You should read the following discussion of our historical performance,
financial condition and prospects in conjunction with our unaudited condensed
consolidated financial statements as of and for the three and nine months ended
Initial Public Offering
On
The closing of the initial public offering, including the underwriters' option,
resulted in net proceeds of approximately
Business Overview
We are a leading, growth oriented environmental infrastructure and solutions
company that directly helps our customers reduce their water and carbon
footprints. We deliver full cycle water handling and recycling solutions that
are proven to increase the sustainability of energy companies. Our
infrastructure creates long term value by delivering high capacity,
comprehensive produced water management, recycling and supply solutions to
operators in the core areas of the
Third Quarter Results
Significant financial and operating highlights for the third quarter of 2021 include:
? Four new long-term acreage dedications, increasing our dedicated acres by
20,000 acres
? Record total water volumes of 960,000 barrels of water per day
? Consolidated revenue of
? Consolidated adjusted EBITDA (as defined and reconciled below) of
? Consolidated net loss of
30 Table of Contents General Trends and Outlook Market Dynamics
During the three and nine months ended
We believe there are several industry trends that continue to provide meaningful
support for future growth. Our key customers are allocating new capital to the
Many industry trends such as multi-well pad development and the trend towards
reuse applications of produced water, particularly in the areas of the
COVID-19 Pandemic
COVID-19 contributed to a significant downturn in oil and gas commodity prices in 2020 and continues to cause significant volatility in 2021. Although we cannot predict future commodity prices, we are not currently experiencing significant disruptions with our workforce or supply chain activities. Moreover, we continue to maintain our focus on safe and reliable performance of our systems, while ensuring the safety of our employees and other stakeholders. However, we are unable to predict the future impact of COVID-19, and it is possible that such impact could be negative.
How We Generate Revenue
We manage our business through a single operating segment comprising two primary revenue streams, Produced Water Handling and Water Solutions. Our Produced Water Handling revenues are driven by the volumes of produced water we gather from our customers, and our Water Solutions revenues are driven by the quantities of recycled produced water and groundwater delivered to our customers to support their well completion operations.
Under our contracts with our customers, which are generally subject to annual CPI-based adjustments, we receive a fixed fee per barrel of produced water received from our customers, which water is either handled or recycled, and a fixed fee per barrel of recycled water or groundwater sold to our customers.
Costs of Conducting Our Business
Operating Expenses
We incur operating costs primarily as a function of the number of barrels of water received, handled and treated. The major categories of operating costs are landowner royalties, power expenses for handling and treatment facilities, direct labor, chemicals for water treatment, water filtration expenses and repair and maintenance of facilities. We seek to minimize, to the extent appropriate for safe and reliable operations, expenses directly tied to operating and maintaining our assets.
31
Table of Contents
General and Administrative Expenses
General and administrative expenses are costs incurred for overhead, including payroll and benefits for our corporate staff, costs of maintaining our offices, costs of managing our permitting operations, information technology expenses, audit and other fees for professional services.
How We Evaluate Our Results of Operations
We use a variety of financial and operational metrics to evaluate our performance. These metrics help us identify factors and trends that impact our operating results, cash flows and financial condition. The key metrics we use to evaluate our business are provided below.
Produced Water Handling Volumes
We continually seek to bring additional produced water volumes onto our system to maintain or increase throughput on our systems. These volumes are a primary revenue driver and serve as a water source for our Water Solutions business. Changes in produced water handling throughput are driven primarily by the level of production and pace of completions activity on our contracted acreage. We define Produced Water Handling Volumes as all produced water barrels received from customers and any barrels that are deficient under minimum volume commitment agreements.
Water Solutions Barrels Sold and Transferred
Our recycled water and groundwater sales are primarily driven by our customers'
completion activities. We continually seek to gain market share and expand our
customer base for recycled water and groundwater sales in the
Revenue
We analyze our revenue and assess our performance by comparing actual revenue to our internal projections and across periods. We examine revenue per barrel of water handled or sold to evaluate pricing trends and customer mix impacts. We also assess incremental changes in revenue compared to incremental changes in direct operating costs and selling, general and administrative expenses to identify potential areas for improvement and to determine whether our performance is meeting our expectations.
We generate revenue by providing fee-based services related to produced water handling and water solutions.
The services related to produced water are fee-based arrangements which are based on the volume of water that flows through our systems and facilities. Revenues from produced water handling consist primarily of per barrel fees charged to our customers for the use of our transportation and water handling services. For our produced water handling contracts, revenue is recognized over time utilizing the output method based on the volume of produced water accepted from the customer.
The sale of recycled produced water and groundwater are priced based on negotiated rates with our customers. For contracts that involve recycled produced water and groundwater, revenue is recognized at a point in time when control of the product is transferred to the customer.
32 Table of Contents Adjusted EBITDA
We use Adjusted EBITDA as a performance measure to assess the ability of our assets to generate sufficient cash to pay interest costs, support indebtedness and return capital to equity holders. Adjusted EBITDA is a Non-GAAP financial measure. We define Adjusted EBITDA as net income (loss) plus: interest expense? income taxes? depreciation, amortization and accretion expense? abandoned well costs, asset impairment and abandoned project charges? losses on the sale of assets? loss on debt modification? and non-recurring or unusual expenses or charges (including temporary power costs discussed below), less any gains on sale of assets. (See Non-GAAP Measures discussed below for more information regarding this financial measure, including a reconciliation to its most directly comparable GAAP measure.)
Adjusted Operating Margin and Adjusted Operating Margin per Barrel
Our Adjusted Operating Margin and Adjusted Operating Margin per Barrel are dependent upon the volume of produced water we gather and handle, the volume of recycled water and groundwater we sell and transfer, the fees we charge for such services, and the recurring operating expenses we incur to perform such services. We define Adjusted Operating Margin as Gross Margin plus depreciation, amortization and accretion and temporary power costs. We define Adjusted Operating Margin per Barrel as Adjusted Operating Margin divided by total volumes handled, sold or transferred. Adjusted Operating Margin and Adjusted Operating Margin per Barrel are non-GAAP financial measures. (See Non-GAAP Measures discussed below for more information regarding this financial measure, including a reconciliation to its most directly comparable GAAP measures for each measure.)
We seek to maximize our Adjusted Operating Margin in part by minimizing, to the extent appropriate, expenses directly tied to operating our assets. Landowner royalties, utilities, direct labor costs, chemical costs, repair and maintenance costs, and contract services comprise the most significant portion of our expenses. Our operating expenses are largely variable and as such, generally fluctuate in correlation with throughput volumes.
Our Adjusted Operating Margin is incrementally benefited from increased Water Solutions recycling sales. When produced water is recycled, we recognize cost savings from reduced landowner royalties, reduced pumping costs, lower chemical treatment and filtration costs, and reduced power consumption.
Temporary Power Costs
In the past, we constructed assets in advance of permanent grid power
infrastructure availability in order to secure long- term produced water
handling contracts. As a result, we rented temporary power generation equipment
that would not have been necessary if grid power connections had been available.
We estimate temporary power costs by taking temporary power and rental expenses
incurred during the period and subtracting estimated expenses that would have
been incurred during such period had permanent grid power been available. Power
infrastructure and permanent power availability rapidly expanded in the
We remove temporary power costs when calculating Adjusted Operating Margin to accurately assess long-term profitability and cash flow on a basis consistent with our long-term projections and current operating cost profile.
33
Table of Contents
Factors Affecting the Comparability of Our Results of Operations
Concho Acquisitions
On
We processed 119,000 and 19,000 barrels per day of produced water volumes
associated with the Lea County Acquisition for the nine months ended
Results of Operations
Results of operations were as follows:
Three Months Ended Nine Months Ended (in thousands) September 30, September 30, 2021 2020 2021 2020 Revenue Produced Water Handling$ 24,639 $ 23,323 $ 71,368 $ 70,382 Produced Water Handling-Affiliates 23,135 13,312 62,216 35,284 Water Solutions 7,666 1,149 11,824 10,410 Water Solutions-Affiliates 4,059 4,672 16,864 10,472 Total Revenue 59,499 42,456 162,272 126,548 Cost of Revenues Direct Operating Costs 23,497 22,207 66,703 71,640 Depreciation, Amortization and Accretion 15,378 11,751 45,550 31,529 Total Cost of Revenue 38,875 33,958 112,253 103,169 Operating Costs and Expenses Abandoned Well Costs 27,402 - 27,402 - General and Administrative 5,228 4,773 15,240 13,421 Other Operating Expenses 940 555 2,590 4,854 Total Operating Expenses 33,570 5,328 45,232 18,275 Operating (Loss) Income (12,946) 3,170 4,787 5,104 Other Expense Interest Expense, Net 7,880 2,099 17,855 5,364 Loss on Debt Modification - - 380 - Total Other Expense 7,880 2,099 18,235 5,364 (Loss) Income Before Taxes (20,826) 1,071 (13,448) (260) Income Taxes (83) 9 (81) 15 Net (Loss) Income$ (20,743) $ 1,062 $ (13,367) $ (275) Equity Accretion and Dividend Related to Redeemable Preferred Units - (1,511) 21 (1,928)
Net Loss Attributable to Members' Equity
34 Table of Contents Operating Metrics The amount of revenue we generate primarily depends on the volumes of water for which we handle, sale or transfer for our customers. Our volumes for the periods indicated were as follows: Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 Thousands barrel water per day Produced Water Handling Volumes 708 574 692 566 Water Solutions Volumes: Recycled Produced Water Volumes Sold 130 44 102 34 Groundwater Volumes Sold 82 45 61 58 Groundwater Volumes Transferred 41 12 42 11 Total Water Solutions Volumes 253 101 205 103 Total Volumes 961 675 897 669
Per Barrel Operating Metrics
Produced Water Handling Revenue/Barrel
$ 0.50 $ 0.63 $ 0.51 $ 0.74 Revenue/Barrel of Total Volumes$ 0.67 $ 0.68 $ 0.66 $ 0.69 Direct Operating Expense/Barrel$ 0.27 $ 0.36 $ 0.27 $ 0.39
Adjusted Operating Margin/Barrel (1)
(1) See Non-GAAP Financial Measures below
Revenues
An analysis of revenues is as follows:
Produced Water Water Total (in thousands) Handling Solutions Revenues
Three Months Ended
8,545 8,731 17,276 Increase (Decrease) in Prices 2,594 (2,827) (233)
Three Months Ended
Nine Months Ended
23,064 20,440 43,504 Increase (Decrease) in Prices 4,854 (12,634) (7,780)
Nine Months Ended
35 Table of Contents
Produced Water Handling Revenues
Total produced water handling revenues increased for third quarter 2021 compared
to third quarter 2020 by
an overall increase of 134 kbwpd and 126 kbwpd for the comparative three- and
nine-month periods, respectively, due to an increase of activity associated
? with our new and previously contracted long-term acreage dedication agreements,
including the ramp up of activities on the
acquired by us in June of 2020, and
? an increase in the weighted average produced water handling price per barrel
due to contractual price adjustments.
Water Solutions Revenue
Water solutions revenues increased for third quarter 2021 compared to third
quarter 2020, by
an overall increase of 152 kbwpd and 102 kbwpd for the comparative three- and
nine-month periods, respectively, principally due to higher recycling volumes.
? The increase in water solutions volumes is due to the increase in completion
activities across the Permian basin in response to recovering commodity prices,
partially offset by,
a decrease in the weighted average price for water sold. The decrease in price
is attributable to the increase of the amount of recycled water, versus ground
? water, sold. Although recycled water sales improve our overall profitability,
we contract recycled water volumes at lower prices relative to ground water
volumes. Direct Operating Costs
For the third quarter in 2021, direct operating costs were
On a per barrel basis, direct operating costs per barrel were
All our significant facilities were on permanent power during the third quarter
of 2021, and therefore we did not adjust for any temporary power expenses. For
third quarter 2020, the estimated incremental impact of temporary power expenses
was
For the nine months ended
Estimated incremental impacts of temporary power expenses were
36
Table of Contents
Depreciation, Amortization and Accretion Expenses
For the three months ended
Abandoned Well Costs
In late third quarter 2021, management completed its evaluation of the
performance of a saltwater disposal asset, located in
General and Administrative Expenses
For the three months ended
For the nine months ended
Other Operating Expenses
Other operating expenses were
For the nine months ended
37 Table of Contents Interest Expense
Interest expense is as follows:
Three Months Ended Nine Months Ended (in thousands) September 30, September 30, Interest on Debt Instruments$ 8,034 $ 2,686 $ 18,402 $ 7,877 Less: Capitalized Interest (765) (795) (1,981) (3,083)
Interest on Debt Less Capitalized Interest 7,269 1,891 16,421 4,794 Amortization of Financing Costs
611 208 1,434 570 Interest Expense, Net$ 7,880 $ 2,099 $ 17,855 $ 5,364
Net interest expense increased
Net interest expense increased
Non-GAAP Financial Measures
Adjusted EBITDA, Adjusted Operating Margin and Adjusted Operating Margin Per Barrel are supplemental non- GAAP measures that we use to evaluate current, past and expected future performance. Although these non-GAAP financial measures are important factors in assessing our operating results and cash flows, they should not be considered in isolation or as a substitute for net income or gross margin or any other measures prepared under GAAP.
Reconciliation of GAAP "Net income" to Non-GAAP "Adjusted EBITDA"
We define Adjusted EBITDA as net income (loss) plus: interest expense; income taxes; depreciation, amortization and accretion expense; abandoned well costs, asset impairment and abandoned project charges; losses on the sale of assets; loss on debt modification; and non-recurring or unusual expenses or charges (including temporary power costs), less any gains on sale of assets.
Reconciliation of GAAP "Gross Margin" to Non-GAAP "Adjusted Operating Margin" and "Adjusted Operating Margin per Barrel"
We define Adjusted Operating Margin as Gross Margin plus depreciation, amortization and accretion and temporary power costs. We define Adjusted Operating Margin per Barrel as Adjusted Operating Margin divided by total volumes.
We believe this presentation is used by investors and professional research analysts for the valuation, comparison, rating, and investment recommendations of companies within our industry. Additionally, we use this information for comparative purposes within our industry. Adjusted EBITDA, Adjusted Operating Margin and Adjusted Operating Margin per Barrel are not measures of financial performance under GAAP and should not be considered as measures of liquidity or as alternatives to net income (loss) or gross margin. Adjusted EBITDA, Adjusted Operating Margin and Adjusted Operating Margin per Barrel as defined by us
38
Table of Contents
may not be comparable to similarly titled measures used by other companies and should be considered in conjunction with net income (loss) and other measures prepared in accordance with GAAP, such as gross margin, operating income or cash flows from operating activities.
The following table sets forth a reconciliation of net income (loss) as determined in accordance with GAAP to Adjusted EBITDA and Adjusted Operating Margin for the periods indicated:
Three Months Ended Nine Months Ended (in thousands) September 30, September 30, 2021 2020 2021 2020 Net Income (Loss)$ (20,743) $ 1,062 $ (13,367) $ (275) Interest Expense, Net 7,880 2,099 17,855 5,364 Income Tax (Benefit) Expense (83) 9 (81) 15
Depreciation, Amortization and Accretion 15,378 11,751 45,550 31,529 Abandoned Well Costs
27,402 - 27,402 - Abandoned Projects 679 368 2,035 1,501 Temporary Power Costs (1) - 3,548 4,253 12,669 Loss on Disposal of Asset, Net 8 15 225 82 Loss on Debt Modification - - 380 - Settled Litigation (2) - 714 - 1,311 Transaction Costs (3) 253 172 330 3,271 Severance and Other - - 221 190 Adjusted EBITDA$ 30,774 $ 19,738 $ 84,803 $ 55,657 Total Revenue$ 59,499 $ 42,456 $ 162,272 $ 126,548 Cost of Revenue (38,875) (33,958) (112,253) (103,169) Gross Margin 20,624 8,498 50,019 23,379
Depreciation, Amortization and Accretion 15,378 11,751 45,550 31,529 Temporary Power Costs
- 3,548 4,253 12,669 Adjusted Operating Margin$ 36,002 $ 23,797 $ 99,822 $ 67,577 Total Volumes (Thousands of BBLs) 88,357 62,103 245,048 183,438 Adjusted Operating Margin/BBL$ 0.41 $ 0.38 $ 0.41 $ 0.37
(1) See discussion above under "Temporary Power Costs".
(2) Settled Litigation is primarily related to legal expenses associated with a
right-of-way dispute that was successfully settled in arbitration.
(3) Transaction Costs are primarily related to certain advisory and legal expense
associated with a recapitalization process that was terminated in first quarter 2020 and acquisition expenses associated with the Concho Lea Country Acquisition inJune 2020 .
Liquidity and Capital Resources
Overview
Our primary needs for cash are permitting, development and construction of water handling and recycling assets to meet customers' needs, payment of contractual obligations including debt, and working capital obligations. Funding for these cash needs may be provided by any combination of internally generated cash flow, borrowings under the Credit Facility, or accessing the capital markets.
In
As of
39 Table of Contents
Cash Flow from Operating Activities
For the nine months ended
Cash Flow Used in Investing Activities
For the nine months ended
Cash Flow Provided by Financing Activities
For the nine months ended
Capital Requirements
Our business is capital intensive, requiring the maintenance of existing pipelines, pumps and handling and recycling facilities and the acquisition or construction and development of new assets and facilities.
Our current level of capital expenditures is expected to remain within our internally generated cash flow as we maintain significant flexibility around the timing of capital expenditures. However, we are subject to certain capital requirements to support our customers' development plans associated with acreage dedication agreements.
Accordingly, we work proactively with our customers to anticipate their future
needs for water handling and recycling assets to support their activities. For
2021, we expect our capital expenditures to range from
We intend to fund 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 Credit Facility.
Debt Agreements
Credit Facility
On
40
Table of Contents
to 5.00 to 1.00, for the third quarter of 2021 to 4.75 to 1.00, and thereafter
to 4.50 to 1.00 and (viii) add a secured leverage covenant of 2.50 to 1.00. In
Senior Sustainability-Linked Notes
We have
Certain of these redemption prices are subject to increase if we fail to satisfy the Sustainability Performance Target (as defined in the indenture governing the notes and referred herein as "SPT") and provide notice of such satisfaction to the trustee. If we undergo a change of control, we may be required to repurchase all or a portion of the notes at a price equal to 101% of the principal amount of the notes, plus accrued interest.
We used the proceeds from the issuance of the Notes to repay all borrowings outstanding under our Credit Facility, to redeem our preferred units in full and for general corporate purposes.
The indenture that governs the Notes contains covenants that, among other things, limit our ability and the ability of our restricted subsidiaries to:
? incur or guarantee additional indebtedness or issue certain preferred stock?
? pay dividends on capital stock or redeem, repurchase or retire our capital
stock or subordinated indebtedness?
? transfer or sell assets? ? make investments? ? create certain liens?
? enter into agreements that restrict dividends or other payments from our
restricted subsidiaries to us?
? consolidate, merge or transfer all or substantially all of our assets?
? engage in transactions with affiliates? and
? create unrestricted subsidiaries.
Our key performance indicator under our Sustainability-Linked Bond Framework is to increase recycled produced water sold and reduce groundwater withdrawals sold expressed as a percentage of barrels of recycled produced water sold per year divided by total barrels of water sold per year (the "Recycling KPI").
41
Table of Contents
The Recycling KPI encompasses 100% of our sourcing operations in the
To the extent the SPT has not been achieved and verified for the year ended
We were in compliance with all covenants under the indenture governing the Notes
as of
Critical Accounting Policies and Estimates
The preparation of financial statements and related disclosures in conformity with GAAP requires the selection and application of appropriate accounting principles to the relevant facts and circumstances of our operations and the use of estimates made by management. We have identified the following accounting policies that are most important to the portrayal of our consolidated financial position and results of operations. The application of these accounting policies, which requires subjective or complex judgments regarding estimates and projected outcomes of future events, and changes in these accounting policies, could have a material effect on our financial statements.
Revenue Recognition
We generate revenue by providing services related to Produced Water Handling and Water Solutions. The services related to produced water are fee-based arrangements and are based on the volume of water that flows through our systems and facilities while the sale of recycled produced water and groundwater are priced based on negotiated rates with the customer.
We have customer contracts that contain minimum transportation and/or disposal volume delivery requirements and we are entitled to deficiency payments if such minimum contractual volumes are not delivered by the customer. These deficiency amounts are based on fixed, daily minimum volumes (measured over monthly, quarterly and annual periods depending on the contract) at a fixed rate per barrel. We are typically entitled to shortfall payments if such minimum contractual obligations are not maintained by our customers. We invoice the customer on either a monthly, quarterly or annual basis, as provided in the contract.
We account for revenue in accordance with ASC Topic 606, Revenue from Contracts
with Customers, which was adopted effective
In determining the appropriate amount of revenue to be recognized as we fulfill our obligations under the contracts, the following steps must be performed at contract inception: (i) identification of the promised goods or services in the contract? (ii) determination of whether the promised goods or services are performance obligations, including whether they are distinct in the context of the contract? (iii) measurement of the transaction price, including the constraint on variable consideration? (iv) allocation of the transaction price to the performance obligations? and (v) recognition of revenue when (or as) we satisfy each performance obligation.
Revenues from Produced Water Handling consist primarily of per barrel fees charged to customer for the use of our system and disposal services. For all of our produced water transfer and disposal contracts, revenue will be recognized over time utilizing the output method based on the volume of wastewater accepted from the customer. We typically charge our customers a disposal and transportation fee on a per barrel basis
42
Table of Contents
under our contracts. In some contracts, we are entitled to shortfall payments if minimum contractual obligations are not satisfied by our customers. Minimum contractual obligations have not been maintained, and thus we have recognized revenues related to shortfalls on such take or pay contractual obligations to date. Some contracts also have a mechanism that allows for shortfalls to be made up over a limited period of time.
For contracts that involve recycled produced water and groundwater, revenue is recognized at a point in time, based on when control of the product is transferred to the purchaser or customer, as the case may be.
Acquisitions
To determine if a transaction should be accounted for as a business combination or an acquisition of assets, we first calculate the relative fair values of the assets acquired. If substantially all of the relative fair value is concentrated in a single asset or group of similar assets, or if not but the transaction does not include a significant process (does not meet the definition of a business), we record the transaction as an acquisition of assets. For acquisitions of assets, the purchase price is allocated based on the relative fair values. For an acquisition of assets, goodwill is not recorded. All other transactions are recorded as business combinations.
Fair values of assets acquired and liabilities assumed are based upon available information and may involve engaging an independent third party to perform an appraisal. Estimating fair values can be complex and subject to significant business judgment. We must also identify and include in the allocation all acquired tangible and intangible assets that meet certain criteria, including assets that were not previously recorded by the acquired entity. The estimates most commonly involve property, plant and equipment and intangible assets, including those with indefinite lives. The estimates also include the fair value of contracts. For a business combination, the excess of the purchase price over the net fair value of acquired assets and assumed liabilities is recorded as goodwill, which is not amortized but instead is evaluated for impairment at least annually. Pursuant to GAAP, an entity is allowed a reasonable period of time (not to exceed one year) to obtain the information necessary to identify and measure the fair value of the assets acquired and liabilities assumed in a business combination.
Impairment of Long-Lived Assets
We evaluate the carrying value of our long-lived assets (property, plant and equipment and amortizable intangible assets) for potential impairment when events and circumstances warrant such a review. A long-lived asset group is considered impaired when the anticipated undiscounted future cash flows from the use and eventual disposition of the asset group is less than its carrying value. We compare the carrying value of the long-lived asset to the estimated undiscounted future cash flows expected to be generated from that asset. Estimates of future net cash flows include estimating future volumes and margins, future operating costs and other estimates and assumptions consistent with our business plans. If we determine that an asset's unamortized cost may not be recoverable due to impairment, we may be required to reduce the carrying value and the subsequent useful life of the asset. Any such write-down of the value and unfavorable change in the useful life of a long-lived asset would increase costs and expenses at that time. Fair value calculations for long-lived assets and intangible assets contain uncertainties because it requires the Company to apply judgment and estimates concerning future cash flows, strategic plans, useful lives and market performance. The Company also applies judgment in the selection of a discount rate that reflects the risk inherent in the current business model.
Impairment of
43
Table of Contents
determine that it is more likely than not that goodwill is impaired, detailed testing methodologies are then applied. Otherwise, we conclude that no impairment has occurred. We may also choose to bypass a qualitative approach and opt instead to employ detailed testing methodologies, regardless of a possible more likely than not outcome. If we determine through the qualitative approach that detailed testing methodologies are required, or if the qualitative approach is bypassed, we compare the fair value of a reporting unit with its carrying amount under Step 1 of the impairment test. The determination of a reporting unit's fair value is predicated on our assumptions regarding the future economic prospects of the reporting unit. Such assumptions include (i) discrete financial forecasts for the assets contained within the reporting unit, which rely on our estimates of gross margins, (ii) long-term growth rates for cash flows beyond the discrete forecast period, (iii) appropriate discount rates and (iv) estimates of the cash flow multiples to apply in estimating the market value of our reporting units. If the carrying amount exceeds the fair value of a reporting unit, the Company performs Step 2 and compares the fair value of reporting unit goodwill with the carrying amount of that goodwill and recognizes an impairment charge for the amount by which the carrying amount exceeds the implied fair value? however, the loss recognized may not exceed the total amount of goodwill allocated to that reporting unit.
If future results are not consistent with our estimates, we could be exposed to future impairment losses that could be material to our results of operations. We monitor the markets for our products and services, in addition to the overall market, to determine if a triggering event occurs that would indicate that the fair value of a reporting unit is less than its carrying value.
Emerging Growth Company Status
We are an "emerging growth company," as defined in the JOBS Act, and we may take
advantage of certain exemptions from various reporting requirements that are
applicable to other public companies that are not "emerging growth companies."
We may take advantage of these exemptions until we are no longer an "emerging
growth company." Section 107 of the JOBS Act provides that an "emerging growth
company" can take advantage of the extended transition period afforded by the
JOBS Act for the implementation of new or revised accounting standards. We have
elected to use the extended transition period for complying with new or revised
accounting standards and as a result of this election, our financial statements
may not be comparable to companies that comply with public company effective
dates. We may take advantage of these exemptions up until the last day of the
fiscal year following the fifth anniversary of our initial public offering or
such earlier time that we are no longer an emerging growth company. We would
cease to be an emerging growth company if we have more than
© Edgar Online, source