Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis should be read in conjunction with the financial statements and related notes presented in this Quarterly Report on Form 10-Q (this “Report”), as well as our audited financial statements and notes thereto included in our final prospectus, dated March 8, 2023, filed with the Securities and Exchange Commission (the “SEC”) pursuant to Rule 424(b) under the Securities Act of 1933, as amended (the “Securities Act”), on March 10, 2023 in connection with our initial public offering (our “Final Prospectus”).
Unless the context otherwise requires, references to “Atlas Inc.” are to Atlas Energy Solutions Inc., and references to the “Company,” “we,” “us,” and like expressions are to Atlas Inc. together with its subsidiaries, including Atlas Sand Company, LLC (“Atlas LLC”), the predecessor of Atlas Inc. References to “Atlas Operating” are to Atlas Sand Operating, LLC, the operating subsidiary of Atlas Inc. and the direct parent company of Atlas LLC.
Cautionary Note Regarding Forward-Looking Statements
This Report contains forward-looking statements that are subject to risks and uncertainties. All statements, other than statements of historical fact included in this Report, regarding our strategy, future operations, financial position, estimated revenues and losses, projected costs, prospects, plans and objectives of management are forward-looking statements. When used in this Report, the words “may,” “forecast,” “continue,” “could,” “would,” “will,” “plan,” “believe,” “anticipate,” “intend,” “estimate,” “expect,” “project” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. These forward-looking statements are based on our current expectations and assumptions about future events and are based on currently available information as to the outcome and timing of future events. When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements described under the section titled “Risk Factors” included in this Report. By their nature, forward-looking statements involve known and unknown risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. Although we believe that the forward-looking statements contained in this Report are based on reasonable assumptions, you should be aware that many factors could affect our actual financial results or results of operations and could cause actual results to differ materially from those in such forward-looking statements, including but not limited to:
•higher than expected costs to operate our proppant production and processing facilities and develop the Dune Express (as defined below);
•the amount of proppant we are able to produce, which could be adversely affected by, among other things, operating difficulties and unusual or unfavorable geologic conditions;
•the volume of proppant we are able to sell and our ability to enter into supply contracts for our proppant on acceptable terms;
•the prices we are able to charge, and the margins we are able to realize, from our proppant sales;
•the demand for and price of proppant, particularly in the Permian Basin;
•the success of our electric dredging transition efforts;
•fluctuations in the demand for certain grades of proppant;
•the domestic and foreign supply of and demand for oil and natural gas;
•the effects of actions by, or disputes among or between, members of the Organization of Petroleum Exporting Countries (“OPEC”) and other oil producing nations (together, “OPEC+”) with respect to production levels or other matters related to the prices of oil and natural gas;
•changes in the price and availability of natural gas, diesel fuel or electricity that we use as fuel sources for our proppant production facilities and related equipment;
•the availability of capital and our liquidity;
•the level of competition from other companies;
•pending legal or environmental matters;
•changes in laws and regulations (or the interpretation thereof) or increased public scrutiny related to the proppant production and oil and natural gas industries, silica dust exposure or the environment;
•facility shutdowns in response to environmental regulatory actions;
•technical difficulties or failures;
•liability or operational disruptions due to pit-wall or pond failure, environmental hazards, fires, explosions, chemical mishandling or other industrial accidents;
21
•unanticipated ground, grade or water conditions;
•inability to obtain government approvals or acquire or maintain necessary permits or mining, access or water rights;
•changes in the price and availability of transportation services;
•inability of our customers to take delivery;
•difficulty collecting on accounts receivable;
•the level of completion activity in the oil and natural gas industry;
•inability to obtain necessary production equipment or replacement parts;
•the amount of water available for processing;
•any planned or future expansion projects or capital expenditures;
•our ability to finance equipment, working capital and capital expenditures;
•inability to successfully grow organically, including through future land acquisitions;
•inaccuracies in estimates of volumes and qualities of our frac sand reserves;
•failure to meet our minimum delivery requirements under our supply agreements;
•material nonpayment or nonperformance by any of our significant customers;
•development of either effective alternative proppants or new processes that replace hydraulic fracturing;
•our ability to borrow funds and access the capital markets;
•our ability to comply with covenants contained in our debt instruments;
•the severity, operational challenges and duration of the ongoing COVID-19 pandemic and efforts to mitigate the spread of the virus, including logistical challenges, protecting the health and well-being of our employees, remote work arrangements, performance of contracts and supply chain disruptions, which have caused economic slowdowns and interruptions to our and our customers’ operations;
•the potential deterioration of our customers’ financial condition, including defaults resulting from actual or potential insolvencies;
•changes in global political or economic conditions, including sustained inflation as well as financial market instability or disruptions to the banking system due to bank failures, particularly in light of the recent events that have occurred with respect to Silicon Valley Bank (“SVB”) and Signature Bank and associated changes in monetary policy, both generally and in the markets we serve;
•the impact of geopolitical developments and tensions, war and uncertainty in oil-producing countries (including the invasion of Ukraine by Russia and any related political or economic responses and counter-responses or otherwise by various global actors or the general effect on the global economy);
•health epidemics, such as the ongoing COVID-19 pandemic, natural disasters or inclement or hazardous weather conditions, including but not limited to cold weather, droughts, flooding, tornadoes and the physical impacts of climate change;
•physical, electronic and cybersecurity breaches;
•the effects of litigation;
•plans, objectives, expectations and intentions described in this Report that are not historical; and
•other factors discussed elsewhere in this Report, including in the section titled “Item 1A. Risk Factors.”
We caution you that these forward-looking statements are subject to numerous risks and uncertainties, most of which are difficult to predict and many of which are beyond our control. These risks include, but are not limited to, the risks described under the section titled “Item 1A. Risk Factors” in this Report and the risk factors disclosed under the heading “Risk Factors” included in our Final Prospectus.
You are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date of this Report. Should one or more of the risks or uncertainties described in this Report occur, or should underlying assumptions prove incorrect, our actual results and plans could differ materially from those expressed in any forward-looking statements. All forward-looking statements, expressed or implied, included in this Report are expressly qualified in their entirety by this cautionary statement.
22
This cautionary statement should also be considered in connection with any subsequent written or oral forward-looking statements that we or persons acting on our behalf may issue. Except as otherwise required by applicable law, we disclaim any duty to update any forward-looking statements to reflect events or circumstances after the date of this Report.
Overview
We are a low-cost producer of high-quality, locally sourced 100 mesh and 40/70 sand used as a proppant during the well completion process. Proppant is necessary to facilitate the recovery of hydrocarbons from oil and natural gas wells. One hundred percent of Atlas LLC’s sand reserves are located in Winkler and Ward Counties, Texas, within the Permian Basin and operations consist of proppant production and processing facilities, including one facility near Kermit, Texas (the “Kermit facility”) and a second facility near Monahans, Texas (the “Monahans facility”). As of March 31, 2023, our Kermit and Monahans facilities have a total combined annual production capacity in excess of 10.0 million tons.
We are currently building a logistics platform with the aim of increasing the efficiency, safety and sustainability of the oil and natural gas industry within the Permian Basin. This will include the Dune Express, an overland conveyor infrastructure solution currently under construction, coupled with our fleet of fit-for-purpose trucks and trailers.
Recent Developments
Initial Public Offering
On March 13, 2023, Atlas Inc. completed its initial public offering of 18.0 million shares of its Class A common stock, par value $0.01 per share (the “Class A common stock”) at a price to the public of $18.00 per share (the “IPO”). The IPO generated combined net proceeds of $292.7 million, after deducting underwriter discounts and commissions and estimated offering costs.
Reorganization
Pursuant to a master reorganization agreement (the “Master Reorganization Agreement”) dated March 8, 2023, by and among Atlas Inc., Atlas Operating, Atlas LLC, Atlas Sand Management Company, LLC, a Texas limited liability company (“ASMC”), Atlas Sand Holdings, LLC, a Delaware limited liability company (“Holdings”), Atlas Sand Holdings II, LLC, a Delaware limited liability company (“Holdings II”), Atlas Sand Management Company II, LLC, a Delaware limited liability company (“ASMC II”), and Atlas Sand Merger Sub, LLC, a Delaware limited liability company (“Merger Sub”), the Company and the parties thereto completed certain restructuring transactions (the “Reorganization”) in connection with the IPO. As part of the Reorganization:
•Merger Sub merged with and into Atlas LLC, with Atlas LLC surviving as a wholly owned subsidiary of Atlas Operating;
•Holdings, Holdings II and ASMC II were formed (collectively with ASMC, the “HoldCos”), through which certain holders who previously held membership interests in Atlas LLC (the “Legacy Owners”) were issued (and continue to hold a portion of) the membership interests in Atlas Operating, as represented by a single class of common units (“Operating Units”);
•certain Legacy Owners, through the HoldCos, transferred all or a portion of their Operating Units and voting rights, as applicable, in Atlas Operating to Atlas Inc. in exchange for an aggregate of 39,147,501 shares of Class A common stock and, in the case of Legacy Owners continuing to hold Operating Units through the HoldCos, an aggregate of 42,852,499 shares of Class B common stock, par value $0.01 per share, of the Company (the “Class B common stock,” and together with the Class A common stock, the “common stock”), so that such Legacy Owners that continue to hold Operating Units also hold, through the HoldCos, one share of Class B common stock for each Operating Unit held by them;
•the 1,000 shares of Class A common stock issued to Atlas LLC at the formation of Atlas Inc. were redeemed and canceled for nominal consideration; and
•Atlas Inc. contributed all of the net proceeds received by it in the IPO to Atlas Operating in exchange for a number of Operating Units (such that the total number of Operating Units held by Atlas Inc. equals the number of shares of Class A common stock outstanding after the IPO), and Atlas Operating further contributed the net proceeds received to Atlas LLC.
On or before August 30, 2023, we will designate a date for distributions of the Operating Units and shares of common stock of the Company currently held by the HoldCos to the Legacy Owners in accordance with the distribution provisions of each respective HoldCo operating agreement. Following this distribution, the HoldCos will be dissolved, and the Legacy Owners will hold shares of the Company’s Class A common stock or Class B common stock (and corresponding Operating Units) directly.
May Dividend and Distribution
On May 8, 2023, Atlas Operating approved a distribution of $0.15 per Operating Unit, in the aggregate amount of $15.0 million, as permitted by the Amended and Restated Limited Liability Company Agreement of Atlas Sand Operating, LLC, and the Company declared a quarterly variable dividend of $0.15 per share of Class A common stock. To effect the payment of the dividend, Atlas Operating will make a distribution of $0.15 per Operating Unit to each of the Company and Holdings, the Company will use its respective distribution to fund the quarterly variable dividend to be paid to the holders of our Class A common stock, and Holdings will distribute its respective distributions to certain Legacy Owners. Concurrent with this distribution, Atlas LLC is required to repay
23
$3.8 million of the 2021 Term Loan Credit Facility at par per the terms of the 2021 Term Loan Credit Facility. The dividend will be payable on May 22, 2023 to holders of record of Class A common stock and Units at the close of business on May 15, 2023.
Our Predecessor
Our predecessor consists of Atlas LLC and certain of its wholly owned subsidiaries: Atlas Sand Employee Holdings, LLC; Atlas Sand Employee Company, LLC; Atlas OLC Employee Company, LLC; Atlas Construction Employee Company, LLC; Fountainhead Logistics Employee Company, LLC; Atlas Sand Construction, LLC; OLC Kermit, LLC; OLC Monahans, LLC; and Fountainhead Logistics, LLC on a consolidated basis (which we refer to collectively as “Atlas Predecessor”). Historical periods for Atlas Predecessor were presented on a consolidated basis given the common control ownership. Unless otherwise indicated, the historical consolidated financial information included in this Report presents the historical financial information of Atlas Predecessor. Historical consolidated financial information is not indicative of the results that may be expected in any future periods.
Recent Trends and Outlook
Current global macroeconomic concerns include rising interest rates, financial institution solvency, and the possibility of a recession. Despite these headwinds, the oil market remained healthy in the first quarter of 2023. During the first quarter of 2023, the price for West Texas Intermediate crude oil averaged $76.08 per barrel (“Bbl”), as compared to $82.79 per Bbl during the fourth quarter of 2022.
We believe the fundamental outlook for hydrocarbons remains strong. Global demand for hydrocarbons has returned to pre-pandemic levels and we believe years of underinvestment in the oil and natural gas industry’s production capacity will lead to a structural supply imbalance. While demand currently remains strong, we acknowledge that there continues to be a concern of a recession risk in global markets. We believe that the impact on the oil and gas industry from a possible recession would be relatively muted in 2023 due to low inventory levels and rather sparse spare global production capacity, which can be exacerbated by geopolitical and regulatory decisions.
Current commodity prices continue to offer returns for oil and gas exploration and production, particularly those in oilier basins. Both major operators and independents are focusing their capital spending on North America, and in particular the Permian Basin. As a result, the Permian Basin proppant market remains healthy, with proppant demand presently at an all-time high. While the available Permian Basin proppant supply has marginally grown over the past year, the market currently remains undersupplied and that deficit is likely to grow based on forecasted demand levels.
How We Generate Revenue
We generate revenue by mining, processing and distributing proppant that our customers use in connection with their operations. We sell proppant to our customers under supply agreements or as spot sales at prevailing market rates, which is dependent upon the cost of producing proppant, the proppant volumes sold and the desired margin and prevailing market conditions.
Revenues also include charges for sand logistics services provided to our customers. Our logistics service revenue fluctuates based on several factors, including the volume of proppant transported and the distance between our facilities and our customers. Revenue is generally recognized as products are delivered in accordance with the contract.
Some of our contracts contain shortfall provisions that calculate agreed upon fees that are billed when the customer does not satisfy the minimum purchases over a period of time defined in each contract.
Costs of Conducting Our Business
We incur operating costs primarily from direct and indirect labor, freight charges, utility costs, fuel and maintenance costs and royalties. We incur labor costs associated with employees at our Kermit and Monahans facilities, which represent the most significant cost of converting proppant to finished product. Our Kermit and Monahans facilities undergo maintenance to minimize unscheduled downtime and ensure the ongoing quality of our proppant and ability to meet customer demands. We may incur variable utility costs in connection with the operation of our processing facilities, primarily natural gas and electricity, which are both susceptible to market fluctuations. We lease equipment in many areas of our operations, including our proppant production hauling equipment. We incur variable royalty expense and/or delay rentals related to our agreements with the owners of our reserves. In addition, other costs including overhead allocation, depreciation and depletion are capitalized as a component of inventory and are reflected in cost of goods sold when inventory is sold. Our logistics services incur operating costs primarily composed of variable freight charges from trucking companies' delivery of sand to customer wellsites, direct and indirect labor, fuel and maintenance costs and royalties.
How We Evaluate Our Operations
Non-GAAP Financial Measures
Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted Free Cash Flow, Adjusted EBITDA less Capital Expenditures, Adjusted Free Cash Flow Margin, Adjusted EBITDA less Capital Expenditures Margin, Adjusted Free Cash Flow Conversion, Contribution Margin, Maintenance Capital Expenditures and Net Debt are non-GAAP supplemental financial measures used by our management and by external users of our financial statements such as investors, research analysts and others, in the case of Adjusted EBITDA, to assess our operating performance on a consistent basis across periods by removing the effects of development activities,
24
provide views on capital resources available to organically fund growth projects and, in the case of Adjusted Free Cash Flow and Adjusted EBITDA less Capital Expenditures, assess the financial performance of our assets and their ability to sustain dividends or reinvest to organically fund growth projects over the long term without regard to financing methods, capital structure or historical cost basis.
We define Adjusted EBITDA as net income (loss) before depreciation, depletion and accretion, interest expense, income tax expense, stock and unit-based compensation, gain (loss) on extinguishment of debt and unrealized commodity derivative gain (loss). Management believes Adjusted EBITDA is useful because it allows them to more effectively evaluate our operating performance and compare the results of our operations from period to period and against our peers without regard to our financing methods or capital structure. We exclude the items listed above from net income in arriving at Adjusted EBITDA because these amounts can vary substantially from company to company within our industry depending upon accounting methods and book values of assets, capital structures and the method by which the assets were acquired.
We define Adjusted EBITDA Margin as Adjusted EBITDA divided by total sales.
We define Adjusted Free Cash Flow as Adjusted EBITDA less Maintenance Capital Expenditures. We define Adjusted EBITDA less Capital Expenditures as Adjusted EBITDA less Net Cash Used in Investing Activities. We believe that Adjusted Free Cash Flow and Adjusted EBITDA less Capital Expenditures are useful to investors as they provide measures of the ability of our business to generate cash.
We define Adjusted Free Cash Flow Margin as Adjusted Free Cash Flow divided by total sales.
We define Adjusted EBITDA less Capital Expenditures Margin as Adjusted EBITDA less Capital Expenditures divided by total sales.
We define Adjusted Free Cash Flow Conversion as Adjusted Free Cash Flow divided by Adjusted EBITDA.
We define Contribution Margin as gross profit plus depreciation, depletion and accretion expense.
We define Maintenance Capital Expenditures as capital expenditures excluding growth capital expenditures.
We define Net Debt as total debt, net of discount and deferred financing costs, plus right-of-use lease liabilities, less cash and cash equivalents.
Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted Free Cash Flow, Adjusted EBITDA less Capital Expenditures, Adjusted Free Cash Flow Margin, Adjusted EBITDA less Capital Expenditures Margin, Adjusted Free Cash Flow Conversion, Contribution Margin, Maintenance Capital Expenditures and Net Debt do not represent and should not be considered alternatives to, or more meaningful than, net income, income from operations, net cash provided by operating activities or any other measure of financial performance presented in accordance with GAAP as measures of our financial performance. Adjusted EBITDA, Adjusted Free Cash Flow, and Adjusted EBITDA less Capital Expenditures have important limitations as analytical tools because they exclude some but not all items that affect net income, the most directly comparable GAAP financial measure. Our computation of Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted Free Cash Flow, Adjusted Free Cash Flow Margin, Adjusted EBITDA less Capital Expenditures, Adjusted EBITDA less Capital Expenditures Margin, Adjusted Free Cash Flow Conversion, Contribution Margin, Maintenance Capital Expenditures and Net Debt may differ from computations of similarly titled measures of other companies.
The following table presents a reconciliation of Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted Free Cash Flow, Adjusted EBITDA less Capital Expenditures, Adjusted Free Cash Flow Margin, Adjusted EBITDA less Capital Expenditures Margin, Adjusted Free Cash Flow Conversion, Contribution Margin, Maintenance Capital Expenditures and Net Debt to the most directly comparable GAAP financial measure for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
For The Three Months Ended March 31, |
|
|
|
2023 |
|
|
2022 |
|
|
|
(unaudited) |
|
|
|
(In thousands) |
|
Net income (1) |
|
$ |
62,905 |
|
|
$ |
20,846 |
|
Depreciation, depletion and accretion expense |
|
|
8,808 |
|
|
|
6,483 |
|
Interest expense |
|
|
4,021 |
|
|
|
4,002 |
|
Income tax expense |
|
|
7,677 |
|
|
|
225 |
|
EBITDA |
|
$ |
83,411 |
|
|
$ |
31,556 |
|
Stock and unit-based compensation expense |
|
|
622 |
|
|
|
205 |
|
Unrealized commodity derivative gain |
|
|
— |
|
|
|
(768 |
) |
Adjusted EBITDA |
|
$ |
84,033 |
|
|
$ |
30,993 |
|
Maintenance Capital Expenditures |
|
$ |
7,114 |
|
|
$ |
8,646 |
|
Adjusted Free Cash Flow |
|
$ |
76,919 |
|
|
$ |
22,347 |
|
25
|
|
|
|
|
|
|
|
|
|
|
For The Three Months Ended March 31, |
|
|
|
2023 |
|
|
2022 |
|
|
|
(unaudited) |
|
|
|
(In thousands) |
|
Net income (1) |
|
$ |
62,905 |
|
|
$ |
20,846 |
|
Depreciation, depletion and accretion expense |
|
|
8,808 |
|
|
|
6,483 |
|
Interest expense |
|
|
4,021 |
|
|
|
4,002 |
|
Income tax expense |
|
|
7,677 |
|
|
|
225 |
|
EBITDA |
|
$ |
83,411 |
|
|
$ |
31,556 |
|
Stock and unit-based compensation expense |
|
|
622 |
|
|
|
205 |
|
Unrealized commodity derivative gain |
|
|
— |
|
|
|
(768 |
) |
Adjusted EBITDA |
|
$ |
84,033 |
|
|
$ |
30,993 |
|
Capital expenditures |
|
$ |
60,940 |
|
|
$ |
6,037 |
|
Adjusted EBITDA less Capital Expenditures |
|
$ |
23,093 |
|
|
$ |
24,956 |
|
|
|
|
|
|
|
|
|
|
|
|
For The Three Months Ended March 31, |
|
|
|
2023 |
|
|
2022 |
|
|
|
(unaudited) |
|
|
|
(In thousands) |
|
Net cash provided by operating activities |
|
$ |
54,235 |
|
|
$ |
23,699 |
|
Current income tax expense(2) |
|
|
3,869 |
|
|
|
225 |
|
Change in operating assets and liabilities |
|
|
22,319 |
|
|
|
3,105 |
|
Cash interest expense(2) |
|
|
3,816 |
|
|
|
3,784 |
|
Maintenance capital expenditures(2) |
|
|
(7,114 |
) |
|
|
(8,646 |
) |
Other |
|
|
(206 |
) |
|
|
180 |
|
Adjusted Free Cash Flow |
|
$ |
76,919 |
|
|
$ |
22,347 |
|
|
|
|
|
|
|
|
|
|
|
|
For The Three Months Ended March 31, |
|
|
|
2023 |
|
|
2022 |
|
|
|
(unaudited) |
|
|
|
(In thousands, except percentages) |
|
Net cash provided by operating activities |
|
$ |
54,235 |
|
|
$ |
23,699 |
|
Current income tax expense(2) |
|
|
3,869 |
|
|
|
225 |
|
Change in operating assets and liabilities |
|
|
22,319 |
|
|
|
3,105 |
|
Cash interest expense(2) |
|
|
3,816 |
|
|
|
3,784 |
|
Capital expenditures |
|
|
(60,940 |
) |
|
|
(6,037 |
) |
Other |
|
|
(206 |
) |
|
|
180 |
|
Adjusted EBITDA less Capital Expenditures |
|
$ |
23,093 |
|
|
$ |
24,956 |
|
Adjusted EBITDA Margin |
|
|
54.8 |
% |
|
|
51.8 |
% |
Adjusted EBITDA less Capital Expenditure Margin |
|
|
15.1 |
% |
|
|
41.7 |
% |
Adjusted Free Cash Flow Margin |
|
|
50.1 |
% |
|
|
37.3 |
% |
Adjusted Free Cash Flow Conversion |
|
|
91.5 |
% |
|
|
72.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
For The Three Months Ended March 31, |
|
|
|
2023 |
|
|
2022 |
|
|
|
(unaudited) |
|
|
|
(In thousands) |
|
Gross Profit |
|
$ |
82,344 |
|
|
$ |
29,242 |
|
Depreciation, depletion and accretion expense |
|
|
8,519 |
|
|
|
6,167 |
|
Contribution Margin |
|
$ |
90,863 |
|
|
$ |
35,409 |
|
(1)Atlas Inc. is a corporation and is subject to U.S. federal income tax. Atlas LLC has elected to be treated as a partnership for income tax purposes and, therefore, was not subject to U.S. federal income tax at an entity level during the periods presented. As a result, the consolidated net income in our historical financial statements does not reflect the tax expense we would have incurred if we had been subject to U.S. federal income tax at an entity level during such periods.
(2)A reconciliation of the adjustment of these items used to calculate Adjusted Free Cash Flow to the Consolidated Financial Statements is included below.
26
|
|
|
|
|
|
|
|
|
|
|
For The Three Months Ended March 31, |
|
|
|
2023 |
|
|
2022 |
|
|
|
(unaudited) |
|
|
|
(In thousands) |
|
Current tax expense reconciliation: |
|
|
|
|
|
|
Income tax expense |
|
$ |
7,677 |
|
|
$ |
225 |
|
Less: deferred tax expense |
|
|
(3,808 |
) |
|
|
— |
|
Current income tax expense |
|
$ |
3,869 |
|
|
$ |
225 |
|
Cash interest expense reconciliation: |
|
|
|
|
|
|
Interest expense, net |
|
$ |
3,442 |
|
|
$ |
3,990 |
|
Less: Amortization of debt discount |
|
|
(118 |
) |
|
|
(109 |
) |
Less: Amortization of deferred financing costs |
|
|
(87 |
) |
|
|
(109 |
) |
Less: Interest income |
|
|
579 |
|
|
|
12 |
|
Cash interest expense |
|
$ |
3,816 |
|
|
$ |
3,784 |
|
Maintenance capital expenditures, accrual basis reconciliation: |
|
|
|
|
|
|
Purchases of property, plant and equipment |
|
$ |
60,940 |
|
|
$ |
6,037 |
|
Changes in operating assets and liabilities associated with investing activities(3) |
|
|
6,811 |
|
|
|
3,592 |
|
Less: Growth capital expenditures |
|
|
(60,637 |
) |
|
|
(983 |
) |
Maintenance Capital Expenditures, accrual basis |
|
$ |
7,114 |
|
|
$ |
8,646 |
|
|
|
|
|
|
|
|
|
|
|
|
For The Three Months Ended March 31, |
|
|
|
2023 |
|
|
2022 |
|
|
|
(unaudited) |
|
|
|
(In thousands) |
|
Total Debt |
|
$ |
139,120 |
|
|
$ |
171,386 |
|
Discount and deferred financing costs |
|
|
1,650 |
|
|
|
2,334 |
|
Finance right-of-use lease liabilities |
|
|
27,018 |
|
|
|
3,740 |
|
Cash and cash equivalents |
|
|
352,656 |
|
|
|
53,836 |
|
Net Debt |
|
$ |
(184,868 |
) |
|
$ |
123,624 |
|
(3)Positive working capital changes reflect capital expenditures in the current period that will be paid in a future period. Negative working capital changes reflect capital expenditures incurred in a prior period but paid during the period presented.
Factors Affecting the Comparability of Our Results of Operations
Long-Term Incentive Plan
In order to incentivize management members, in March 2023, our board of directors (the “Board”) adopted the Atlas Energy Solutions Inc. 2023 Long Term Incentive Plan (the “LTIP”) for the benefit of employees, directors and consultants of the Company and its affiliates. The LTIP provides for the grant of all or any of the following types of awards: (1) incentive stock options qualified as such under U.S. federal income tax laws; (2) stock options that do not qualify as incentive stock options; (3) stock appreciation rights; (4) restricted stock awards; (5) restricted stock units (“RSUs”); (6) bonus stock; (7) dividend equivalents; (8) other stock-based awards; (9) cash awards; and (10) substitute awards. As such, our historical financial data may not present an accurate indication of what our actual results would have been if we had implemented the LTIP program prior to the periods presented.
Public Company Expenses
As a result of the IPO, we incurred direct, incremental selling, general and administrative 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, including stock-based compensation, preparing quarterly reports to stockholders, tax return preparation, independent and internal auditor fees, investor relations activities, registrar and transfer agent fees, incremental director and officer liability insurance costs and independent director compensation. These direct, incremental selling, general and administrative expenses are not included in our results of operations prior to the IPO.
Income Taxes
Atlas Inc. is a corporation subject to U.S. federal, state and local income taxes. Although Atlas Predecessor is subject to margin tax in the State of Texas (at less than 1% of modified pre-tax earnings), it is and historically has been treated as a pass-through entity for U.S. federal, state and local income tax purposes, and as such generally is and was not subject to U.S. federal, state or local income taxes. Rather, the tax liability with respect to the taxable income of Atlas Predecessor is and was passed through to its owners. Accordingly, the financial data attributable to Atlas Predecessor contains no provision for U.S. federal income taxes or income taxes in any state or locality (other than margin tax in the State of Texas). Atlas Inc. is subject to U.S. federal, state and local taxes at a blended statutory rate of approximately 21.75% (plus any applicable state income tax) of pre-tax earnings, based upon the federal statutory income tax rate of 21%, plus Texas margin tax rate of 0.75%.
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We account for income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled pursuant to the provisions of Accounting Standards Codification 740, Income Taxes. The effect on deferred tax assets and liabilities of a change in tax rate is recognized in earnings in the period that includes the enactment date. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts more likely than not to be realized.
On March 13, 2023 (the closing date of the IPO), a corresponding deferred tax liability of approximately $17.8 million associated with the differences between the tax and book basis of the investment in Atlas LLC was recorded. The offset of the deferred tax liability was recorded to additional paid-in capital.
Results of Operations
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For The Three Months Ended March 31, |
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2023 |
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|
2022 |
|
|
|
(unaudited) |
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|
|
(In thousands) |
|
Product sales |
|
$ |
128,142 |
|
|
$ |
54,812 |
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Service sales |
|
|
25,276 |
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|
|
5,042 |
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Total sales |
|
|
153,418 |
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|
|
59,854 |
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Cost of sales (excluding depreciation, depletion and accretion expense) |
|
|
62,555 |
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|
|
24,445 |
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Depreciation, depletion and accretion expense |
|
|
8,519 |
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|
|
6,167 |
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Gross profit |
|
|
82,344 |
|
|
|
29,242 |
|
Operating expenses: |
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|
|
|
|
|
Selling, general and administrative expense (including stock and unit-based expense of $622 and $205 for the three months ended March 31, 2023 and 2022, respectively) |
|
|
8,504 |
|
|
|
5,275 |
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Operating income |
|
|
73,840 |
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|
|
23,967 |
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Interest expense, net |
|
|
(3,442 |
) |
|
|
(3,990 |
) |
Other income |
|
|
184 |
|
|
|
1,094 |
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Income tax expense |
|
|
7,677 |
|
|
|
225 |
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Net income |
|
$ |
62,905 |
|
|
$ |
20,846 |
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Three Months Ended March 31, 2023 Compared to Three Months Ended March 31, 2022
Product Sales. Product sales increased by $73.3 million to $128.1 million for the three months ended March 31, 2023, as compared to $54.8 million for the three months ended March 31, 2022. An increase in proppant prices between the periods contributed to a $63.0 million positive impact, while an increase in sales volume contributed a $10.3 million positive impact.
Service Sales. Services sales, which includes freight for last-mile logistics services, increased by $20.3 million to $25.3 million for the three months ended March 31, 2023, as compared to $5.0 million for the three months ended March 31, 2022. The increase in logistics revenue was due to higher sales volumes shipped to last-mile logistics customers.
Cost of sales (excluding depreciation, depletion and accretion expense). Cost of sales (excluding depreciation, depletion and accretion expense) increased by $38.2 million to $62.6 million for the three months ended March 31, 2023, as compared to $24.4 million for the three months ended March 30, 2022. Cost of sales (excluding depreciation, depletion and accretion) related to product sales increased by $20.0 million to $39.8 million for the three months ended March 31, 2023, as compared to $19.8 million for the three months ended March 31, 2022, due to higher sales volumes, which increased costs for maintenance, royalties and transition costs related to purchase of dredge equipment, requiring temporary usage of traditional mining rental equipment.
Cost of sales (excluding depreciation, depletion and accretion expense) related to services increased by $18.2 million to $22.8 million for the three months ended March 31, 2023, as compared to $4.6 million for the three months ended March 31, 2022, due to higher sales volumes shipped to last-mile logistics customers during the period.
Depreciation, depletion and accretion expense. Depreciation, depletion and accretion expense increased by $2.3 million to $8.5 million for the three months ended March 31, 2023, as compared to $6.2 million for the three months ended March 31, 2022. The increase in depreciation, depletion and accretion expense is due to increased units of production depletion due to higher proppant production and additional depreciable assets placed into service when compared to the prior period.
Selling, general and administrative expense. Selling, general and administrative expense increased by $3.2 million to $8.5 million for the three months ended March 31, 2023, as compared to $5.3 million for the three months ended March 31, 2022. The increase is primarily due to an increase of $2.2 million of employee costs, including an increase of $0.4 million of stock-based compensation expense, and $1.0 million of travel, sales and other corporate expenses associated with increased opportunities to conduct commercial business development efforts in person during the three months ended March 31, 2023, compared to the three months ended March 31, 2022.
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Our selling, general and administrative expense includes the non-cash expense for stock and unit-based compensation expense for equity awards granted to our employees. For the three months ended March 31, 2023, unit-based compensation expense was $0.2 million and stock-based compensation expense was $0.4 million, as compared to $0.2 million of unit-based compensation expense and no stock-based compensation expense for the three months ended March 31, 2022.
Interest expense, net. Interest expense, net decreased by $0.6 million to $3.4 million for the three months ended March 31, 2023, as compared to $4.0 million for the three months ended March 31, 2022. The decrease is driven by an increase in interest income of $0.6 million related to interest earned on net IPO proceeds.
Income tax expense. Income tax expense increased by $7.5 million to $7.7 million for the three months ended March 31, 2023, as compared to $0.2 million for the three months ended March 31, 2022. The increase is primarily due to Atlas Inc. incurring U.S. federal income taxes subsequent to our Reorganization on March 8, 2023 and increased revenues, which increased our liability related to Texas margin taxes.
Liquidity and Capital Resources
Overview
Historically, our primary sources of liquidity to date have been capital contributions from our owners, cash flows from operations, and borrowings under our 2018 Term Loan Credit Facility, which was refinanced by our 2021 Term Loan Credit Facility (as defined below), and our previous asset-based loan credit facility (the “2018 ABL Credit Facility”). Going forward, we expect our primary sources of liquidity to be the net proceeds retained from the IPO, cash flows from operations, availability under our 2023 ABL Credit Facility (defined below) or any other credit facility we enter into in the future and proceeds from any future issuances of debt or equity securities. We expect our primary use of capital will be for the payment of any distributions and dividends to our stockholders and for investing in our business, specifically for construction of the Dune Express, expansion of our Kermit facility, and acquisition of fit-for-purpose equipment for our trucking fleet used in our logistics platform. In addition, we have routine facility upgrades and additional ancillary capital expenditures associated with, among other things, contractual obligations and working capital obligations.
As of March 31, 2023, we had working capital, defined as current assets less current liabilities, of $367.6 million and $73.9 million of availability under the 2023 ABL Credit Facility. Our cash and cash equivalents totaled $352.7 million.
Cash Flow
The following table summarizes our cash flow for the periods indicated:
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For The Three Months Ended March 31, |
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2023 |
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2022 |
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|
(unaudited) |
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Consolidated Statement of Cash Flow Data: |
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(In thousands) |
|
Net cash provided by operating activities |
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$ |
54,235 |
|
|
$ |
23,699 |
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Net cash used in investing activities |
|
|
(60,940 |
) |
|
|
(6,037 |
) |
Net cash provided by (used in) financing activities |
|
|
277,351 |
|
|
|
(4,227 |
) |
Net increase in cash |
|
$ |
270,646 |
|
|
$ |
13,435 |
|
Three Months Ended March 31, 2023 Compared to Three Months Ended March 31, 2022
Net Cash Provided by Operating Activities. Net cash provided by operating activities was $54.2 million and $23.7 million for the three months ended March 31, 2023 and 2022, respectively. The increase is primarily attributable to increased revenues of $93.6 million. The increase was partially offset by a $38.2 million increase in cost of sales (excluding depreciation, depletion and accretion expense).
Net Cash Used in Investing Activities. Net cash used in investing activities was $60.9 million and $6.0 million for the three months ended March 31, 2023 and 2022, respectively. The increase was due to an increase in capital spending at the Kermit and Monahans facilities, Dune Express and logistics assets during the three months ended March 31, 2023 when compared to the three months ended March 31, 2022.
Net Cash Provided by (Used in) Financing Activities. Net cash provided by financing activities was $277.4 million and net cash used in financing activities was $4.2 million for the three months ended March 31, 2023 and 2022, respectively. The increase is primarily due to cash inflows of $303.4 million from net IPO proceeds during the three months ended March 31, 2023. This was offset by an increase of $15.0 million of member distributions prior to the Reorganization and increase of $4.4 million for payments of term loan borrowings during the three months ended March 31, 2023 compared to the three months ended March 31, 2022.
Capital Requirements
Our primary growth and technology initiatives include construction of the Dune Express, expansion of the Kermit facility, and acquisition of fit-for-purpose equipment for our trucking fleet. Outside of our growth and technology initiatives, our business is not presently capital intensive in nature and only requires the maintenance of our Kermit and Monahans facilities. In addition to capital
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expenditures, we have certain contractual long-term capital requirements associated with our lease, royalty payments and debt. See Note 5 - Leases, Note 6 - Debt and Note 7 - Commitments and Contingencies of the condensed consolidated financial statements included elsewhere in this Quarterly Report. Our current level of maintenance capital expenditures is expected to remain within our cash on hand and internally generated cash flow.
We expect to use net proceeds from the IPO to fund construction of the Dune Express over the next 18 to 20 months. We intend to fund our other capital requirements through our primary sources of liquidity, which include cash on hand and cash flows from operations and, if needed, our borrowing capacity under the 2023 ABL Credit Facility.
At any time that our Board declares a dividend to holders of our Class A common stock, we currently expect such dividend to be paid from cash provided by operating activities. We do not expect to borrow funds to finance dividends on our Class A common stock. The timing and amount of any future dividends will be subject to the discretion of our Board from time to time.
Debt Agreements
2023 ABL Credit Facility
On February 22, 2023, Atlas LLC, certain of its subsidiaries, as guarantors, Bank of America, N.A., as administrative agent, and certain financial institutions party thereto as lenders (the “ABL Lenders”) entered into a Loan, Security and Guaranty Agreement (the “2023 ABL Credit Agreement”) pursuant to which the ABL Lenders provide revolving credit financing to the Company in an aggregate principal amount of up to $75.0 million (the “2023 ABL Credit Facility”), with Availability (as defined in the 2023 ABL Credit Agreement) thereunder subject to a “Borrowing Base” as described in the 2023 ABL Credit Agreement. The 2023 ABL Credit Facility includes a letter of credit sub-facility, which permits issuances of letters of credit up to an aggregate amount of $25.0 million. The scheduled maturity date of the 2023 ABL Credit Facility is February 22, 2028; provided that the 2023 ABL Credit Facility will mature on June 30, 2027 if any amount of the 2021 Term Loan Credit Facility that has a maturity date less than 91 days prior to February 22, 2028 is outstanding on June 30, 2027.
Borrowings under the 2023 ABL Credit Facility bear interest, at the Company’s option, at either a base rate or Term SOFR, as applicable, plus an applicable margin based on average availability as set forth in the 2023 ABL Credit Agreement. Term SOFR loans bear interest at Term SOFR for the applicable interest period plus an applicable margin, which ranges from 1.50% to 2.00% per annum based on average availability as set forth in the 2023 ABL Credit Agreement. Base rate loans bear interest at the applicable base rate, plus an applicable margin, which ranges from 0.50% to 1.00% per annum based on average availability as set forth in the 2023 ABL Credit Agreement. In addition to paying interest on outstanding principal under the 2023 ABL Credit Facility, the Company is required to pay a commitment fee which ranges from 0.375% per annum to 0.500% per annum with respect to the unutilized commitments under the 2023 ABL Credit Facility, based on the average utilization of the 2023 ABL Credit Facility. The Company is also required to pay customary letter of credit fees, to the extent that one or more letter of credit is outstanding.
Under the 2023 ABL Credit Agreement, Atlas LLC is permitted to make payments of dividends and distributions pursuant to certain limited exceptions and baskets set forth therein and otherwise generally subject to certain restrictions, including that (i) no Event of Default (as defined under the 2023 ABL Credit Agreement) has occurred and is continuing, (ii) and no loans and no more than more than $7.5 million in letters of credit are outstanding, and liquidity exceeds $30.0 million at all times during the 30 days prior to the date of the dividend or distribution; provided that if any loans are outstanding or outstanding letters of credit exceed $7.5 million and no event of default has occurred and is continuing, Atlas LLC is permitted to make payments of dividends and distributions, subject to a minimum Fixed Charge Coverage Ratio (as defined under the 2023 ABL Credit Agreement) of 1.00 to 1.00 and satisfaction of minimum availability thresholds under the Borrowing Base (as defined under the 2023 ABL Credit Agreement), as provided under the 2023 ABL Credit Agreement. Additionally, Atlas LLC may make additional payments of dividends and distributions in qualified equity interests and may make Permitted Tax Distributions (as defined under the 2023 ABL Credit Agreement).
The 2023 ABL Credit Facility is unconditionally guaranteed, jointly and severally, by Atlas LLC and certain of its subsidiaries and secured by substantially all of the assets of Atlas LLC and certain of its subsidiaries, excluding: OLC Kermit, LLC, OLC Monahans, LLC and Atlas OLC Employee Company, LLC.
2021 Term Loan Credit Facility
On October 20, 2021, Atlas LLC entered into a credit agreement with Stonebriar Commercial Finance LLC (“Stonebriar”) pursuant to which Stonebriar extended us a $180.0 million single advance term loan credit facility (the “2021 Term Loan Credit Facility”). The term loan outstanding under the 2021 Term Loan Credit Facility is payable in seventy-two consecutive monthly installments and has a final maturity date of October 1, 2027. The amortization of the 2021 Term Loan Credit Facility carries an implied interest rate of 8.47% per annum.
At any time prior to the maturity date, we may redeem the 2021 Term Loan Credit Facility, in whole or in part, at a price equal to 100% of the principal amount being prepaid plus a prepayment fee. The prepayment fee is 2% for prepayments made on or before October 19, 2023 and 1% with respect to any prepayments made thereafter. Upon the maturity of the 2021 Term Loan Credit Facility, the entire unpaid principal amount of the loans outstanding thereunder, together with interest, fees and other amounts payable in connection with the facility, will be immediately due and payable without further notice or demand. Mandatory debt service (inclusive
30
of principal repayment and interest) is $30 million per year for the first two years of the 2021 Term Loan Credit Facility, increasing to $45 million for the final four years.
Dividends and distributions to equity holders are permitted to be made pursuant to certain limited exceptions and baskets described in the credit agreement governing the 2021 Term Loan Credit Facility (the “2021 Term Loan Credit Agreement”) and otherwise generally subject to certain restrictions set forth in the 2021 Term Loan Credit Agreement, including the requirements that (a) no Event of Default (as defined under the 2021 Term Loan Credit Agreement) has occurred and is continuing, (b) Atlas maintains a $30.0 million cash balance pro forma for the Restricted Payment (as defined under the 2021 Term Loan Credit Agreement), (c) the Annualized Leverage Ratio (as defined under the 2021 Term Loan Credit Agreement) is not greater than 2.00 to 1.00 and (d) Atlas LLC makes a concurrent prepayment of the loans outstanding under the 2021 Term Loan Credit Facility, which prepayment is not subject to a prepayment penalty fee, in an amount equal to one-third or one-fourth of the total equity distributions being made, based on a pro forma leverage ratio as set forth in the 2021 Term Loan Credit Agreement. Furthermore, the 2021 Term Loan Credit Facility permits dividends and distributions in certain other circumstances subject to the terms of the 2021 Term Loan Credit Agreement, including dividends and distributions made in equity interests, tax distributions, and dividends of up to 10.0% per annum of the net proceeds raised in our IPO.
The 2021 Term Loan Credit Facility includes certain non-financial covenants, including but not limited to restrictions on incurring additional debt and certain distributions. The 2021 Term Loan Credit Facility is not subject to financial covenants, but does require us to maintain a minimum average liquidity balance of not less than $20.0 million at any time there are loans of $5.0 million or more in the aggregate outstanding under our 2018 ABL Credit Facility.
Proceeds from the 2021 Term Loan Credit Facility were used to repay outstanding indebtedness under our previous 2018 Term Loan Credit Facility with BlackGold Capital Management, to make permitted distributions, and for general corporate purposes.
The 2021 Term Loan Credit Facility is unconditionally guaranteed, jointly and severally, by Atlas LLC and certain of its subsidiaries and secured by substantially all of the assets of Atlas LLC and certain of its subsidiaries, excluding: OLC Kermit, LLC, OLC Monahans, LLC and Atlas OLC Employee Company, LLC.
2018 ABL Credit Facility
Prior to entering into the 2023 ABL Credit Facility, the Company maintained a revolving credit facility with a borrowing capacity of up to $50.0 million. On February 22, 2023, the Company terminated the 2018 ABL Credit Facility. The Company did not have borrowings under the credit facility at termination.
Critical Accounting Policies and Estimates
As of March 31, 2023, there have been no material changes to our critical accounting policies and related estimates previously disclosed in our IPO registration statement, except the accounting policies discussed in the notes to our condensed consolidated financial statements under Note 2 - Summary of Significant Accounting Policies.
Property, Plant and Equipment, Including Depreciation and Depletion
In order to calculate depreciation of our fixed assets, other than plant facilities and mine development costs, we use the best estimated useful lives at the time the asset is placed into service.
Mining property and development costs, including plant facilities directly associated with mining properties, are amortized using the units of production method on estimated measures of tons of in-place reserves. The impact to reserve estimates is recognized on a prospective basis. Drilling and related costs are capitalized for deposits where proven and probable reserves exist. These activities are directed at obtaining additional information on the deposit or converting non-reserve minerals to proven and probable reserves, with the benefit being realized over a period greater than one year. At a minimum, we will assess the useful lives and residual values of all long-lived assets on an annual basis to determine if adjustments are required. The actual reserve life may differ from the assumptions we have made about the estimated reserve life.
We review property, plant and equipment for impairment annually or whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. If such a review should indicate that the carrying amount of long-lived assets is not recoverable, the Company will reduce the carrying amount of such assets to fair value.
Emerging Growth Company Status
Under the Jumpstart Our Business Startups Act of 2012 (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. We have elected to take advantage of all of the reduced reporting requirements and exemptions, including the longer phase-in periods for the adoption of new or revised financial accounting standards under Section 107 of the JOBS Act, until we are no longer an emerging growth company.
Our election to use the phase-in periods permitted by this election may make it difficult to compare our financial statements to those of non-emerging growth companies and other emerging growth companies that have opted out of the longer phase-in periods under Section 107 of the JOBS Act and that will comply with new or revised financial accounting standards. If we were to
31
subsequently elect instead to comply with these public company effective dates, such election would be irrevocable pursuant to Section 107 of the JOBS Act.