses previously recorded through 2023 in connection with this case. Of this amount, $2.5 million was presented as gain on reversal of property tax contingency and $1.8 million reduced the cost of revenue in our consolidated statement of operations.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $8.7 million, or 32%, to $35.6 million for the year ended December 31, 2024 compared to $27.0 million for the year ended December 31, 2023. The increase is primarily due to increases in corporate headcount, professional fees and office rental expenses.

Other Operating Expense, Net

Other operating expense increased $1.8 million, to $2.5 million for the year ended December 31, 2024 compared to $0.6 million for the year ended December 31, 2023. Other operating expense for the year ended December 31, 2024 primarily relate to acquisition-related costs, partially offset by gain from change in payables related to the Tax Receivable Agreement and sublease income on an office lease. Other operating expense for the year ended December 31, 2023 primarily relate to credit losses and loss on disposal of assets, partially offset by sales tax rebates.

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Interest Expense, Net

Interest expense increased $8.5 million, or 257%, to $11.8 million for the year ended December 31, 2024 compared to $3.3 million for the year ended December 31, 2023. The increase was primarily due to interest on our Term Loan Agreement (as defined below) executed on September 11, 2024 in connection with the closing of the MER Acquisition.

Loss on Debt Extinguishment

Loss on debt extinguishment increased by $4.1 million for the year ended December 31, 2024 compared to nil for the year ended December 31, 2023. The loss on debt extinguishment related to the extinguishment of the senior secured bridge term loan facility and the prior revolving credit facility.

Provision for Income Taxes

During the year ended December 31, 2024, we recognized a combined United States federal and state expense for income taxes of $8.0 million, an increase of $0.2 million compared to the $7.8 million income tax expense we recognized during the year ended December 31, 2023. The effective combined United States federal and state income tax rates were 21.7% and 16.8% for the years ended December 31, 2024 and 2023, respectively. The effective tax rate differed from the statutory rate primarily due to Solaris LLC’s treatment as a partnership for United States federal income tax purposes.

Liquidity and Capital Resources

Overview

Our primary sources of liquidity consist of cash flows from operations, borrowings under our debt financing agreements, available capacity from our revolving credit facility, and proceeds from opportunistic capital market offerings. Additionally, we may explore various financing options to support our recent capital investments, particularly within our Solaris Power Solutions segment, which is crucial to our growth strategy. We believe that these sources will provide sufficient liquidity to meet our financial obligations, including both our short-term and long-term purchase commitments related to growth capital expenditures. Additionally, while no assurance can be given, we may seek to issue additional securities through opportunistic capital market transactions, depending upon market conditions, and / or enter into additional debt financing agreements.

On September 11, 2024, we and certain of our subsidiaries entered into a senior secured term loan agreement (the “Term Loan Agreement”) with Banco Santander, S.A. New York Branch, as administrative agent, and Silver Point Finance, LLC, as collateral agent, along with other participating lenders. Under the Term Loan Agreement, the lenders provided term loans totaling $325.0 million. We utilized a portion of the proceeds to fund the MER Acquisition, with the remaining funds restricted for growth capital expenditures. Principal payments totaling $8.2 million are due within the next 12 months. The interest rate was 10.4% as of December 31, 2024 and is subject to periodic repricing. Assuming this rate remains constant, we estimate our interest payments for the next 12 months will total approximately $34.0 million. See Note 10. “Debt” under Part II, Item 8. “Financial Statements and Supplementary Data” for additional information.

On October 2, 2024, we and certain of our subsidiaries entered into a new revolving credit facility with Bank of America, N.A., acting as agent for the participating lenders. The facility provides for borrowings up to the lesser of $75.0 million or a borrowing base determined by a percentage of eligible accounts receivable and eligible inventory, subject to reserves and other adjustments. At our option, and provided certain conditions are met, the facility may be increased by up to an additional $50.0 million. Additionally, up to $10.0 million of the facility is available for the issuance of letters of credit by the agent. As of December 31, 2024, no amounts had been drawn under the facility, and based on the borrowing base calculation, the availability under the facility was $36.8 million. If any amount is drawn, Solaris intends to use the proceeds for working capital and other corporate purposes. See Note 10. “Debt” under Part II, Item 8. “Financial Statements and Supplementary Data” for additional information.

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On December 11, 2024, we completed an underwritten public offering in which we sold 6,500,000 shares of our Class A common stock, par value of $0.01 per share, at a price of $24.75 per share. After deducting underwriting discounts and commissions of $4.8 million, we received net proceeds of approximately $156.0 million.

As of December 31, 2024, we have outstanding purchase commitments for power generation equipment that are integral to our growth strategy. Our short-term purchase commitments, due within the next 12 months, total $140.7 million, while our long-term purchase commitments, with remaining terms extending beyond one year, total $99.0 million. Both short-term and long-term commitments are cancellable but subject to significant termination penalties, ranging from 5% to 90% of the purchase price, depending on the timing of the cancellation.

Subsequent to December 31, 2024, we entered into additional purchase commitments totaling $549.1 million, primarily related to power generation equipment for Solaris Power Solutions. We expect payments to occur over the course of two years, concluding in the fourth quarter of 2026. Each purchase order includes distinct product specifications, such as product type, quantity, delivery period, and price, as well as standard terms and conditions with respect to acceptance, delivery, transportation, inspection, assignment, taxes and performance failure. These commitments are consistent with our growth strategy and are cancellable but subject to significant termination penalties, ranging from 5% to 90% of the purchase price, depending on the timing of the cancellations.

Our ability to fulfill these purchase commitments depends on the successful execution of our growth strategy, which includes securing appropriate financing and securing customer contracts for the equipment on order. As discussed previously, two thirds of our fleet capacity is currently contracted for tenors of two to six years and we are in active negotiations for the remaining one third of capacity.

As of December 31, 2024, cash and cash equivalents, along with restricted cash, totaled $159.9 million. We believe that our cash reserves, operating cash flows and available capacity under our new revolving credit facility will provide adequate liquidity to meet our future operational needs for the next 12 months and beyond, including debt service obligations, dividend payments and potential cancellation penalties, should we be unable to secure financing for our growth strategy.

Share Repurchase Program

On March 1, 2023, the Company’s Board authorized a share repurchase plan allowing the repurchase of up to $50.0 million of the Company’s Class A common stock until the plan terminates pursuant to its provisions. During the year ended December 31, 2024, Solaris Inc. repurchased and retired 1,108,349 shares of the Company’s Class A common stock at an aggregate cost of $8.1 million, or $7.30 per share, under the share repurchase program. During the year ended December 31, 2023, Solaris Inc. repurchased and retired 3,163,778 shares of the Company’s Class A common stock at an aggregate cost of $26.4 million, or $8.37 per share.

As of December 31, 2024, we had repurchased and retired a total of 4,272,127 shares of Class A common stock for $34.6 million, or $8.09 per share, resulting in $15.4 million remaining under the repurchase authorization. No shares were repurchased during the three months ended December 31, 2024.

Cash Flows

The following table summarizes our cash flows for the periods indicated:

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Significant Sources and Uses of Cash Flows

Operating Activities. Net cash provided by operating activities decreased to $59.4 million for the year ended December 31, 2024, compared to $88.3 million for the year ended December 31, 2023. This $28.9 million decrease is primarily attributed to reduced business activity, as evidenced by a decrease in our fully utilized systems.

In the operating cash flow calculation, we begin with net income and adjust for non-cash items such as depreciation, amortization, and changes in provisions. For the year ended December 31, 2024, the sum of net income adjusted for these non-cash items was $90.5 million, compared to $92.0 million in the same period in 2023. Additionally, changes in working capital resulted in a $31.2 million decrease in cash for the year ended December 31, 2024, compared to a $3.8 million decrease in cash for the year ended December 31, 2023.

Investing Activities. Net cash used in investing activities was $305.0 million for the year ended December 31, 2024, an increase from $62.0 million for the year ended December 31, 2023. The $243.0 million increase is primarily attributed to $122.1 million used in the business acquisition of MER and $180.7 million paid for turbines and ancillary equipment for Solaris Power Solutions. This increase was partially offset by the absence of Solaris Logistics Solutions capital expenditures from our previous growth capital program in 2023.

Financing Activities. For the year ended December 31, 2024, net cash provided by financing activities totaled $400.0 million. This amount primarily reflects net debt financing proceeds of $295.0 million and proceeds from the Class A common stock offering of $160.9 million, partially offset by payments of $15.6 million on debt financing and debt extinguishment costs, $14.6 million in quarterly dividends to Class A common stock shareholders, $8.5 million in distributions to Solaris LLC unitholders, $8.1 million on share repurchases, and $5.3 million on payments of fees related to the Class A common stock offering. In comparison, net cash used in financing activities was $29.3 million for the year ended December 31, 2023. This was largely due to share repurchases of $26.4 million, dividends of $14.1 million to our Class A common stock shareholders, and $6.6 million in distributions to Solaris LLC unitholders, partially offset by net borrowings under the credit agreement of $22.0 million.

Future Uses of Cash

Our material cash commitments consist primarily of obligations under our debt financing, purchase commitments related to our power generation fleet growth program, obligations under the Tax Receivable Agreement, obligations under our finance and operating leases and purchase obligations as part of normal operations.

In 2025, we expect to pay approximately $34.0 million in interest expense on the Term Loan Agreement, based on the interest rate as of December 31, 2024 of 10.4%. Along with interest payments, principal repayments totaling $8.1 million will be due in 2025.

Total purchase commitments related to our power generation fleet growth program amounted to $788.8 million, consisting of $239.7 million outstanding as of December 31, 2024, and $549.1 million entered into in 2025. We estimate that approximately $693.8 million will be fulfilled in 2025, and approximately $95.0 million will be fulfilled in 2026. While these commitments are aligned with our growth strategy, they are cancellable, though subject to significant termination penalties ranging from 5% to 90% of the purchase price, depending on the timing of the cancellation. If we are unable to secure appropriate financing, we can manage the cancellation penalties, ensuring that we have the financial capacity to absorb such costs, as necessary.

We made payments of $3.6 million in January 2025 under the Tax Receivable Agreement. In order to satisfy these obligations, Solaris LLC made a distribution to Solaris Inc. of $3.6 million and made a concurrent cash distribution of $1.1 million on a pro rata basis to each of the other members of Solaris LLC. Future amounts payable under the Tax Receivable Agreement are dependent upon future events. See Note 15. “Income Taxes” under Part II. Item 8. “Financial Statements and Supplementary Data” for additional information regarding the Tax Receivable Agreement.

See Note 9. “Leases” under Part II, Item 8. “Financial Statements and Supplementary Data” for additional information regarding scheduled maturities of finance and operating leases.

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Off Balance Sheet Arrangements

Refer to Note 17. “Commitments and Contingencies – Purchase Commitments” under Part II. Item 8. “Financial Statements and Supplementary Data” included in the notes to our consolidated financial statements contained herein for a discussion of our off-balance sheet arrangements.

Critical Accounting Estimates

The preparation of our financial statements requires the use of judgments and estimates. Critical accounting estimates are those estimates that require us to make our most complex, subjective or uncertain judgments and have a material impact on the carrying values of assets and liabilities in our financial statements.

We base our estimates on historical experience and on various other assumptions we believe are 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. The following discussion highlights the critical accounting estimates that involve significant judgment and are integral to the preparation of our financial statements. This discussion should be read in conjunction with our consolidated financial statements and related notes included in this report.

Fair Value Measurements in Business Combinations

When accounting for a business combination, we allocate the purchase consideration to the various acquired assets and assumed liabilities based on their fair values. Our measurement of fair value involved significant estimates and assumptions, and we have up to one-year post-acquisition to finalize these measurements if necessary. For tangible and identifiable assets acquired, we employ various valuation methodologies, including discounted cash flow analysis. These analyses rely on assumptions regarding the timing and amount of future revenues and expenses. Key assumptions include probability of renewal curve, discount rates, future revenues, operating costs, and projections of capital expenditures, aligned with those used by principal market participants. Given the complexity of these calculations, we engage third-party specialists to assist in evaluating our assumptions and appropriately measuring the fair value of the assets acquired and liabilities assumed.

Impairment of Long-Lived Assets and Goodwill

Long-Lived Assets

We evaluate the carrying value of long-lived assets, which consists of property, plant, and equipment, assets held for lease, definite-lived intangible assets and right-of-use lease assets, for impairment whenever events or changes in circumstances suggest that the carrying amount may not be recoverable. These events may include insufficient cash flows or plans to dispose of or sell assets before the end of their originally estimated useful lives.

The impairment analysis requires significant judgment in determining the asset group’s future cash flows. For assets classified as held for use, we group individual assets at the lowest level where identifiable cash flows are largely independent of other assets. We then estimate the future undiscounted cash flows from the use and eventual disposal of the asset group and compare them to the asset group’s carrying amount.

If the estimated undiscounted cash flows are less than the carrying amount, we then estimate the fair value of the asset group using a discounted cash flow analysis. This process involves key assumptions, including management’s forecasts of future operating performance, such as revenue growth rates and expected profitability margins, estimates of the remaining useful life and service potential of the assets, and a discount rate based on our weighted average cost of capital. An impairment loss is recorded if the carrying amount exceeds the estimated fair value. These estimates are highly subjective and can be impacted by factors such as changes in market conditions, operational performance, or shifts in the company’s strategy.

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Goodwill

Goodwill represents the excess of the purchase price over the fair value of identifiable assets acquired and liabilities assumed in a business combination. Goodwill is not amortized but is subject to annual impairment testing, typically performed during the fourth quarter, or more frequently if events or changes in circumstances suggest that the carrying value may not be recoverable. Such events may include adverse economic conditions, increased competition or shifts in market dynamics, all of which may necessitate more frequent impairment assessments.

The impairment testing for goodwill involves significant estimates and judgment. We first assess whether it is more likely than not that the carrying value of a reporting unit exceeds its fair value through a qualitative analysis. If we determine that this condition exists, we then perform a quantitative analysis, comparing the fair value of the reporting unit to its carrying amount. If the carrying value exceeds the fair value, an impairment loss is recognized. This process involves subjective estimates, including projections of future cash flows, market conditions, and the applicable discount rate. Changes in these estimates or the occurrence of adverse events could result in impairment charges in future periods, impacting the financial results.

Income Taxes

Solaris Inc. is a corporation and, as a result, is subject to United States federal, state and local income taxes. For the years ended December 31, 2024 and 2023 we recognized a combined United States federal and state expense for income taxes of $8.0 million and $7.8 million, respectively. Solaris LLC is treated as a partnership for United States federal income tax purposes and therefore does not pay federal income tax on its taxable income. Instead, the Solaris LLC members are liable for federal income tax on their respective shares of the Company’s taxable income reported on the members’ United States federal income tax returns.

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 routinely evaluate the realizability of our deferred tax assets by assessing the likelihood that our deferred tax assets will be recovered based on all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, estimates of future taxable income, tax planning strategies and results of operations. Estimating future taxable income is inherently uncertain and requires judgment. In projecting future taxable income, we consider our historical results and incorporate certain assumptions, including revenue growth and operating margins, among others. As of December 31, 2024 and 2023, we had $43.6 million and $48.0 million of net deferred tax assets, respectively.

See Note 15. “Income Taxes” under Part II, Item 8. “Financial Statements and Supplementary Data.” for additional information.

Tax Receivable Agreement

As described in Note 15. “Income Taxes” under Part II, Item 8. “Financial Statements and Supplementary Data,” Solaris Inc. is a party to the Tax Receivable Agreement under which it is contractually committed to pay the TRA Holders 85% of the net cash savings, if any, in United States 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 its IPO as a result of certain increases in tax basis, and certain tax benefits attributable to imputed interest as a result of Solaris Inc.’s acquisition (or deemed acquisition for United States federal income tax purposes) of Solaris LLC Units in connection with its IPO or pursuant to an exercise of the Redemption Right or the Call Right (each as defined in the Solaris LLC Agreement) and additional tax basis arising from any payments Solaris Inc. makes under the Tax Receivable Agreement.

The projection of future taxable income involves estimates which require significant judgment. Actual taxable income may differ from our estimates, which could significantly impact the liability relating to the Tax Receivable Agreement. The Company accounts for amounts payable under the Tax Receivable Agreement in accordance with Accounting Standard Codification (“ASC”) Topic 450, Contingencies.

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Recent Accounting Pronouncements

See Note 2. “Summary of Significant Accounting Policies — New Accounting Standards” under Part II. Item 8. “Financial Statements and Supplementary Data” for a discussion of recent accounting pronouncements.

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Item 7.      Management’s Discussion and Analysis of Financial Condition and Results of Operations

Unless the context requires otherwise, references in this Annual Report to the "Company," "Solaris," "we," "us" and "our" refer to Solaris Oilfield Infrastructure, Inc. ("Solaris Inc.") and its consolidated subsidiaries, including Solaris Oilfield Infrastructure, LLC (“Solaris LLC”), our operating subsidiary. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the accompanying financial statements and related notes. This section of this Annual Report generally discusses 2023 and 2022 items and year-to-year comparisons between 2023 and 2022. Discussions of 2021 items and year-to-year comparisons between 2022 and 2021 that are not included in this Annual Report can be found in “Part II, Item 7. “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022. The following discussion contains “forward-looking statements” that reflect our plans, estimates, beliefs and expected performance. Our actual results may differ materially from those anticipated as discussed in these forward-looking statements as a result of a variety of risks and uncertainties, including those described above in “Cautionary Statement Regarding Forward-Looking Statements” and “Risk Factors” included elsewhere in this Annual

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Report, all of which are difficult to predict. In light of these risks, uncertainties and assumptions, the forward-looking events discussed may not occur. We assume no obligation to update any of these forward-looking statements except as otherwise required by law.

Overview

We design and manufacture specialized equipment, which combined with field technician support, last mile and mobilization logistics services and our software solutions, enables us to provide a service offering that helps oil and natural gas operators and their suppliers drive efficiencies that reduce operational footprint and costs during the completion phase of well development. We service most active oil and natural gas basins in the United States.

Recent Trends and Outlook

Demand for our services is predominantly influenced by the level of oil and natural gas well drilling and completion activity in the U.S. During 2023, U.S. drilling and completion activity, as measured by the Baker Hughes U.S. Land Rig Count, declined 5% on a full year average basis and over 20% from the start to the end of the year. This activity decline was primarily driven by a decrease in commodity prices. Average WTI oil prices declined over 20% from the mid-$90s per barrel range in 2022 to the mid-$70s per barrel range in 2023. Average Henry Hub natural gas prices remained in a range between $2 and $3 per MMBtu for most of 2023, which reflected a 50-70% decrease from price levels in 2022.

During 2023, our fully utilized total system count grew from 95 systems for the year ended December 31, 2022 to 109 systems for the year ended December 31, 2023 outpacing the Baker Hughes rig count trend due primarily to new technology-led growth with new and existing customers. An increase in pricing at the start of 2023 and incremental earnings from our new services also allowed us to grow earnings despite a decline in drilling and completion activity during the year. As a result, our operating profit grew over 19% despite the industry activity decline.

In 2024, we expect the Company’s revenue and profitability to track closer to the overall direction of U.S. drilling and completion activity. Oil prices currently remain in the mid-$70s per barrel range in 2024, which we believe should support a sustained level of oil-directed U.S. drilling and completion activity. Today oil-directed drilling activity comprises approximately 80% of the total Baker Hughes U.S. Land rig count.

Our 2023 capital expenditures of approximately $64 million were down compared to full year 2022. Following the completion of our prior growth capital program in 2023, capital expenditure spending is expected to decline. The Company expects full year 2024 capital expenditures to be below $15 million, which reflects an over 75% decrease from total capital expenditures in 2023. This reduction in capital expenditures combined with a relatively stable market should allow us to generate significantly increased cash flow in 2024.

The sustainability of favorable supply-demand dynamics and a strong commodity environment will depend on multiple factors, including any supply chain disruptions, potential regulatory changes, uncertainty around a potential economic slowdown and potential impacts from geopolitical disruptions, including the war in Ukraine and the Israel and Hamas conflict. Additionally, consolidation can drive procurement strategy changes, which has historically resulted in both market share gains and losses for the Company. We expect both consolidation and financial discipline will likely continue to be important themes for the energy industry going forward.

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Results of Operations

Year Ended December 31, 2023 Compared to Year Ended December 31, 2022

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Revenue

Revenue decreased $27.1 million, or 8%, to $292.9 million for the year ended December 31, 2023 compared to $320.0 million for the year ended December 31, 2022. Revenue decreased mainly due to a decrease in last mile logistics services activity. The decrease in revenue was partially offset by an increase in fully utilized systems and increased pricing. As our new technology introductions allowed us to provide more systems per location serviced, total fully utilized systems increased from 95 systems for the year ended December 31, 2022 to 109 systems for the year ended December 31, 2023.

Cost of Services

Cost of services, excluding depreciation and amortization expense, decreased $41.9 million, or 19%, to $177.8 million for the year ended December 31, 2023 compared to $219.8 million for the year ended December 31, 2022. The decrease was primarily due to a decrease in last mile and mobilization logistics services activity, partially offset by increased systems costs in line with the increase in fully utilized systems discussed above. Cost of services as a percentage of revenue was 61% and 69% for the year ended December 31, 2023 and 2022, respectively.

Property Tax Contingency

We are subject to a number of state and local taxes that are not income-based. As many of these taxes are subject to assessment and audit by the taxing authorities, it is possible that an assessment or audit could result in additional taxes due. We accrue for additional taxes when we determine that it is probable that we will have incurred a liability and we can reasonably estimate the amount of the liability. On June 16, 2022, Cause Number CV20-09-372, styled Solaris Oilfield Site Services v. Brown County Appraisal District, was presented to the 35th District Court of Brown County, Texas. The 35th District Court of Brown County ruled in favor of Brown County Appraisal District regarding the disqualification of our equipment for certain property tax exemptions. On July 20, 2022, we filed an appeal with the Eleventh District of Texas – Eastland Court of Appeals, and an appellate hearing relating thereto was held on April 13, 2023. We anticipate that a final ruling from the Eastland Court of Appeals will be delivered sometime in the first half of 2024. In connection

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therewith, we have recognized $3.1 million in Accrued Liabilities as of December 31, 2023. No additional contingencies were recognized during the year ended December 31, 2023. If this litigation is ultimately resolved against us, in whole or in part, it is possible that the resolution of this matter could be material to our consolidated results of operations or cash flows.

Selling, General and Administrative Expenses

Selling, general and administrative expenses, excluding depreciation and amortization, increased $3.9 million, or 17%, to $27.0 million for the year ended December 31, 2023 compared to $23.1 million for the year ended December 31, 2022. The increase is primarily due to increases in headcount and professional fees.

Impairment of Fixed Assets

During the year ended December 31, 2023, we entered into a non-binding sale agreement with a third party to sell certain fixed assets. These fixed assets met the criteria as assets held for sale and are included as such on the consolidated balance sheet as of December 31, 2023. As the carrying value of the fixed assets classified as held for sale exceeded their fair value less estimated costs to sell, we recorded an impairment loss of $1.4 million in the consolidated statement of operations for the year ended December 31, 2023.

Other Operating Expense, Net

Other operating expense decreased $1.2 million, or 67%, to $0.6 million for the year ended December 31, 2023 compared to $1.8 million for the year ended December 31, 2022. Other operating expense in the year ended December 31, 2023 primarily relate to credit losses and loss on disposal of assets, partially offset by sales tax rebates. Other operating expense in the year ended December 31, 2022 primarily relate to loss on disposal of assets, change in the TRA liability, credit losses, gain on insurance claims and other settlements, and costs related to the evaluation of potential acquisitions.

Interest Expense, Net

Interest expense increased $2.8 million, or 560%, to $3.3 million for the year ended December 31, 2023 compared to $0.5 million for the year ended December 31, 2022. The increase was primarily due to an increase in average borrowings outstanding and effective interest rates on the senior secured credit facility.

Provision for Income Taxes

During the year ended December 31, 2023, we recognized a combined United States federal and state expense for income taxes of $7.8 million, which is flat compared to the $7.8 million income tax expense we recognized during the year ended December 31, 2022. The effective combined United States federal and state income tax rates were 16.8% and 18.9% for the year ended December 31, 2023 and 2022, respectively. The effective tax rate differed from the statutory rate primarily due to Solaris LLC’s treatment as a partnership for United States federal income tax purposes.

Comparison of Non-GAAP Financial Measures

We view EBITDA and Adjusted EBITDA as important indicators of performance. We use them to assess our results of operations because it allows us, our investors and our lenders to compare our operating performance on a consistent basis across periods by removing the effects of varying levels of interest expense due to our capital structure, depreciation and amortization due to our asset base and other items that impact the comparability of financial results from period to period. We present EBITDA and Adjusted EBITDA because we believe they provide useful information regarding trends and other factors affecting our business in addition to measures calculated under generally accepted accounting principles in the United States (“GAAP”).

We define EBITDA as net income, plus (i) depreciation and amortization expense, (ii) interest expense and (iii) income tax expense, including franchise taxes. We define Adjusted EBITDA as EBITDA plus (i) stock-based

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compensation expense and (ii) certain non-cash items and any extraordinary, unusual or non-recurring gains, losses or expenses.

EBITDA and Adjusted EBITDA should not be considered in isolation or as substitutes for an analysis of our results of operation and financial condition as reported in accordance with GAAP. Net income is the GAAP measure most directly comparable to EBITDA and Adjusted EBITDA. EBITDA and Adjusted EBITDA should not be considered alternatives to net income presented in accordance with GAAP. Because EBITDA and Adjusted EBITDA may be defined differently by other companies in our industry, our definitions of EBITDA and Adjusted EBITDA may not be comparable to similarly titled measures of other companies, thereby diminishing their utility.

The following table presents a reconciliation of Net income to EBITDA and Adjusted EBITDA for each of the periods indicated.

Year Ended December 31, 2023 Compared to Year Ended December 31, 2022: EBITDA and Adjusted EBITDA

EBITDA increased $13.9 million to $86.1 million for the year ended December 31, 2023 compared to $72.2 million for the year ended December 31, 2022. Adjusted EBITDA increased $12.9 million to $96.7 million for the year ended December 31, 2023 compared to $83.8 million for the year ended December 31, 2022. The increases in EBITDA and Adjusted EBITDA were primarily due to the changes in revenues and expenses, discussed above.

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Liquidity and Capital Resources

Overview

Our primary sources of liquidity to date have been cash flows from operations, borrowings under our credit agreements and proceeds from equity offerings. Our primary uses of capital have been to fund ongoing operations, capital expenditures to support organic growth, including our system development and related maintenance and system upgrades, repurchase shares of Class A common stock in the open market, and pay dividends. Although no assurance can be given, depending upon market conditions and other factors, we may also have the ability to issue additional equity and debt if needed.

As of December 31, 2023, cash and cash equivalents totaled $5.8 million. We have $30.0 million in borrowings outstanding under our Credit Agreement and have $41.3 million of available borrowing capacity. We believe that our cash on hand, operating cash flow and available borrowings under our Credit Agreement will be sufficient to fund our operations for the next 12 months and beyond. See Note 8. “Senior Secured Credit Facility” under Item 8. “Financial Statements and Supplementary Data” for additional information regarding our Credit Facility.

Cash Flows

The following table summarizes our cash flows for the periods indicated:

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Analysis of Cash Flow Changes for Year Ended December 31, 2023 Compared to Year Ended December 31, 2022

Operating Activities. Net cash provided by operating activities was $89.9 million for the year ended December 31, 2023, compared to net cash provided by operating activities of $68.0 million for the year ended December 31, 2022. The increase of $21.9 million in operating cash flow was primarily attributable to increased profitability from operations.

Investing Activities. Net cash used in investing activities was $62.0 million for the year ended December 31, 2023, compared to $79.5 million for the year ended December 31, 2022. The decrease in investing activities of $17.5 million is primarily due to a reduction in capital expenditures as the build out of our new service lines was largely completed during 2023.

Financing Activities. Net cash used in financing activities for the year ended December 31, 2023 was $30.9 milion. The Company repurchased shares of $26.4 million and distributed a total of $20.7 million to shareholders in the form of dividends. Net borrowings under the Credit Agreement for the year ended December 31, 2023 were $22.0 million. Net cash used in financing activities of $16.1 million for the year ended December 31, 2022 was primarily related to dividends of $19.6 million, partially offset by net borrowings under the credit agreement of $8.0 million.

Future sources and uses of cash

Our material cash commitments consist primarily of obligations under our Credit Agreement, Tax Receivable Agreement, finance and operating leases for property and equipment, and purchase obligations as a part of normal operations. We have no material off balance sheet arrangements as of December 31, 2023, except for purchase commitments under supply agreements disclosed below.

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In 2024, we expect to pay approximately $0.2 million in commitment fees on our Credit Agreement, calculated based on the unused portion of lender commitments as of December 31, 2023, at the applicable commitment fee rate of 0.375%. As of December 31, 2023, if our borrowings under the Credit Agreement remain at $30.0 million, we expect to pay approximately $2.5 million in interest within the next twelve months, calculated based on the weighted average interest rate on the borrowings outstanding as of December 31, 2023 of approximately 8.38%.

We made payments of $1.1 million in January 2023 under the Tax Receivable Agreement. Solaris LLC made a tax distribution to Solaris Inc. of $1.1 million in order to satisfy these obligations and concurrently made a cash distribution on a pro rata basis to each of the other members of Solaris LLC of $0.4 million. Future amounts payable under the Tax Receivable Agreement are dependent upon future events. See Note 10. “Income Taxes” under Item 8. “Financial Statements and Supplementary Data” for additional information regarding the Tax Receivable Agreement.

See Note 7. “Leases” under Item 8. “Financial Statements and Supplementary Data” for additional information regarding scheduled maturities of finance and operating leases.

As of December 31, 2023, we had purchase obligations of approximately $3.5 million payable within the next twelve months. See Note 12. “Commitments and Contingencies” under Item 8. “Financial Statements and Supplementary Data” for information regarding scheduled contractual obligations.

Critical Accounting 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.

Value of Long-Lived Assets, Definite-Lived Intangible Assets and Goodwill

We carry a variety of long-lived assets on our balance sheet including property, plant and equipment, goodwill and other intangibles. Impairment is the condition that exists when the carrying amount of a long-lived asset exceeds its fair value, and any impairment charge that we record reduces our operating income. Goodwill is the excess of the cost of an acquired entity over the net of the amounts assigned to assets acquired and liabilities assumed. We conduct impairment tests on goodwill annually, on October 31, or more frequently whenever events or changes in circumstances indicate an impairment may exist. We conduct impairment tests on long-lived assets, other than goodwill, whenever events or changes in circumstances indicate that the carrying value may not be recoverable.

Key estimates relate to the fair value and recoverability of carrying values of long-lived assets, definite-lived intangible assets and goodwill. These estimates include management’s short-term and long-term forecast of operating performance, including revenue growth rates and expected profitability margins, estimates of the remaining useful life and service potential of the assets, a discount rate based on our weighted average cost of capital, forecasted capital expenditures and the timing of expected future cash flows based on market conditions. Impairment assessments also incorporate inherent uncertainties, including projected commodity pricing, supply and demand for our services and future market conditions, which are difficult to predict in volatile economic and actual results could materially differ from the estimated assumptions utilized in our forecasts.

If market conditions deteriorate, including crude oil prices significantly declining and remaining at low levels for a sustained period of time, we could be required to record impairments of the carrying value of our long-lived assets,

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definite-lived intangible assets or goodwill in the future which could have a material adverse impact on our operating results.

Income Taxes

Solaris Inc. is a corporation and, as a result, is subject to United States federal, state and local income taxes. For the years ended December 31, 2023 and 2022 we recognized a combined United States federal and state expense for income taxes of $7.8 million. Solaris LLC is treated as a partnership for United States federal income tax purposes and therefore does not pay federal income tax on its taxable income. Instead, the Solaris LLC members are liable for federal income tax on their respective shares of the Company’s taxable income reported on the members’ United States federal income tax returns.

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 routinely evaluate the realizability of our deferred tax assets by assessing the likelihood that our deferred tax assets will be recovered based on all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, estimates of future taxable income, tax planning strategies and results of operations. Estimating future taxable income is inherently uncertain and requires judgment. In projecting future taxable income, we consider our historical results and incorporate certain assumptions, including revenue growth and operating margins, among others. As of December 31, 2023 and 2022, we had $48.0 million and $55.4 million of deferred tax assets, respectively.

See Note 10. “Income Taxes” under Part II, Item 8. “Financial Statements and Supplementary Data.” for additional information.

Tax Receivable Agreement

As described in Note 10. “Income Taxes” under Part II, Item 8. “Financial Statements and Supplementary Data,” Solaris Inc. is a party to the Tax Receivable Agreement under which it is contractually committed to pay the TRA Holders 85% of the net cash savings, if any, in United States 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 our initial public offering as a result of certain increases in tax basis, and certain tax benefits attributable to imputed interest as a result of Solaris Inc.’s acquisition (or deemed acquisition for United States federal income tax purposes) of Solaris LLC Units in connection with the initial public offering (“IPO”) or pursuant to an exercise of the Redemption Right or the Call Right (each as defined in the Solaris LLC Agreement) and additional tax basis arising from any payments Solaris Inc. makes under the Tax Receivable Agreement.

The projection of future taxable income involves estimates which require significant judgment. Actual taxable income may differ from our estimates, which could significantly impact the liability relating to the Tax Receivable Agreement. The Company accounts for amounts payable under the Tax Receivable Agreement in accordance with Accounting Standard Codification (“ASC”) Topic 450, Contingencies.

Recent Accounting Pronouncements

See Note 2. “Summary of Significant Accounting Policies — Accounting Standards Recently Issued But Not Yet Adopted” under Item 8. “Financial Statements and Supplementary Data” for a discussion of recent accounting pronouncements.

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Item 7.      Management’s Discussion and Analysis of Financial Condition and Results of Operations

Unless the context requires otherwise, references in this Annual Report to the "Company," "Solaris," "we," "us" and "our" refer to (i) Solaris Oilfield Infrastructure, LLC ("Solaris LLC") and its consolidated subsidiaries prior to the completion of our initial public offering and (ii) Solaris Oilfield Infrastructure, Inc. ("Solaris Inc.") and its consolidated subsidiaries following the completion of our initial public offering. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the accompanying financial statements and related notes. This section of this Form 10-K generally discusses 2022 and 2021 items and year-to-year comparisons between 2022 and 2021. Discussions of 2020 items and year-to-year comparisons between 2021 and 2020 that are not included in this Form 10-K can be found in “Part II, Item 7. “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021. The following discussion contains “forward-looking statements” that reflect our plans, estimates, beliefs and expected performance. Our actual results may differ materially from those anticipated as discussed in these forward-looking statements as a result of a variety of risks and uncertainties, including those described above in “Cautionary Statement Regarding Forward-Looking Statements” and “Risk Factors” included elsewhere in this Annual Report, all of which are difficult to predict. In light of these risks, uncertainties and assumptions, the forward-looking events discussed may not occur. We assume no obligation to update any of these forward-looking statements except as otherwise required by law.

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Overview

We design and manufacture specialized equipment, which combined with field technician support, logistics services and our software solutions, enables us to provide a service offering that helps oil and natural gas operators and their suppliers drive efficiencies that reduce operational footprint and costs during the completion phase of well development. Our equipment and services are deployed across active oil and natural gas basins in the United States.

Recent Trends and Outlook

Supply and demand dynamics in the oil and natural gas industry remained tight throughout 2022. Continued supply chain tightness, gradual reopening of certain global economies and geopolitical conflicts, among other factors, drove WTI oil prices to fluctuate between $70 per barrel and over $120 per barrel throughout 2022. Henry Hub natural gas prices also fluctuated between $3.70 per MMBtu and nearly $10.00 per MMBtu throughout 2022. While an improvement in commodity prices has historically driven an increase in drilling and completion activity in North America, overall activity levels have been impacted by industry capital discipline and supply chain challenges. Late in December 2022, Henry Hub natural gas prices began to decline to approximately $2.40 per MMBtu at the beginning of February 2023. While the extent and duration of these lower natural gas commodity prices is unknown, a decline in our customers’ activity in natural gas basins may impact our overall activity levels.

North American land activity improved throughout 2022 as the Baker Hughes Land rig count increased 52% on average compared to a 52% increase in our fully utilized systems during 2022. Overall, demand for our offerings is predominantly influenced by the level of oil and natural gas well drilling and completion activity. While our fully utilized systems are highly correlated with US land rig count activity over longer periods, timing differences between drilling and completion activity can result in lags of one to two quarters or longer.

In 2022, our system count growth outpaced general activity due to new technology introductions. In 2023, we expect slower general market growth in North American land activity due to continued capital discipline among oil and gas operators and supply chain and labor constraints limiting the addition of additional drilling rig and completion crews. We expect our activity, as measured by fully utilized systems, will continue to outpace the market in 2023 as we enhance our offering and gain additional market share through additional deployments of our new technology.

The sustainability of favorable supply-demand dynamics and a strong commodity environment will depend on multiple factors, including the health of the global economy, any further supply chain disruptions or potential regulatory changes. Continued industry consolidation amongst some of our E&P and oil service customers combined with financial discipline from publicly traded energy companies has reduced industry-wide capital spending, resulting in activity levels that remain below pre-pandemic levels despite the recovery in commodity prices. Additionally, consolidation can drive procurement strategy changes, which has historically resulted in both market share gains and losses for the Company. We expect both consolidation and financial discipline will likely continue to be important themes for the energy industry going forward.

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Results of Operations

Year Ended December 31, 2022 Compared to Year Ended December 31, 2021

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Revenue

Revenue increased $160.8 million, or 101%, to $320.0 million for the year ended December 31, 2022 compared to $159.2 million for the year ended December 31, 2021. Revenue increased mainly due to an activity-driven increase in demand for our products and services, as well as new technology introductions and increased pricing. Mobile proppant systems on a fully utilized basis increased from 57 systems for the year ended December 31, 2021 to 86 systems for the year ended December 31, 2022, in response to the increase in industry activity levels and due to activity growth with new and existing customers led by the introduction of new products.

Cost of Services

Cost of services, excluding depreciation and amortization expense, increased $104.3 million, or 90%, to $219.8 million for the year ended December 31, 2022 compared to $115.5 million for the year ended December 31, 2021. The increase was primarily due to an increase in operating costs to support an activity-driven increase in demand for our products and services. Cost of services as a percentage of revenue was 69% and 73% for the year ended December 31, 2022 and 2021, respectively.

Property Tax Contingency

We are subject to a number of state and local taxes that are not income-based. As many of these taxes are subject to assessment and audit by the taxing authorities, it is possible that an assessment or audit could result in additional taxes due. We accrue for additional taxes when we determine that it is probable that we will have incurred a liability and we can reasonably estimate the amount of the liability. On June 16, 2022, Cause Number CV20-09-372, styled Solaris Oilfield Site Services v. Brown County Appraisal District, was presented to the 35th District Court of Brown County, Texas. The 35th District Court of Brown County ruled in favor of Brown County Appraisal District regarding the disqualification of our equipment for certain property tax exemptions. While we are vigorously appealing this ruling, we have recognized $3.1 million in accrued liabilities and cost of services as of and for the the year ended December 31, 2022. If this litigation is ultimately resolved against us, in whole or in part, it is possible that the resolution of this matter could be material to our consolidated results of operations or cash flows.

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Selling, General and Administrative Expenses

Selling, general and administrative expenses, excluding depreciation and amortization, increased $3.8 million, or 20%, to $23.1 million for the year ended December 31, 2022 compared to $19.3 million for the year ended December 31, 2021. The increase is primarily due to increases in headcount and professional fees.

Other Operating Expense (Income)

Other operating expense (income) decreased $4.2 million, or 178% to expense of $1.8 million for the year ended December 31, 2022 compared to income of $2.4 million for the year ended December 31, 2021. Other operating expense in the twelve months ended December 31, 2022 primarily relate to loss on disposal of assets, change in the TRA liability, credit losses, gain on insurance claims and other settlements, and costs related to the evaluation of potential acquisitions. Other operating income in the twelve months ended December 31, 2021 primarily relate to employee retention credits, credit losses, gain on insurance claims, transaction costs, and loss on disposal of assets.

Provision for Income Taxes

During the year ended December 31, 2022, we recognized a combined United States federal and state expense for income taxes of $7.8 million, an increase of $7.2 million as compared to the $0.6 million income tax expense we recognized during the year ended December 31, 2021. This change was attributable to operating gains. The effective combined United States federal and state income tax rates were 18.9% and (98.7)% for the year ended December 31, 2022 and 2021, respectively. The effective tax rate differed from the statutory rate primarily due to Solaris LLC’s treatment as a partnership for United States federal income tax purposes.

Comparison of Non-GAAP Financial Measures

We view EBITDA and Adjusted EBITDA as important indicators of performance. We define EBITDA as net income, plus (i) depreciation and amortization expense, (ii) interest expense and (iii) income tax expense, including franchise taxes. We define Adjusted EBITDA as EBITDA plus (i) stock-based compensation expense and (ii) certain non-cash items and any extraordinary, unusual or non-recurring gains, losses or expenses.

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EBITDA and Adjusted EBITDA should not be considered in isolation or as substitutes for an analysis of our results of operation and financial condition as reported in accordance with accounting standards generally accepted in the United States (“GAAP”). Net income is the GAAP measure most directly comparable to EBITDA and Adjusted EBITDA. EBITDA and Adjusted EBITDA should not be considered alternatives to net income presented in accordance with GAAP. Because EBITDA and Adjusted EBITDA may be defined differently by other companies in our industry, our definitions of EBITDA and Adjusted EBITDA may not be comparable to similarly titled measures of other companies, thereby diminishing their utility.

The following table presents a reconciliation of Net income to EBITDA and Adjusted EBITDA for each of the periods indicated.

Year Ended December 31, 2022 Compared to Year Ended December 31, 2021: EBITDA and Adjusted EBITDA

EBITDA increased $45.4 million to $72.2 million for the year ended December 31, 2022 compared to $26.8 million for the year ended December 31, 2021. Adjusted EBITDA increased $53.7 million to $83.8 million for the year ended December 31, 2022 compared to $30.1 million for the year ended December 31, 2021. The increases in EBITDA and Adjusted EBITDA were primarily due to the changes in revenues and expenses, discussed above.

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Liquidity and Capital Resources

Overview

Our primary sources of liquidity to date have been cash flows from operations, borrowings under our credit agreements and proceeds from equity offerings. Our primary uses of capital have been to fund ongoing operations, capital expenditures to support organic growth, including our fleet development and related maintenance and fleet upgrades, repurchase shares of Class A common stock in the open market, and pay dividends. Although no assurance can be given, depending upon market conditions and other factors, we may also have the ability to issue additional equity and debt if needed.

As of December 31, 2022, cash and cash equivalents totaled $8.8 million. We have $8.0 million in borrowings outstanding under our Credit Agreement and have $42.0 million of available borrowing capacity. We believe that our cash on hand, operating cash flow and available borrowings under our Credit Agreement will be sufficient to fund our operations for the next 12 months and beyond. See Note 8. “Senior Secured Credit Facility” under Item 8. “Financial Statements and Supplementary Data” for additional information regarding our Credit Facility.

Cash Flows

The following table summarizes our cash flows for the periods indicated:

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Analysis of Cash Flow Changes for Year Ended December 31, 2022 Compared to Year Ended December 31, 2021

Operating Activities. Net cash provided by operating activities was $68.0 million for the year ended December 31, 2022, compared to net cash provided by operating activities of $16.5 million for the year ended December 31, 2021. The increase of $51.5 million in operating cash flow was primarily attributable to increased profitability from operations.

Investing Activities. Net cash used in investing activities was $79.5 million for the year ended December 31, 2022, compared to $19.5 million for the year ended December 31, 2021. The increase in investing activities of $60.0 million is primarily due to capital expenditures related to new technologies and enhancements to our fleet.

Financing Activities. Net cash used in financing activities of $16.1 million for the year ended December 31, 2022, was primarily related to quarterly dividends of $19.6 million, payments under finance leases of $1.6 million, payments under insurance premium financing of $1.5 million and $1.1 million of payments related to vesting of stock-based compensation, partially offset by net borrowings under the credit agreement of $8.0 million. Net cash used in financing activities of $20.8 million for the year ended December 31, 2021 was primarily related to quarterly dividends of $19.2 million and $0.8 million of payments related to vesting of stock-based compensation.

Future sources and uses of cash

Our material cash commitments consist primarily of obligations under our Credit Agreement, Tax Receivable Agreement, finance and operating leases for property and equipment, and purchase obligations as a part of normal operations. We have no material off balance sheet arrangements as of December 31, 2022, except for purchase commitments under supply agreements disclosed below.

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In 2023, we expect to pay approximately $0.2 million in commitment fees on our Credit Agreement, calculated based on the unused portion of lender commitments, at the applicable commitment fee rate of 0.375%. As of December 31, 2022, if our borrowings under the Credit Agreement remain at $8.0 million, we expect to pay approximately $0.6 million in interest within the next twelve months, calculated based on the weighted average interest rate on the borrowings outstanding as of December 31, 2022 of approximately 7.16%.

We made payments of $1.1 million in January 2023 under the Tax Receivable Agreement. Solaris LLC made a tax distribution to Solaris Inc. of $1.1 million in order to satisfy these obligations and concurrently made a cash distribution on a pro rata basis to each of the other members of Solaris LLC of $0.4 million. Future amounts payable under the Tax Receivable Agreement are dependent upon future events. See Note 10. “Income Taxes” under Item 8. “Financial Statements and Supplementary Data” for additional information regarding the Tax Receivable Agreement.

See Note 7. “Leases” under Item 8. “Financial Statements and Supplementary Data” for additional information regarding scheduled maturities of finance and operating leases.

As of December 31, 2022, we had purchase obligations of approximately $29.7 million payable within the next twelve months. See Note 12. “Commitments and Contingencies” under Item 8. “Financial Statements and Supplementary Data” for information regarding scheduled contractual obligations.

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

Our revenue is primarily derived from short-term contracts and consists of fees charged to customers for the use of our equipment and labor services, mobilization and transportation of our equipment, services coordinating the transportation of proppant delivery to our equipment, transloading services and for inventory software services, each of which are considered to be separate performance obligations.

The majority of our contracts contain multiple performance obligations, such as work orders containing a combination of equipment, transportation, and labor services. We allocate the transaction price to each performance obligation identified in the contract based on relative stand-alone selling prices, or estimates of such prices, and recognize the related revenue as control of each individual product or service is transferred to the customer, in satisfaction of the corresponding performance obligations. We measure progress using an input method based on resources consumed or expended relative to the total resources expected to be consumed or expended. We assess our customers’ ability and intention to pay, which is based on a variety of factors including historical payment experience and financial condition and we typically charge our customers on a weekly or monthly basis.

Variable consideration typically may relate to discounts, price concessions and incentives. The Company estimates variable consideration based on the amount of consideration we expect to receive. The Company accrues revenue on an ongoing basis to reflect updated information for variable consideration as performance obligations are met.

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Value of Long-Lived Assets, Definite-Lived Intangible Assets and Goodwill

We carry a variety of long-lived assets on our balance sheet including property, plant and equipment, goodwill and other intangibles. Impairment is the condition that exists when the carrying amount of a long-lived asset exceeds its fair value, and any impairment charge that we record reduces our operating income. Goodwill is the excess of the cost of an acquired entity over the net of the amounts assigned to assets acquired and liabilities assumed. We conduct impairment tests on goodwill annually, on October 31, or more frequently whenever events or changes in circumstances indicate an impairment may exist. We conduct impairment tests on long-lived assets, other than goodwill, whenever events or changes in circumstances indicate that the carrying value may not be recoverable.

Key estimates relate to the fair value and recoverability of carrying values of long-lived assets, definite-lived intangible assets and goodwill. These estimates include management’s short-term and long-term forecast of operating performance, including revenue growth rates and expected profitability margins, estimates of the remaining useful life and service potential of the assets, a discount rate based on our weighted average cost of capital, forecasted capital expenditures and the timing of expected future cash flows based on market conditions. Impairment assessments also incorporate inherent uncertainties, including projected commodity pricing, supply and demand for our services and future market conditions, which are difficult to predict in volatile economic and actual results could materially differ from the estimated assumptions utilized in our forecasts.

If market conditions deteriorate, including crude oil prices significantly declining and remaining at low levels for a sustained period of time, we could be required to record impairments of the carrying value of our long-lived assets, definite-lived intangible assets or goodwill in the future which could have a material adverse impact on our operating results.

Income Taxes

Solaris Inc. is a corporation and, as a result, is subject to United States federal, state and local income taxes. For the year ended December 31, 2022 we recognized a combined United States federal and state expense for income taxes of $7.8 million. For the year ended December 31, 2021 we recognized an income tax expense of $0.6 million. Solaris LLC is treated as a partnership for United States federal income tax purposes and therefore does not pay federal income tax on its taxable income. Instead, the Solaris LLC members are liable for federal income tax on their respective shares of the Company’s taxable income reported on the members’ United States federal income tax returns.

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 routinely evaluate the realizability of our deferred tax assets by assessing the likelihood that our deferred tax assets will be recovered based on all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, estimates of future taxable income, tax planning strategies and results of operations. Estimating future taxable income is inherently uncertain and requires judgment. In projecting future taxable income, we consider our historical results and incorporate certain assumptions, including revenue growth and operating margins, among others. As of December 31, 2022 and 2021, we had $55.4 million and $62.9 million of deferred tax assets, respectively.

See Note 10. “Income Taxes” under Part II, Item 8. “Financial Statements and Supplementary Data.” for additional information.

Tax Receivable Agreement

As described in Note 10. “Income Taxes” under Part II, Item 8. “Financial Statements and Supplementary Data”, Solaris Inc. is a party to the Tax Receivable Agreement under which it is contractually committed to pay the TRA Holders 85% of the net cash savings, if any, in United States 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 our initial public offering as a result of certain increases in tax basis, and certain tax benefits attributable to imputed interest as a result of Solaris

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Inc.’s acquisition (or deemed acquisition for United States federal income tax purposes) of Solaris LLC Units in connection with the IPO or pursuant to an exercise of the Redemption Right or the Call Right (each as defined in the Solaris LLC Agreement) and additional tax basis arising from any payments Solaris Inc. makes under the Tax Receivable Agreement.

The projection of future taxable income involves estimates which require significant judgment. Actual taxable income may differ from our estimates, which could significantly impact the liability relating to the Tax Receivable Agreement. The Company accounts for amounts payable under the Tax Receivable Agreement in accordance with Accounting Standard Codification (“ASC”) Topic 450, Contingencies.

Recent Accounting Pronouncements

See Note 2. “Summary of Significant Accounting Policies — Recently Issued Accounting Standards” under Item 8. “Financial Statements and Supplementary Data” for a discussion of recent accounting pronouncements.

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Item 7.      Management’s Discussion and Analysis of Financial Condition and Results of Operations

Unless the context requires otherwise, references in this Annual Report to the "Company," "Solaris," "we," "us" and "our" refer to (i) Solaris Oilfield Infrastructure, LLC ("Solaris LLC") and its consolidated subsidiaries prior to the completion of our initial public offering and (ii) Solaris Oilfield Infrastructure, Inc. ("Solaris Inc.") and its consolidated subsidiaries following the completion of our initial public offering. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the accompanying financial statements and related notes. This section of this Form 10-K generally discusses 2021 and 2020 items and year-to-year comparisons between 2021 and 2020. Discussions of 2019 items and year-to-year comparisons between 2020 and 2019 that are not included in this Form 10-K can be found in “Part II, Item 7. “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020. The following discussion contains “forward-looking statements” that reflect our plans, estimates, beliefs and expected performance. Our actual results may differ materially from those anticipated as discussed in these forward-looking statements as a result of a variety of risks and uncertainties, including those described above in “Cautionary Statement Regarding Forward-Looking Statements” and “Risk Factors” included elsewhere in this Annual Report, all of which are difficult to predict. In light of these risks, uncertainties and assumptions, the forward-looking events discussed may not occur. We assume no obligation to update any of these forward-looking statements except as otherwise required by law.

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Overview

We design and manufacture specialized equipment, which combined with field technician support, logistics services and our software solutions, enables us to provide a service offering that helps oil and natural gas operators and their suppliers to drive efficiencies and reduce oil and gas development costs and environmental impact. The majority of our revenue is currently derived from providing equipment and services related to our mobile proppant and fluid management systems and our last mile logistics management services. We also generate revenue from new technology and offerings that work in conjunction with our mobile proppant and fluid management systems, including our AutoBlend™ integrated electric blender and proprietary top fill equipment. Our systems and equipment are deployed in most of the active oil and natural gas basins in the United States.

Recent Trends and Outlook

The oil and natural gas industry is continuing its broad recovery since 2020, as global supply and demand dynamics are improving. Tightening supply fundamentals, together with growing global demand, drove WTI oil prices to a high of over $90 per barrel in February 2022 from $52 in January 2021. While the improvement in commodity prices has driven an increase in drilling and completion activity in North America, overall activity levels in North America have been impacted by capital discipline among many operators.

North American land activity improved throughout 2021 as the Baker Hughes Land rig count increased 66% since the start of the year to 571 rigs at year-end, compared to a 49% increase in our fully utilized systems since the fourth quarter of 2020. Overall, demand for our offerings is predominantly influenced by the level of oil and natural gas well drilling and completion activity. While our fully utilized systems are highly correlated with US land rig count activity over longer periods, timing differences between drilling and completion activity can result in lags of one to two quarters or longer.

The sustainability of favorable supply-demand dynamics and a strong commodity environment will depend on multiple factors, including any further supply chain disruptions or potential regulatory changes. Recent consolidation amongst some of our E&P and oil service customers combined with financial discipline from publicly traded energy companies has reduced industry-wide capital spending, resulting in activity levels that remain below pre-pandemic levels despite the recovery in commodity prices. Additionally, consolidation can drive procurement strategy changes, which has historically resulted in both market share gains and losses for the Company. We expect both consolidation and financial discipline will likely continue to be important themes for the energy industry going forward.

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Results of Operations

Year Ended December 31, 2021 Compared to Year Ended December 31, 2020

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Revenue

Revenue increased $56.2 million, or 55%, to $159.2 million for the year ended December 31, 2021 compared to $103.0 million for the year ended December 31, 2020. Revenue increased mainly due to an increase increase in demand for our products and services. Mobile proppant systems on a fully utilized basis increased from 45 systems for the year ended December 31, 2020 to 57 systems for the year ended December 31, 2021, in response to higher overall activity levels of our customers, driven primarily by stronger commodity prices.

Cost of Services

Cost of services, excluding depreciation and amortization expense increased $49.7 million, or 76%, to $115.5 million for the year ended December 31, 2021 compared to $65.8 million for the year ended December 31, 2020. The increase was primarily due to operating costs related to an increase in demand for our products and services. Cost of services as a percentage of revenue was 73% and 64% for the year ended December 31, 2021 and 2020, respectively.

Selling, General and Administrative Expenses

Selling, general and administrative expenses, excluding depreciation and amortization increased $2.8 million, or 17%, to $19.3 million for the year ended December 31, 2021 compared to $16.5 million for the year ended December 31, 2020. The increase is primarily due to increases in headcount and professional fees.

Impairment Losses

As a result of risks and uncertainties associated with volatility in global oil markets, which were exacerbated by COVID-19, and the expected impact on our business, results of operations and earnings, we recorded impairment losses and other charges of $37.8 million, $4.2 million, $2.8 million, $2.6 million and $0.4 million in relation to property, plant and equipment, goodwill, right of use assets, and inventories and other assets, respectively, in the year ended December 31, 2020. We did not record impairment losses in the year ended December 31, 2021.

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Other Operating (Income) Expense

Other operating (income) expense decreased $8.1 million, or 140% to income of $2.4 million for the year ended December 31, 2021 compared to the expense of $5.8 million for the year ended December 31, 2020. The Company qualified for federal government assistance through employee retention credit provisions of the Consolidated Appropriations Act of 2021. During the year ended December 31, 2021, the Company recorded $3.1 million of employee retention credits in other income on its consolidated income statements. As of December 31, 2021, $1.2 million of the credits have been received and $1.9 million is included in prepaid expenses and other current assets on the consolidated balance sheet. The calculation of the credit is based on employees continued employment and represents a portion of the wages paid to them. For income tax purposes, the credit will result in decreased expense related to the wages it offsets in the period received. Other operating expenses in the year ended December 31, 2020 primarily relate to credit losses, loss on disposal of assets, severance costs and the write off of prepaid purchase orders that were not fulfilled.

Provision for Income Taxes

During the year ended December 31, 2021, we recognized a combined United States federal and state expense for income taxes of $0.6 million, an increase of $9.6 million as compared to the $9.0 million income tax benefit we recognized during the year ended December 31, 2020. This change was attributable to lower operating losses. The effective combined United States federal and state income tax rates were (98.7)% and 14.9% for the year ended December 31, 2021 and 2020, respectively. The effective tax rate differed from the statutory rate primarily due to Solaris LLC’s treatment as a partnership for United States federal income tax purposes. The effective tax rate for 2021 was higher than the effective tax rate for 2020 primarily due to the impact of permanent differences on a smaller operating loss.

Comparison of Non-GAAP Financial Measures

We view EBITDA and Adjusted EBITDA as important indicators of performance. We define EBITDA as net income, plus (i) depreciation and amortization expense, (ii) interest expense and (iii) income tax expense, including franchise taxes. We define Adjusted EBITDA as EBITDA plus (i) stock-based compensation expense and (ii) certain non-cash items and any extraordinary, unusual or non-recurring gains, losses or expenses.

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EBITDA and Adjusted EBITDA should not be considered in isolation or as substitutes for an analysis of our results of operation and financial condition as reported in accordance with accounting standards generally accepted in the United States (“GAAP”). Net income is the GAAP measure most directly comparable to EBITDA and Adjusted EBITDA. EBITDA and Adjusted EBITDA should not be considered alternatives to net income presented in accordance with GAAP. Because EBITDA and Adjusted EBITDA may be defined differently by other companies in our industry, our definitions of EBITDA and Adjusted EBITDA may not be comparable to similarly titled measures of other companies, thereby diminishing their utility.

The following table presents a reconciliation of Net income to EBITDA and Adjusted EBITDA for each of the periods indicated.

Year Ended December 31, 2021 Compared to Year Ended December 31, 2020: EBITDA and Adjusted EBITDA

EBITDA increased $59.7 million to $26.9 million for the year ended December 31, 2021 compared to $(32.9) million for the year ended December 31, 2020. Adjusted EBITDA increased $4.5 million to $30.1 million for the year ended December 31, 2021 compared to $25.6 million for the year ended December 31, 2020. The increases in EBITDA and Adjusted EBITDA were primarily due to the changes in revenues and expenses, discussed above.

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Liquidity and Capital Resources

Overview

Our primary sources of liquidity to date have been cash flows from operations, borrowings under our credit agreements and proceeds from equity offerings. Our primary uses of capital have been to fund ongoing operations, capital expenditures to support organic growth, including our fleet development and related maintenance and fleet upgrades, repurchase shares of Class A common stock in the open market, and pay dividends. Although no assurance can be given, depending upon market conditions and other factors, we may also have the ability to issue additional equity and debt if needed.

As of December 31, 2021, cash and cash equivalents totaled $36.5 million. We have no borrowings outstanding under our Credit Agreement and have $50.0 million of available borrowing capacity. We believe that our cash on hand, operating cash flow and available borrowings under our Credit Agreement will be sufficient to fund our operations for at least the next 12 months. See Note 8. “Senior Secured Credit Facility” under Item 8. “Financial Statements and Supplementary Data” for additional information regarding our Credit Facility.

Cash Flows

The following table summarizes our cash flows for the periods indicated:

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Analysis of Cash Flow Changes for Year Ended December 31, 2021 Compared to Year Ended December 31, 2020

Operating Activities. Net cash provided by operating activities was $16.5 million for the year ended December 31, 2021, compared to net cash provided by operating activities of $43.9 million for the year ended December 31, 2020. The decrease of $27.4 million in operating cash flow was primarily attributable to changes in working capital, including an increase in accounts receivable and prepaid expenses.

Investing Activities. Net cash used in investing activities was $19.5 million for the year ended December 31, 2021, compared to $3.8 million for the year ended December 31, 2020. The increase in investing activities of $15.7 million is primarily due to capital expenditures related to enhancements to our fleet and for new technologies.

Financing Activities. Net cash used in financing activities of $20.8 million for the year ended December 31, 2021, was primarily related to quarterly dividends of $19.2 million and $0.8 million of payments related to vesting of stock-based compensation. Net cash used in financing activities of $46.6 million for the year ended December 31, 2020 was primarily related to $26.7 million of share repurchases and quarterly distributions and dividends of $19.0 million.

Future sources and uses of cash

Our material cash commitments consist primarily of obligations under our Credit Agreement, Tax Receivable Agreement, finance and operating leases for property and equipment, and purchase obligations as a part of normal operations. We have no material off balance sheet arrangements as of December 31, 2021, except for purchase commitments under supply agreements disclosed below.

In 2022, we expect to pay approximately $0.2 million in commitment fees on our Credit Agreement, calculated based on the unused portion of lender commitments, at the applicable commitment fee rates of 0.25% and 0.375%.

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We currently expect to make payments of approximately $1.2 million under the Tax Receivable Agreement within the next twelve months. Future amounts payable under the Tax Receivable Agreement are dependent upon future events. See Note 10. “Income Taxes” under Item 8. “Financial Statements and Supplementary Data” for additional information regarding the Tax Receivable Agreement.

See Note 7. “Leases” under Item 8. “Financial Statements and Supplementary Data” for additional information regarding scheduled maturities of finance and operating leases.

As of December 31, 2021, we had purchase obligations of approximately $9.3 million payable within the next twelve months. See Note 12. “Commitments and Contingencies” under Item 8. “Financial Statements and Supplementary Data” for information regarding scheduled contractual obligations.

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

Our revenue is derived from short-term contracts and consists of fees charged to customers for the use of our equipment and labor services, mobilization and transportation of our equipment, services coordinating the transportation of proppant delivery to our equipment, transloading services and for inventory software services, each of which are considered to be separate performance obligations.

The majority of our contracts contain multiple performance obligations, such as work orders containing a combination of equipment, transportation, and labor services. We allocate the transaction price to each performance obligation identified in the contract based on relative stand-alone selling prices, or estimates of such prices, and recognize the related revenue as control of each individual product or service is transferred to the customer, in satisfaction of the corresponding performance obligations. We measure progress using an input method based on resources consumed or expended relative to the total resources expected to be consumed or expended. We assess our customers’ ability and intention to pay, which is based on a variety of factors including historical payment experience and financial condition and we typically charge our customers on a weekly or monthly basis.

Variable consideration typically may relate to discounts, price concessions and incentives. The Company estimates variable consideration based on the amount of consideration we expect to receive. The Company accrues revenue on an ongoing basis to reflect updated information for variable consideration as performance obligations are met.

Value of Long-Lived Assets, Definite-Lived Intangible Assets and Goodwill

We carry a variety of long-lived assets on our balance sheet including property, plant and equipment, goodwill and other intangibles. Impairment is the condition that exists when the carrying amount of a long-lived asset exceeds its fair value, and any impairment charge that we record reduces our operating income. Goodwill is the excess of the cost of an acquired entity over the net of the amounts assigned to assets acquired and liabilities assumed. We conduct impairment tests on goodwill annually, on October 31, or more frequently whenever events or changes in circumstances indicate an

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impairment may exist. We conduct impairment tests on long-lived assets, other than goodwill, whenever events or changes in circumstances indicate that the carrying value may not be recoverable.

Key estimates relate to the fair value and recoverability of carrying values of long-lived assets, definite-lived intangible assets and goodwill. These estimates include management’s short-term and long-term forecast of operating performance, including revenue growth rates and expected profitability margins, estimates of the remaining useful life and service potential of the assets, a discount rate based on our weighted average cost of capital, forecasted capital expenditures and the timing of expected future cash flows based on market conditions. Impairment assessments also incorporate inherent uncertainties, including projected commodity pricing, supply and demand for our services and future market conditions, which are difficult to predict in volatile economic and actual results could materially differ from the estimated assumptions utilized in our forecasts.

See Note 2. “Summary of Significant Accounting Policies — Recently Issued Accounting Standards” under Item 8. “Financial Statements and Supplementary Data” for impairments and other charges recorded during the year ended December 31, 2020. If market conditions further deteriorate, including crude oil prices significantly declining and remaining at low levels for a sustained period of time, we could be required to record additional impairments of the carrying value of our long-lived assets, definite-lived intangible assets or goodwill in the future which could have a material adverse impact on our operating results.

Income Taxes

Solaris Inc. is a corporation and, as a result, is subject to United States federal, state and local income taxes. For the year ended December 31, 2021 we recognized a combined United States federal and state expense for income taxes of $0.6 million. For the year ended December 31, 2020 we recognized an income tax benefit of $9.0 million. Solaris LLC is treated as a partnership for United States federal income tax purposes and therefore does not pay federal income tax on its taxable income. Instead, the Solaris LLC members are liable for federal income tax on their respective shares of the Company’s taxable income reported on the members’ United States federal income tax returns.

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 routinely evaluate the realizability of our deferred tax assets by assessing the likelihood that our deferred tax assets will be recovered based on all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, estimates of future taxable income, tax planning strategies and results of operations. Estimating future taxable income is inherently uncertain and requires judgment. In projecting future taxable income, we consider our historical results and incorporate certain assumptions, including revenue growth and operating margins, among others. As of December 31, 2021 and 2020, we had $62.9 million and $59.8 million of deferred tax assets, respectively.

See Note 10. “Income Taxes” under Part II, Item 8. “Financial Statements and Supplementary Data.” for additional information.

Tax Receivable Agreement

As described in Note 10. “Income Taxes” under Part II, Item 8. “Financial Statements and Supplementary Data”, Solaris Inc. is a party to the Tax Receivable Agreement under which it is contractually committed to pay the TRA Holders 85% of the net cash savings, if any, in United States 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 our initial public offering as a result of certain increases in tax basis, and certain tax benefits attributable to imputed interest as a result of Solaris Inc.’s acquisition (or deemed acquisition for United States federal income tax purposes) of Solaris LLC Units in connection with the IPO or pursuant to an exercise of the Redemption Right or the Call Right (each as defined in the Solaris LLC Agreement) and additional tax basis arising from any payments Solaris Inc. makes under the Tax Receivable Agreement.

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The projection of future taxable income involves estimates which require significant judgment. Actual taxable income may differ from our estimates, which could significantly impact the liability relating to the Tax Receivable Agreement. The Company accounts for amounts payable under the Tax Receivable Agreement in accordance with Accounting Standard Codification (“ASC”) Topic 450, Contingencies.

Recent Accounting Pronouncements

See Note 2. “Summary of Significant Accounting Policies — Recently Issued Accounting Standards” under Item 8. “Financial Statements and Supplementary Data” 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).

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