Solaris Energy Infrastructure, Inc.: Form 10-Q for the period ended Jun 30, 2017

Unless the context requires otherwise, references in this report to “Solaris,” the "Company," "we," "us," and "our" refer to Solaris Oilfield Infrastructure, Inc and its consolidated subsidiaries. The following discussion and analysis should be read in conjunction with the accompanying financial statements and related notes. The following discussion contains forward-looking statements that reflect our future plans, estimates, beliefs and expected performance. The forward-looking statements are dependent upon events, risks and uncertainties that may be outside our control. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those factors discussed above in “Cautionary Note Regarding Forward-Looking Statements” and described under the heading “Risk Factors” included in the Prospectus filed by Solaris and in the other related Solaris filings with the Securities and Exchange Commission (“SEC”), all of which are difficult to predict. In light of these risks, uncertainties and assumptions, the forward-looking events discussed may not occur. We do not undertake any obligation to publicly update any forward-looking statements except as otherwise required by applicable law.

Our Predecessor and Solaris Inc.

Solaris Oilfield Infrastructure, LLC (“Solaris LLC”) was formed in July 2014. Solaris was formed in February 2017. In connection with Solaris’s initial public offering (the “IPO” or the “Offering”) in May 2017, Solaris became a holding company whose sole material asset consists of units in Solaris LLC (“Solaris LLC Units”). Solaris became the managing member of Solaris LLC and is responsible for all operational, management and administrative decisions relating to Solaris LLC’s business and consolidates the financial results of Solaris LLC and its subsidiaries.

Overview

We manufacture and provide our patented mobile proppant management systems that unload, store and deliver proppant at oil and natural gas well sites. Our systems reduce our customers’ cost and time to complete wells by improving the efficiency of proppant logistics, in addition to enhancing well site safety. Our customers include oil and natural gas exploration and production (“E&P”) companies, such as EOG Resources, Inc., Devon Energy and Apache Corporation, as well as oilfield service companies, such as ProPetro Services, Inc. Our systems are deployed in many of the most active oil and natural gas basins in the U.S., including the Permian Basin, the Eagle Ford Shale and the STACK/SCOOP formation. Since commencing operations in April 2014, we have grown our fleet from two systems to 49 systems.

Our mobile proppant system is designed to address the challenges associated with transferring large quantities of proppant to the well site, including the cost and management of last mile logistics, which we define as the transportation of proppant from transload terminal or regional proppant mine to the well site. Today’s horizontal well completion designs require between 400 and 1,000 truckloads of proppant delivered to the well site per well which creates bottlenecks in the storage, handling and delivery of proppant. Our patented systems typically provide 2.5 million pounds of proppant storage capacity in a footprint that is considerably smaller than traditional or competing well site proppant storage equipment. Our systems have the ability to unload up to 24 pneumatic proppant truckloads simultaneously. Importantly, the proppant storage silos in our systems can be filled from trucks while simultaneously delivering proppant on-demand directly to the blender for hydraulic fracturing operations. Accordingly, our systems can maintain high rates of proppant delivery for extended periods of time, which helps achieve a greater number of frac stages per day, driving a reduction in our customers’ costs. Our systems also reduce the amount of truck demurrage, or wait time, at the well site which can result in significant cost savings for our customers.

In July 2017, Solaris Logistics, LLC, a wholly owned subsidiary of Solaris LLC, entered into a seven (7) year contract with an exploration and production company to provide proppant transloading service at a facility to be constructed and operated by Solaris in Kingfisher, Oklahoma (the “Kingfisher Facility”). The Kingfisher Facility will be located central to the STACK/SCOOP plays and will be the first independent, unit-train capable, high speed transload facility in Oklahoma. The Kingfisher Facility will initially provide proppant transloading services, but will also have capacity to provide transloading services for other drilling and completion related consumables.

The Kingfisher Facility will be located on a 300-acre parcel of land, directly on the Union Pacific Railroad. Solaris has secured a 30-year land lease with the State of Oklahoma and has started ordering long-lead construction items in anticipation of breaking ground in August 2017. The facility is designed to service multiple large volume customers with dedicated storage and unit train loop tracks. Initial storage will include 30,000 tons of vertical storage in six (6) silos with individual capacity of 5,000 tons per silo. The facility will also service manifest trains and provide direct rail-to-truck transloading.

Recent Trends and Outlook

Demand for our systems and services is predominantly influenced by the level of drilling and completion by E&P companies, which, in turn, depends largely on the current and anticipated profitability of developing oil and natural gas reserves. More specifically, demand for our systems and services is driven by demand for proppant, which, in turn, is primarily driven by advancements in oil and natural gas drilling and well completion technology and techniques, such as horizontal drilling and hydraulic fracturing, which have made the extraction of oil and natural gas increasingly cost-effective in formations that historically would have been uneconomic to develop.

While overall drilling and completion activities have declined in North America from their highs in late 2014 as a result of the downturn in hydrocarbon prices, the industry has witnessed an increase in such activity in the third and fourth quarters of 2016 and the first and second quarters of 2017 as hydrocarbon prices have recovered. Recently, there has been an increase in proppant demand as E&P companies have shifted toward:

• drilling more and longer horizontal wells;
• completing more hydraulic fracturing stages and utilizing more proppant per lateral foot;
• utilizing multi-well pads; and
• accelerating completion rates through “zipper fracs,” or the process of completing multiple adjacent wells simultaneously.

We believe that the demand for proppant will increase over the medium and long term as commodity prices rise from their recent lows, which will lead producers to resume completion of their inventory of drilled but uncompleted wells and undertake new drilling activities. Further, recent agreements by the Organization of the Petroleum Exporting Countries (“OPEC”) and non-OPEC members to reduce their oil production quotas have also provided upward momentum for WTI prices, which have increased to $49.55 per Bbl as of August 4, 2017, up from a low of $26.21 per Bbl in February 2016.

While we do not currently anticipate any shortages in the supply of the proppant used in hydraulic fracturing operations, supplies of high-quality raw frac sand, the most prevalent proppant used, are limited to select areas, predominantly in western Wisconsin and limited areas of Minnesota and Illinois. Accordingly, transportation costs often represent a significant portion of our customer’s overall product cost, and transferring large quantities of proppant to the well site presents a number of challenges, including the cost and management of last mile logistics. Additionally, increased focus on cost control and increased health, safety and environment regulation has created numerous operational challenges that cannot be solved with labor intensive proppant storage equipment, such as those that utilize individual containers for on-site proppant storage and handling.

These supply and demand trends have contributed to our significant growth since our formation in 2014. We have increased our total system revenue days, defined as the combined number of days our systems earned revenues, in eleven of the last twelve quarters beginning in the first quarter of 2014. Since commencing operations in April 2014, we have also grown our fleet from two systems to 49 systems. The increase in total system revenue days is attributable to an increase in the number of systems available for rental and an increase in the number of systems deployed to customers. Our total system revenue days increased to 3,375 in the three months ended June 30, 2017 from 994 in the three months ended June 30, 2016, an increase of approximately 240%. Our total system revenue days increased to 6,002 in the six months ended June 30, 2017 from 2,098 in the six months ended June 30, 2016, an increase of approximately 186%.

The number of systems in our fleet increased to an average of 38.5 during the three months ended June 30, 2017 from an average of 23.0 during the three months ended June 30, 2016, an increase of approximately 67%. In addition, the average number of systems deployed to customers increased to 37.1 in the three months ended June 30, 2017 from 10.9 in the three months ended June 30, 2016, an increase of approximately 240%.

The number of systems in our fleet increased to an average of 34.9 during the six months ended June 30, 2017 from an average of 22.5 during the six months ended June 30, 2016, an increase of approximately 55%. In addition, the average number of systems deployed to customers increased to 33.2 in the six months ended June 30, 2017 from 11.5 in the six months ended June 30, 2016, an increase of approximately 188%.

How We Generate Revenue

We currently generate revenue primarily through the rental of our systems and related services, including transportation of our systems and field supervision and support. The system rentals and provision of related services are performed under a variety of contract structures, primarily master service agreements as supplemented by individual work orders detailing statements of work, pricing agreements and specific quotes. The master service agreements generally establish terms and conditions for the provision of our systems and service on a well site, indemnification, damages, confidentiality, intellectual property protection and payment terms and provisions. The services are generally priced based on prevailing market conditions at the time the services are provided, giving consideration to the specific requirements and activity levels of the customer. We typically rent our systems on a monthly basis. In addition, from time-to-time, we have evaluated and completed individual system sales on a case-by-case basis.

Costs of Conducting Our Business

The principal costs associated with operating our business are:

• Cost of proppant system rental (excluding depreciation and amortization);
• Cost of proppant system services (excluding depreciation and amortization);
• Depreciation and amortization associated with the costs to build our systems;
• Salaries, benefits and payroll taxes; and
• Selling, general and administrative expenses; and
• Other operating expenses.

Our cost of proppant system rental (excluding depreciation and amortization) consists primarily of the costs of maintaining our equipment, as well as insurance and property taxes related to our equipment.

Our cost of proppant system services (excluding depreciation and amortization) consists primarily of direct labor costs, and related travel and lodging expenses, and system transportation costs. A large portion of our cost of proppant system services (excluding depreciation and amortization) are variable based on the number of systems deployed with customers.

Our depreciation and amortization expense primarily consists of the depreciation expense related to our systems and related manufacturing machinery and equipment. The costs to build our systems, including any upgrades, are capitalized and depreciated over a life ranging from two to fifteen years.

Our salaries, benefits and payroll taxes are comprised of the salaries and related benefits for several functional areas of our organization, including sales and commercial, research and development, manufacturing administrative, accounting and corporate administrative.

Our selling, general and administrative expenses are comprised primarily of office rent, marketing expenses and third-party professional service providers.

How We Evaluate Our Operations

We use a variety of qualitative, operational and financial metrics to assess our performance. Among other measures, management considers revenue, revenue days, EBITDA and Adjusted EBITDA.

Revenue

We analyze our revenue by comparing actual monthly revenue to our internal projections for a given period and to prior periods to assess our performance. We also assess our revenue in relation to the number of proppant systems we have deployed to customers from period to period.

Revenue Days

We view revenue days as an important indicator of our performance. We calculate revenue days as the combined number of days our systems earn revenue in a period. We assess our revenue days from period to period in relation to the number of proppant systems we have available in our fleet.

EBITDA and Adjusted EBITDA

We view EBITDA and Adjusted EBITDA as important indicators of performance. We define EBITDA as net income (loss), plus (i) depreciation and amortization expense, (ii) interest expense and (iii) income tax expense, including franchise taxes. We define Adjusted EBITDA as EBITDA plus (i) unit-based compensation expense and (ii) certain non-cash charges and unusual or non-recurring charges.

Note Regarding Non-GAAP Financial Measures

EBITDA and Adjusted EBITDA are not financial measures presented in accordance with accounting principles generally accepted in the United States (“GAAP”). We believe that the presentation of these non-GAAP financial measures will provide useful information to investors in assessing our financial condition and results of operations. Net income (loss) is the GAAP measure most directly comparable to EBITDA and Adjusted EBITDA. Our non-GAAP financial measures should not be considered as alternatives to the most directly comparable GAAP financial measure. Each of these non-GAAP financial measures has important limitations as analytical tools because they exclude some but not all items that affect the most directly comparable GAAP financial measures. You should not consider EBITDA or Adjusted EBITDA in isolation or as substitutes for an analysis of our results as reported under GAAP. Because EBITDA and Adjusted EBITDA may be defined differently by other companies in our industry, our definitions of these non-GAAP financial measures may not be comparable to similarly titled measures of other companies, thereby diminishing their utility.

Factors Impacting Comparability of Our Financial Results

Our future results of operations may not be comparable to the historical results of operations of our accounting predecessor, Solaris LLC, for the periods presented, primarily for the reasons described below.

Corporate Reorganization

The historical consolidated financial statements included in this report are based on the financial statements of our accounting predecessor, Solaris LLC, prior to our corporate reorganization consummated in connection with the Offering. As a result, the historical consolidated financial data may not give you an accurate indication of what our actual results would have been if the corporate reorganization had been completed at the beginning of the periods presented or of what our future results of operations are likely to be. Following the IPO and the transactions related thereto, Solaris became a holding company whose sole material asset consists of Solaris LLC Units. Solaris is the managing member of Solaris LLC and is responsible for all operational, management and administrative decisions relating to Solaris LLC’s business and consolidates the financial results of Solaris LLC and its subsidiaries.

In addition, in connection with the offering, Solaris entered into a Tax Receivable Agreement (the “Tax Receivable Agreement”) with the existing members of Solaris LLC (collectively, the “Existing Owners”) and permitted transferees

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

Fleet Growth

We have experienced significant growth over the past two years. Since commencing operations in April 2014, we have grown our fleet from two systems to  systems and the number of major oil and gas basins in which our systems are deployed has increased from two as of April 2014 to five as of August 4, 2017. Since the first quarter of 2014, we have increased our total system revenue days, defined as the combined number of days our systems earned revenues, in eleven of the last twelve quarters. We have increased our system revenue days by more than 1,800% from the second quarter of 2014 to the second quarter of 2017, representing a 168% compound annual growth rate.

Public Company Expenses

Following the completion of Solaris’ IPO, we incur direct, incremental general and administrative (“G&A”) expenses as a result of being a publicly traded company, including, but not limited to, costs associated with hiring new personnel, implementation of compensation programs that are competitive with our public company peer group, annual and quarterly reports to stockholders, tax return preparation, independent auditor fees, investor relations activities, registrar and transfer agent fees, incremental director and officer liability insurance costs and incremental director compensation. These direct, incremental G&A expenses are not included in our results of operations prior to the IPO.

Income Taxes

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

Results of Operations

Three Months Ended June 30, 2017 Compared to Three Months Ended June 30, 2016 (In thousands)

Revenue

Proppant System Rental Revenue. Our proppant system rental revenue increased $8.8 million, or 376%, to $11.1 million for the three months ended June 30, 2017 compared to $2.3 million for the three months ended June 30, 2016. This increase was primarily due to a 240% increase in the number of revenue days, or 2,381 days, coupled with an increase in rental rates charged to customers due to increasing demand for our systems.

Proppant System Services Revenue. Our proppant system services revenue increased $1.6 million, or 254%, to $2.3 million for the three months ended June 30, 2017 compared to $0.6 million for the three months ended June 30, 2016. Proppant system services revenue from the provision of field technicians increased by $0.9 million, or 189%, to $1.3 million for the three months ended June 30, 2017, as a result of the increase in revenue days as noted above. Proppant system services revenue from transportation services increased by $0.7 million, or 465%, to $0.9 million for the three months ended June 30, 2017, due to an increase in the amount of system transportation requests that we received from customers as a result of an increase in the number of systems deployed.

Operating Expenses

Total operating costs and expenses for the three months ended June 30, 2017 and 2016 were $11.8 million and $3.8 million, respectively, which represented 88% and 126% of total revenue, respectively. Other operating expenses are primarily related to non-recurring charges, including those related to the reorganization transactions completed in connection with the IPO (the “Reorganization Transactions”). Excluding other operating expenses, total operating expenses for the three months ended June 30, 2017 and 2016 were $7.9 million and $3.8 million, respectively, which represented 59% and 126% of total revenue, respectively. Total operating costs and expenses increased year-over-year primarily as a result of an increase in the cost of proppant service which includes direct labor and related costs. Cost of proppant system service increased as a result of an increase in the number of field technicians and amount of system transportation required to support the increase in revenue days. Depreciation and amortization expense also increased, primarily due to the addition of new systems that were manufactured and added to our fleet in 2016 and the first six months of 2017. Salaries, benefits and payroll taxes and selling, general and administrative expenses, increased related to increases in indirect personnel and general business expenses resulting from increased manufacturing and rental operations and incremental public company expenses. Additional details regarding the changes in operating expenses are presented below.

Cost of Proppant System Rental. Cost of proppant system rental increased $0.1 million, or 30%, to $0.6 million for the three months ended June 30, 2017 compared to $0.5 million for the three months ended June 30, 2016, excluding depreciation and amortization expense. Cost of proppant system rental as a percentage of proppant system rental revenue was 5% and 20% for the three months ended June 30, 2017 and 2016, respectively. These costs as a percentage of related rental revenue decreased due to lower repairs and maintenance costs relative to the increase in systems that were deployed to customers.

Cost of proppant system rental including depreciation and amortization expense increased $0.5 million, or 42%, to $1.8 million for the three months ended June 30, 2017 compared to $1.3 million for the three months ended June 30, 2016. This increase was primarily attributable to an increase in depreciation expense related to additional systems that were manufactured and added to our fleet.

Cost of Proppant System Services. Cost of proppant system services increased $1.6 million, or 154%, to $2.6 million for the three months ended June 30, 2017 compared to $1.0 million for the three months ended June 30, 2016. This increase was primarily due to an increase in labor and related costs of $0.7 million, or 112%, and travel and lodging costs of $0.2 million, or 134%, both of which were driven by an increase in the number of field technicians required to support the increased revenue days during the three months ended June 30, 2017, coupled with an increase in third-party trucking services of $0.5 million, or 266% to transport incremental systems deployed to customers.

For the three months ended June 30, 2017, the cost of proppant system services as a percentage of proppant system services revenue decreased to 115% compared to 160% the three months ended June 30, 2016. Cost of proppant system services as a percentage of proppant system services revenue decreased for the three months ended June 30, 2017 as certain costs for our proppant system services were passed along to our customers due to increasing demand for our systems and a general improvement in market conditions.

Cost of proppant system services including depreciation and amortization expense increased $1.7 million, or 154%, to $2.7 million for the three months ended June 30, 2017 compared to $1.0 million for the three months ended June 30, 2016. This increase was primarily attributable to the factors mentioned above, as well as an increase in depreciation expense related to additional light-duty field trucks that were purchased to support our increased activity.

Depreciation and Amortization. Depreciation and amortization increased $0.5 million, or 50%, to $1.4 million for the three months ended June 30, 2017 compared to $0.9 million for the three months ended June 30, 2016. This increase was primarily attributable to additional depreciation expense related to additional systems that were manufactured and added to our fleet.

Salaries, Benefits and Payroll Taxes. Salaries, benefits and payroll taxes increased $1.1 million, or 185%, to $1.7 million for the three months ended June 30, 2017 compared to $0.6 million for the three months ended June 30, 2016. The increase was due to an increase in stock based compensation expense of $0.6 million as a result of the issuance of restricted shares in connection with the Offering and $0.5 million increase was due to additions in corporate and manufacturing administrative personnel in response to the increase in our manufacturing activity, demand for our fleets, and industry activity.

Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $0.9 million, or 114%, to $1.6 million for the three months ended June 30, 2017 compared to $0.7 million for the three months ended June 30, 2016 due primarily to an increase of $0.8 million in professional fees and employee recruiting fees.

Other Operating Expenses. Other operating expenses in 2017 are primarily one-time bonuses of $3.1 million paid to certain employees in connection with the offering, loss on disposal of field equipment and vehicles of $0.4 million and certain non-recurring organizational and transaction costs of $0.3 million associated with the IPO and the Kingfisher facility.

Net Income (loss)

Net income (loss) increased $1.9 million to $1.1 million for the three months ended June 30, 2017 compared to a net loss of $0.8 million for the three months ended June 30, 2016, due to the changes in revenues and expenses discussed above. Excluding other operating expenses which are primarily related to the Reorganization Transactions, net income increased $5.7 million to $4.9 million for the three months ended June 30, 2017 compared to a net loss of $0.8 million for the three months ended June 30, 2016, due to the change in revenues and expenses discussed above.

Comparison of Non-GAAP Financial Measures

We view EBITDA and Adjusted EBITDA as important indicators of performance. We define EBITDA as net income (loss), plus (i) depreciation and amortization expense, (ii) interest expense and (iii) income tax expense, including franchise taxes. We define Adjusted EBITDA as EBITDA plus (i) unit-based compensation expense and (ii) certain non-cash charges and unusual or non-recurring charges.

We believe that our presentation of EBITDA and Adjusted EBITDA will provide useful information to investors in assessing our financial condition and results of operations. Net income is the GAAP measure most directly comparable to EBITDA and Adjusted EBITDA. EBITDA and Adjusted EBITDA should not be considered alternatives to net income presented in accordance with GAAP. Because EBITDA and Adjusted EBITDA may be defined differently by other companies in our industry, our definitions of EBITDA and Adjusted EBITDA may not be comparable to similarly titled measures of other companies, thereby diminishing their utility. The following table presents a reconciliation of Net income (loss) to EBITDA and Adjusted EBITDA for each of the periods indicated.

(in thousands)

(1) Income taxes include add-back for federal and state taxes.

(2) Certain non-recurring organizational and transaction costs associated with Solaris’ IPO and the Kingfisher Facility.

(3) One-time cash bonuses of $3.1 million and restricted stock awards with one-year vesting of $0.4 million were paid or granted to certain employees and consultants in connection with the Offering.

(4) Represents unit-based compensation costs of $0.2 million related to restricted stock awards, with three-year vesting and $0.1 million related to the options issued under the Plan.

Three Months Ended June 30, 2017, Compared to Three Months Ended June 30, 2016: EBITDA and Adjusted EBITDA

EBITDA increased $2.8 million to $3.0 million for the three months ended June 30, 2017 and Adjusted EBITDA increased $7.3 million to $7.5 million for the three months ended June 30, 2017 compared to $0.2 million for the three months ended June 30, 2016. EBITDA and Adjusted EBITDA increased 2,467% and 4,839%, respectively, for the three months ended June 30, 2017 compared to the three months ended June 30, 2016. The increases were primarily due to an increase in the number of revenue days and the number of systems deployed to customers, as well as an increase in the rental rates charged to customers due to increasing demand for our systems.

Six Months Ended June 30, 2017 Compared to Six Months Ended June 30, 2016 (In thousands)

32

Revenue

Proppant System Rental Revenue. Our proppant system rental revenue increased $14.7 million, or 303%, to $19.5 million for the six months ended June 30, 2017 compared to $4.8 million for the six months ended June 30, 2016. This increase was primarily due to a 186% increase in the number of revenue days, or 3,904 days, coupled with an increase in rental rates charged to customers due to increasing demand for our systems.

Proppant System Services Revenue. Our proppant system services revenue increased $2.9 million, or 228%, to $4.2 million for the six months ended June 30, 2017 compared to $1.3 million for the six months ended June 30, 2016. Proppant system services revenue from the provision of field technicians increased by $1.6 million, or 173%, to $2.5 million for the six months ended June 30, 2017, as a result of the increase in revenue days as noted above. Proppant system services revenue from transportation services increased by $1.3 million, or 446%, to $1.6 million for the six months ended June 30, 2017, due to an increase in the amount of system transportation requests that we received from customers as a result of an increase in the number of systems deployed.

Operating Expenses

Total operating costs and expenses for the six months ended June 30, 2017 and 2016 were $17.3 million and $7.0 million, respectively, which represented 73% and 115% of total revenue, respectively. Other operating expenses are primarily related to non-recurring charges, including those related to the Reorganization Transactions. Excluding other operating expenses, total operating costs and expenses for the six months ended June 30, 2017 and 2016 were $13.4 million and $7.0 million, respectively, which represented 57% and 115% of total revenue, respectively. Total operating expenses increased year-over-year primarily as a result of an increase in the cost of proppant service which includes direct labor and related costs. Cost of proppant system service increased as a result of an increase in the number of field technicians and amount of system transportation required to support the increased revenue days. Depreciation and amortization expense also increased, primarily due to the addition of new systems that were manufactured and added to our fleet in 2016 and the first six months of 2017. Salaries, benefits and payroll taxes and selling, general and administrative expenses, increased related to increases in indirect personnel and general business expenses resulting from increased manufacturing and rental operations. Additional details regarding the changes in operating expenses are presented below.

Cost of Proppant System Rental. Cost of proppant system rental increased $0.1 million, or 19%, to $0.9 million for the six months ended June 30, 2017 compared to $0.8 million for the six months ended June 30, 2016, excluding depreciation and amortization expense. Cost of proppant system rental as a percentage of proppant system rental revenue was 5% and 16% for the six months ended June 30, 2017 and 2016, respectively. These costs as a percentage of related rental revenue decreased due to lower repairs and maintenance costs relative to the increase in systems that were deployed to customers.

Cost of proppant system rental including depreciation and amortization expense increased $0.8 million, or 35%, to $3.2 million for the six months ended June 30, 2017 compared to $2.4 million for the six months ended June 30, 2016. This increase was primarily attributable to an increase in depreciation expense related to additional systems that were manufactured and added to our fleet.

Cost of Proppant System Services. Cost of proppant system services increased $2.9 million, or 161%, to $4.7 million for the six months ended June 30, 2017 compared to $1.8 million for the six months ended June 30, 2016. This increase was primarily due to an increase in labor and related costs of $1.2 million, or 119%, and travel and lodging costs of $0.3 million, or 129%, both of which were driven by an increase in the number of field technicians required to support the increased revenue days during the six months ended June 30, 2017, coupled with an increase in third-party trucking services of $1.1 million, or 327%, to transport incremental systems deployed to customers.

For the six months ended June 30, 2017, the cost of proppant system services as a percentage of proppant system services revenue decreased to 112% compared to 140% for the six months ended June 30, 2016. Cost of proppant system services as a percentage of proppant system services revenue decreased for the six months ended June 30, 2017 as certain costs for our proppant system services were passed along to our customers due to increasing demand for our systems and a general improvement in market conditions.

Cost of proppant system services including depreciation and amortization expense increased $3.0 million, or 160%, to $4.9 million for the six months ended June 30, 2017 compared to $1.9 million for the six months ended June 30, 2016. This increase was primarily attributable to the factors mentioned above, as well as an increase in depreciation expense related to additional light-duty field trucks that were purchased to support our increased activity.

Depreciation and Amortization. Depreciation and amortization increased $0.7 million, or 42%, to $2.5 million for the six months ended June 30, 2017 compared to $1.8 million for the six months ended June 30, 2016. This increase was primarily attributable to additional depreciation expense related to additional systems that were manufactured and added to our fleet.

Salaries, Benefits and Payroll Taxes. Salaries, benefits and payroll taxes increased $1.3 million, or 102%, to $2.7 million for the six months ended June 30, 2017 compared to $1.4 million for the six months ended June 30, 2016. The increase was primarily due to an increase in stock based compensation expense of $0.6 million as a result of the issuance of restricted shares in connection with the Offering. The remaining increase was due to additions in corporate and manufacturing administrative personnel in response to the increase in our manufacturing activity, demand for our fleets, and industry activity.

Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $1.2 million, or 91%, to $2.5 million for the six months ended June 30, 2017 compared to $1.3 million for the six months ended June 30, 2016 due primarily to an increase of $1.1 million in professional fees and employee recruiting fees.

Other Operating Expense. Other operating expenses in 2017 are primarily one-time bonuses of $3.1 million paid to certain employees in connection with the offering, loss on disposal of field equipment and vehicles of $0.4 million and certain non-recurring organizational and transaction costs of $0.3 million associated with the IPO and the Kingfisher facility.

Net Income (loss)

Net income (loss) increased $6.8 million to $5.8 million for the six months ended June 30, 2017 compared to a net loss of $0.9 million for the six months ended June 30, 2016, due to the changes in revenues and expenses discussed above. Excluding other operating expenses which are primarily related to the Reorganization Transactions, Net income increased $10.6 million to $9.7 million for the six months ended June 30, 2017 compared to a net loss of $0.9 million for the six months ended June 30, 2016, due to the change in revenues and expenses discussed above.

Comparison of Non-GAAP Financial Measures

We view EBITDA and Adjusted EBITDA as important indicators of performance. We define EBITDA as net income (loss), plus (i) depreciation and amortization expense, (ii) interest expense and (iii) income tax expense, including franchise taxes. We define Adjusted EBITDA as EBITDA plus (i) unit-based compensation expense and (ii) certain non-cash charges and unusual or non-recurring charges.

We believe that our presentation of EBITDA and Adjusted EBITDA will provide useful information to investors in assessing our financial condition and results of operations. Net income is the GAAP measure most directly comparable to EBITDA and Adjusted EBITDA. EBITDA and Adjusted EBITDA should not be considered alternatives to net income presented in accordance with GAAP. Because EBITDA and Adjusted EBITDA may be defined differently by other companies in our industry, our definitions of EBITDA and Adjusted EBITDA may not be comparable to similarly titled measures of other companies, thereby diminishing their utility. The following table presents a reconciliation of Net income (loss) to EBITDA and Adjusted EBITDA for each of the periods indicated.

(in thousands)

(1) Income taxes include add-back for federal and state taxes.

(2) Certain non-recurring organizational and transaction costs associated with Solaris’ IPO and the Kingfisher facility.

(3) One-time cash bonuses of $3.1 million and restricted stock awards with one-year vesting of $0.4 million were paid or granted to certain employees and consultants in connection with the Offering.

(4) Represents unit-based compensation costs of $0.2 million related to restricted stock awards, with three-year vesting and $0.2 related to the options issued under the Plan.

Six Months Ended June 30, 2017, Compared to Six Months Ended June 30, 2016: EBITDA and Adjusted EBITDA

EBITDA increased $8.1 million to $8.9 million for the six months ended June 30, 2017 and Adjusted EBITDA increased $12.7 million to $13.6 million for the six months ended June 30, 2017 compared to $0.9 million for the six months ended June 30, 2016. EBITDA and Adjusted EBITDA increased 928% and 1,343%, respectively, for the six months ended June 30, 2017 compared to the six months ended June 30, 2016. The increases were primarily due to an increase in the number of revenue days and the number of systems deployed to customers, as well as an increase in the rental rates charged to customers due to increasing demand for our systems.

Liquidity and Capital Resources

Overview

Our primary sources of liquidity to date have been capital contributions from our owners, cash flows from operations, borrowings under our Credit Facility (defined below) and proceeds from our IPO. Our primary uses of capital have been capital expenditures to support organic growth and the acquisition of our manufacturing facility and intellectual property. We strive to maintain financial flexibility and proactively monitor potential capital sources, including equity and debt financing, to meet our investment and target liquidity requirements and to permit us to manage the cyclicality associated with our business.

On May 17, 2017, Solaris completed the Offering of 10,100,000 shares of the Class A common stock, par value $0.01 per share (“Class A Common Stock”), at a price to the public of $12.00 per share ($11.28 net of underwriting discounts and commissions). After deducting underwriting discounts and commissions and offering expenses payable by Solaris, Solaris received net proceeds of approximately $113.9 million. Solaris contributed all of the net proceeds of the IPO to Solaris LLC in exchange for Solaris LLC Units. Solaris LLC used the net proceeds (i) to fully repay our existing balance of approximately $5.5 million under our Credit Facility, (ii) to pay $3.1 million in cash bonuses to certain employees and consultants and (iii) to distribute approximately $25.8 million to the Existing Owners as part of the corporate reorganization being undertaken in connection with the IPO. Solaris LLC intends to use the remaining proceeds for general corporate purposes, including funding our 2017 capital program. Following the IPO, we intend to finance most of our capital expenditures, contractual obligations and working capital needs with cash generated from operations, proceeds from the IPO and borrowings under our Credit Facility. We currently estimate that our capital expenditures for 2017 will range from $80.0 million to $95.0 million, the majority of which we expect will be used to manufacture additional systems for our fleet and advance construction of the proppant transloading facility we are developing in Kingfisher, Oklahoma (the “Kingfisher Facility”). We continuously evaluate our capital expenditures and the amount we ultimately spend will depend on a number of factors, including expected industry activity levels and company initiatives. We believe that our operating cash flow, proceeds from the IPO and available borrowings under our Credit Facility will be sufficient to fund our operations for at least the next twelve months.

As of June 30, 2017, cash totaled $70.1 million.

Cash Flows

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

(in thousands)

Analysis of Cash Flow Changes for Three Months Ended June 30, 2017 Compared to Three Months Ended June 30, 2016

Operating Activities. Net cash provided by operating activities was $1.5 million for the six months ended June 30, 2017, compared to net cash used in operating activities of $0.5 million for the six months ended June 30, 2016. The increase of $2.0 million in operating cash flow was primarily attributable to an increase in net income of $6.8 million due to an increase in the number of revenue days, offset by an increase of $5.4 million in prepaid expenses and other current assets as a result of advanced payment deposits relating to an increase in our manufacturing activities and an increase in other working capital items of $0.8 million.

Investing Activities. Net cash used in investing activities was $21.5 million for the six months ended June 30, 2017, compared to $3.5 million for the six months ended June 30, 2016 due to an increase in the manufacturing rate of new systems. For the six months ended June 30, 2017, $20.1 million of investing activities were capital expenditures related to manufacturing new systems and $1.2 million of investing activities were capital expenditures related to the purchase of vehicles to support the service of our systems. For the six months ended June 30, 2016, $3.5 million of investing activities were primarily related to capital expenditures related to manufacturing new systems.

Financing Activities. Net cash provided by financing activities of $86.5 million for the six months ended June 30, 2017, was primarily related to $113.9 million in net proceeds received in the Offering and $4.2 million in proceeds received from the payment of promissory notes from employees, less $5.5 million used to fully repay borrowings under the Credit Facility, $3.1 million in cash bonuses to certain employees and consultants and $25.8 million distributions to legacy members of Solaris LLC as part of the Reorganization Transactions undertaken in connection with the IPO.

Debt Agreements

Senior Secured Credit Facility

On December 1, 2016, Solaris LLC entered into a credit agreement (the “Credit Agreement”) by and among Solaris LLC, the lenders party thereto from time to time and Woodforest National Bank, as administrative agent (the “Administrative Agent”), providing for $11.0 million aggregate principal amount of senior secured credit facilities (the “Credit Facility”). The Credit Facility initially consisted of (i) up to $10.0 million aggregate principal amount of advance term loan commitments (the “Advance Loan Facility”) available for borrowing until December 1, 2017 and (ii) up to $1.0 million aggregate principal amount of revolving credit commitments (the “Revolving Facility”) available for borrowing until December 1, 2018.

On May 17, 2017, in connection with the Offering, the Company entered into an amendment (the “First Amendment”) to the Credit Agreement (as amended by the First Amendment, the “Amended Credit Facility. The First Amendment, among other things, modified the terms of the Credit Agreement to (i) increase the Revolving Facility from $1.0 million to $20.0 million, (ii) decrease the Advance Loan Facility from $10.0 million to $0 and (iii) amend both the scheduled maturity date of the Revolving Facility and the Advance Loan Facility to be May 17, 2021. Additionally, the First Amendment increased the accordion feature of the Revolving Facility from $1.0 million to $10.0 million, which accordion may be elected by the Company at any time prior to the scheduled maturity date of the Revolving Facility so long as no default or event of default shall have occurred and be continuing and provided that no lender has any obligation to increase its own revolving credit commitment.

Proceeds from the Offering were used to fully repay the $5.5 million outstanding under the Credit Facility in May 2017. As of June 30, 2017, there were no borrowings outstanding under the Revolving Facility. For the three and six months ended June 30, 2017, the weighted average interest rates on the Credit Facility were 5.49% and 5.39%, respectively

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

Borrowings under the Amended Credit Facility bear interest at a one-month London Interbank Offered Rate plus an applicable margin and interest shall be payable monthly. The applicable margin ranges from 3.00% to 4.00% depending on the Company’s leverage ratio. The leverage ratio is defined in the Amended Credit Facility, as of any day, as the ratio of funded indebtedness, less a cash adjustment of the lesser of $10.0 million or fifty percent of unrestricted cash of the Company and its subsidiaries, to EBITDA, for the twelve months then ended (the “Leverage Ratio”). During the continuance of an event of default, overdue amounts under the Amended Credit Facility will bear interest at 5.00% plus the otherwise applicable interest rate.

The Revolving Facility initially had a scheduled maturity date of December 1, 2018 and the Advance Loan Facility initially had a scheduled maturity date of December 1, 2021. The First Amendment extended the scheduled maturity of the Revolving Facility and Advance Loan Facility to May 17, 2021.

The First Amendment modified the monthly commitment fee we pay on undrawn amounts of the Revolving Facility to a range from 0.1875% to 0.50% depending on the Company’s leverage ratio; provided, however that the Company will not be required to pay such commitment fee for any month when it has outstanding borrowings greater than 50.0% of the commitments under the Revolving Facility.

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

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

The Credit Agreement initially required that the Company maintain, at all times, a ratio of total indebtedness to consolidated EBITDA of not more than 2.00 to 1.00 and a ratio of consolidated EBITDA to fixed charges of not less than 1.50 to 1.00, and the Company was in compliance with all such ratios as of June 30, 2017. The Amended Credit Facility requires that the Company maintain, at all times, a Leverage Ratio of not more than 2.50 to 1.00. The Amended Credit Facility also requires that the Company maintain, at all times, a ratio of consolidated EBITDA to fixed charges of not less than 1.25 to 1.00. Additionally, the Company’s capacity to make capital expenditures is capped at $80.0 million for each fiscal year plus, for fiscal years beginning on January 1, 2019, any unused availability for capital expenditures from the immediately preceding fiscal year; provided, however that the Company is permitted to make any capital expenditures in an amount equal to the proceeds of equity contributions made to the Company used to fund such capital expenditures.

Tax Receivable Agreement

With respect to obligations we expect Solaris to incur under the Tax Receivable Agreement (except in cases where Solaris elects to terminate the Tax Receivable Agreement early, the Tax Receivable Agreement is terminated (or is treated as terminated) early due to certain mergers or other changes of control or we have available cash but fail to make payments when due, in which cases Solaris would be required to make a substantial, immediate lump-sum payment), generally Solaris may elect to defer payments due under the Tax Receivable Agreement if it does not have available cash to satisfy its payment obligations under the Tax Receivable Agreement or if its contractual obligations limit its ability to make these payments. Any such deferred payments under the Tax Receivable Agreement generally will accrue interest.

Critical Accounting Policies and Estimates

The preparation of financial statements requires the use of judgments and estimates. Our critical accounting policies are described below to provide a better understanding of how we develop our assumptions and judgments about future events and related estimates and how they can impact our financial statements. A critical accounting estimate is one that requires our most difficult, subjective or complex estimates and assessments and is fundamental to our results of operations.

We base our estimates on historical experience and on various other assumptions we believe to be reasonable according to the current facts and circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We believe the following are the critical accounting policies used in the preparation of our combined financial statements, as well as the significant estimates and judgments affecting the application of these policies. This discussion and analysis should be read in conjunction with our consolidated financial statements and related notes included in this report.

Revenue Recognition

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

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

Accounts Receivable

Accounts receivable consists of trade receivables recorded at the invoice amount, plus accrued revenue that is earned, but not yet billed less an estimated allowance for doubtful accounts (if any). Accounts receivable are generally due within 60 days or less, or in accordance with terms agreed with customers, and are stated at amounts due from customers net of any allowance for doubtful accounts. We consider accounts outstanding longer than the payment terms past due. We determine the allowance by considering a number of factors, including the length of time trade accounts receivable are past due, previous loss history, the customer’s current ability to pay its obligation, and the condition of the general economy and the industry as a whole. Accounts receivable are written off when they are deemed uncollectible, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts. However, it is reasonably possible that the estimates of the allowance for doubtful accounts will change and that losses ultimately incurred could differ materially from the amounts estimated in determining the allowance. As of June 30, 2017 we had no allowance for doubtful accounts.

Inventories

Inventories consists of materials used in the manufacturing of the proppant systems, which include raw materials and purchased parts. Inventory purchases are recorded initially at cost and issued at weighted average cost when consumed.

Property, Plant and Equipment

Property, plant and equipment are stated at cost, or fair value for assets acquired, less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful service lives of the assets. Systems that are in the process of being manufactured are considered property, plant and equipment. However, the systems in process do not depreciate until they are fully completed. Systems in process are a culmination of material, labor and overhead.

The costs of ordinary repairs and maintenance are charged to expense as incurred, while significant enhancements, including upgrades or overhauls, are capitalized. These enhancements include upgrades to various components of the system and to equipment at our manufacturing facility that will either extend the life or improve the utility and efficiency of the systems, plant and equipment. These enhancements include:

• Generation two to three control system upgrades that allow for customization and automation of system controls. This improves the operational capabilities of our systems by allowing automated shutdown logic and a wide range of customer driven customizations. These include seamless integrated controls on various configuration of our systems (three, six or twelve silo configuration), as well as proppant and admixture blending capabilities. This upgrade is added to and depreciated over the remaining life of the system.
• The PropView™ inventory management system enables our customers to track inventory levels in, and delivery rates from, each silo in a system. This upgrade improves our customers’ operational efficiencies and reduces operating and supply chain costs by allowing the customer to better manage proppant inventory levels both onsite and remotely. This upgrade is added to and depreciated over the remaining life of the system.
• Interchangeable discharge heads for the conveyor belt that serves the various needs of our customers. This upgrade allows us to better meet the needs of our customers by fitting to a wide range of blender configurations at the well site. This is depreciated over a 15‑year life.
• Plant improvements include upgrades to overhead cranes and the addition of new column bays and trunions that improve the manufacturing flow, as well as improvements in the paint booths. These improvements increase

productivity by reducing labor hours, while improving safety. These upgrades are depreciated over their useful lives (range of 2‑10 years).

The determination of whether an expenditure should be capitalized or expensed requires management judgment in the application of how the costs benefit future periods, relative to our capitalization policy. Costs that increase the value or materially extend the life of the asset are capitalized and depreciated over the remaining useful life of the asset. When property and equipment are sold or retired, the cost and related accumulated depreciation are removed from the accounts and any gain or loss is reflected in the consolidated statements of operations.

Impairment of Long-Lived and Other Intangible Assets

Long-lived assets, such as property, plant and equipment and finite-lived intangible assets, are evaluated for impairment whenever events or changes in circumstances indicate that their carrying value may not be recoverable. Recoverability is assessed using undiscounted future net cash flows of assets grouped at the lowest level for which there are identifiable cash flows independent of the cash flows of other groups of assets. When alternative courses of action to recover the carrying amount of the asset group are under consideration, estimates of future undiscounted cash flows take into account possible outcomes and probabilities of their occurrence, which require us to apply judgment. If the carrying amount of the asset is not recoverable based on its estimated undiscounted cash flows expected to result from the use and eventual disposition, an impairment loss is recognized in an amount by which its carrying amount exceeds its estimated fair value. The inputs used to determine such fair value are primarily based upon internally developed cash flow models. Our cash flow models are based on a number of estimates regarding future operations that are subject to change. There was no impairment for the three and six months ended June 30, 2017 and 2016.

Goodwill

Goodwill represents the excess of the purchase price of acquisitions, or fair value of contributed assets, over the fair value of the net assets acquired and consists of synergies in combining operations and other intangible assets which do not qualify for separate recognition. We evaluate goodwill for impairment annually, as of October 31, or more often as facts and circumstances warrant. The recoverability of the carrying value is assessed based on expected future profitability and undiscounted future cash flows of the acquisitions and their contribution to our overall operations. These types of analyses contain uncertainties because they require us to make judgments and assumptions regarding future profitability, industry factors, planned strategic initiatives, discount rates and other factors. There was no impairment for the three and six months ended June 30, 2017 and 2016.

Unit-Based Awards

We follow the fair value recognition provisions in accordance with GAAP. Under the fair value recognition provisions, unit-based compensation cost is measured at the grant date based on the fair value of the award and is amortized to compensation expense on a straight-line basis over the awards’ vesting period, which is generally the requisite service period. We have historically and consistently calculated fair value using the Black-Scholes option-pricing model. This valuation approach involves significant judgments and estimates, including estimates regarding our future operations, price variation and the appropriate risk-free rate of return.

Recent Accounting Pronouncements

See Note 2, “Summary of Significant Accounting Policies —Recently Accounting Pronouncements” to our consolidated financial statements as of June 30, 2017, for a discussion of recent accounting pronouncements.

Under the JOBS Act, we meet the definition of an “emerging growth company,” which allows us to have an extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act, however we elected to opt out of such exemption (this election is irrevocable).

Off Balance Sheet Arrangements

We have no material off balance sheet arrangements, except for operating leases. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such financing arrangements.

Market risk is the risk of loss arising from adverse changes in market rates and prices. Currently, our market risks relate to potential changes in the fair value of our long-term debt due to fluctuations in applicable market interest rates. Going forward our market risk exposure generally will be limited to those risks that arise in the normal course of business, as we do not engage in speculative, non-operating transactions, nor do we utilize financial instruments or derivative instruments for trading purposes.

Commodity Price Risk

The market for our services is indirectly exposed to fluctuations in the prices of crude oil and natural gas to the extent such fluctuations impact drilling and completion activity levels and thus impact the activity levels of our customers in the exploration and production and oilfield services industries. We do not currently intend to hedge our indirect exposure to commodity price risk.

Interest Rate Risk

We are subject to interest rate risk on a portion of our long-term debt under the Credit Facility. We do not currently have any borrowings under our Credit Facility.

Credit Risk

The majority of our accounts receivable have payment terms of 60 days or less. As of June 30, 2017, three customers accounted for 27%, 23% and 11% of our total accounts receivable. As of December 31, 2016, one customer accounted for 23% of our total accounts receivable. We mitigate the associated credit risk by performing credit evaluations and monitoring the payment patterns of our customers.

As required by Rule 13a‑15(b) under the Securities Exchange Act of 1934 (the “Exchange Act”), we have evaluated, under the supervision and with the participation of management, including our principal executive officer and principal financial officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a‑15(e) and 15d‑15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10‑Q. Our disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed by us in reports that we file or submit under the Exchange Act is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure and is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. Based upon that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of June 30, 2017.

Changes in Internal Control over Financial Reporting

Except for the adoption of certain corporate governance policies as described below, there were no changes in our internal control over financial reporting that occurred during the quarter ended June 30, 2017 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

In connection with the IPO, we adopted certain corporate governance policies in order to strengthen our corporate governance and comply with the requirements of the New York Stock Exchange. These changes included the appointment of five independent members of the Solaris Board of Directors, the establishment of Corporate Governance Guidelines, the adoption of Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee Charters and the adoption of a Code of Business Conduct and Ethics.

Factors that could materially adversely affect our business, financial condition, operating results or liquidity and the trading price of our Class A Common Stock are described under Risk Factors, included in our prospectus dated May 11, 2017 and filed with the SEC pursuant to Rule 424(b) under the Securities Act, on May 15, 2017, as amended. This information should be considered carefully, together with other information in this report and other reports and materials we file with the SEC.