Liberty Energy Inc.: Form 10-Q for the period ended Jun 30, 2023

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and related notes. The following discussion contains “forward-looking statements” that reflect our future plans, estimates, beliefs, and expected performance. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of a variety of risks and uncertainties, including those described in “Cautionary Note Regarding Forward-Looking Statements,” the Annual Report under the heading “Item 1A. Risk Factors,” and in "Part II – Other Information, Item 1A. Risk Factors" included herein. We assume no obligation to update any of these forward-looking statements.

Overview

The Company, together with its subsidiaries, is a leading integrated energy services and technology company focused on providing innovative hydraulic fracturing services and related technologies to onshore oil and natural gas E&P companies in North America. We offer customers hydraulic fracturing services, together with complementary services including wireline services, proppant delivery solutions, field gas processing, CNG delivery, data analytics, related goods (including our sand mine operations), and technologies that will facilitate lower emission completions, thereby helping our customers reduce their emissions profile. We have grown from one active hydraulic fracturing fleet in December 2011 to over 40 active fleets as of June 30, 2023. We provide our services primarily in the Permian Basin, the Eagle Ford Shale, the DJ Basin, the Williston Basin, the San Juan Basin, the Powder River Basin, the Haynesville Shale, the SCOOP/STACK, the Marcellus Shale, Utica Shale, and the Western Canadian Sedimentary Basin. Additionally, we operate two sand mines in the Permian Basin.

The Company recently launched Liberty Power Innovations (“LPI”), an integrated alternative fuel and power solutions provider for remote applications. LPI’s initial focus is on CNG supply, field gas processing and treating, and well site fueling and logistics. Dependable access to fuel is critical to maintaining highly efficient well site operations. LPI will supply this fuel to Liberty and others in the industry.

To accelerate LPI’s expansion, on April 6, 2023, the Company acquired Siren in exchange for $76.4 million in cash, subject to customary post-closing adjustments. Siren is a Permian focused integrated natural gas compression and CNG delivery business. At the acquisition date, Siren had 16 MMcf per day of natural gas compression capacity at two expandable Permian sites and transportation, logistics, and pressure reduction services. Siren currently delivers fuel to customers in both the drilling and completions markets, and its logistics system is designed to deliver CNG, renewable natural gas, or hydrogen to remote locations. We believe that the added natural gas compression capability is a key enabler of the next step of cost and emissions reductions in the industry.

We believe technical innovation and strong relationships with our customer and supplier bases distinguish us from our competitors and are the foundations of our business. We expect that E&P companies will continue to focus on technological innovation as completion complexity and fracture intensity of horizontal wells increases, particularly as customers are increasingly focused on reducing emissions from their completions operations. We remain proactive in developing innovative solutions to industry challenges, including developing: (i) our databases of U.S. unconventional wells to which we apply our proprietary multi-variable statistical analysis technologies to provide differential insight into fracture design optimization; (ii) our Liberty Quiet Fleet® design which significantly reduces noise levels compared to conventional hydraulic fracturing fleets; (iii) hydraulic fracturing fluid systems tailored to the specific reservoir properties in the basins in which we operate; (iv) our dual fuel dynamic gas blending fleets that allow our engines to run diesel or a combination of diesel and natural gas, to optimize fuel use, reduce emissions and lower costs; (v) our first digiFleet℠, comprising of digiFrac℠ and digiPrime℠ pumps, our innovative, purpose-built electric frac pump that has approximately 25% lower CO2e emission profile than the Tier IV DGB; and (vi) our wet sand handling technology which eliminates the need to dry sand, enabling the deployment of mobile mines nearer to wellsites. In addition, our integrated supply chain includes proppant, chemicals, equipment, natural gas fueling services, logistics and integrated software which we believe promotes wellsite efficiency and leads to more pumping hours and higher productivity throughout the year to better service our customers. In order to achieve our technological objectives, we carefully manage our liquidity and debt position to promote operational flexibility and invest in the business throughout the full commodity cycle in the regions we operate.

Recent Trends and Outlook

Frac markets in North America are at steady, healthy activity levels, after moderating a bit from late 2022 levels as commodity prices retreated from the 2022 peak. Crude oil prices are now at pre-Russia-Ukraine war levels which has spurred private operators in oilier basins to reduce activity. Lower natural gas prices have led to a curtailment of activity in gas basins. In the second half of 2023, we expect demand for frac fleets to parallel recent rig count trends at approximately a one quarter lag in the second half of 2023. The rig count shows signs of stabilization emerging. We believe E&P operators are already benefiting from lower well costs from consumable inputs, and some are evaluating plans to pull-forward completions activity, however, activity in natural gas markets will likely not increase until 2024 in advance of rising LNG and Mexico exports.

More broadly, global oil markets are signaling a constructive outlook on a tightening supply-demand balance. OPEC+ supply cuts in recent months are beginning to take hold, and markets are anticipating a subsequent draw on global oil inventories. In the U.S., slowing production growth, a drawdown of oil inventories, and a likely shift to refilling U.S. strategic petroleum reserves aid the outlook. Despite recessionary risks, demand for oil remains resilient given several factors, including global travel trending towards pre-COVID-19 levels, robust demand from India and strength in emerging markets. Underinvestment in global production capacity likely supports a resilient multi-year cycle for oil and gas.

Relative to prior cycles, frac demand has a natural floor as the large majority of completions activity is simply offsetting normal production declines. Operators are largely adhering to flat or very modest growth production targets. The combination has resulted in higher base levels of frac fleet utilization and more insulation from commodity price volatility than in prior cycles. The current, more consolidated industry is better prepared to navigate near-term softness in completions activity by reducing fleet counts to balance the market and protect margins.

The industrialization of emerging economies is driving long term demand for reliable, affordable energy, and the North American land market is in a strong position as the largest supplier of incremental production. Our industry remains healthy, even with a modest contraction in oil prices from 2022 levels and transient softness in natural gas markets. We anticipate North American completions activity will moderate in the second half of the year versus the first half and service companies are reducing fleets in response, supporting a balanced frac market and a largely stable price environment.

During the second quarter of 2023, the posted WTI price traded at an average of $73.54 per barrel (“Bbl”), as compared to the second quarter of 2022 average of $108.83 per Bbl, and first quarter of 2023 average of $75.93 per Bbl. In addition, the average domestic onshore rig count for the United States and Canada was 815 rigs reported in the second quarter of 2023, up from the second quarter of 2022 of 810 but a decrease from the first quarter of 2023 of 965, according to a report from Baker Hughes.

Results of Operations

Three Months Ended June 30, 2023, Compared to Three Months Ended June 30, 2022

(in thousands)

Revenue

Our revenue increased $252.4 million, or 26.8%, to $1.2 billion for the three months ended June 30, 2023 compared to $942.6 million for the three months ended June 30, 2022. The increase in revenue is attributable to higher service pricing, the addition and reactivation of several fleets subsequent to the prior year period, and an activity-driven increase in fleet efficiency commensurate with consistent demand for hydraulic fracturing services.

Cost of Services

Cost of services (excluding depreciation, depletion, and amortization) increased $119.7 million, or 16.8%, to $833.5 million for the three months ended June 30, 2023 compared to $713.7 million for the three months ended June 30, 2022. The increase in expense was primarily related to increases in materials and parts consumption and higher labor costs related to additional fleets and higher fleet efficiency as well as ongoing inflationary increases impacting costs for materials, labor, and maintenance parts.

General and Administrative

General and administrative expenses increased $15.9 million, or 37.6%, to $58.0 million for the three months ended June 30, 2023 compared to $42.2 million for the three months ended June 30, 2022 primarily related to an increase in performance-based variable compensation, labor cost inflation, and corporate costs related to increased levels of activity.

Transaction, Severance and Other Costs

Transaction, severance, and other costs decreased $1.2 million, or 55.1%, to $1.0 million for the three months ended June 30, 2023 compared to $2.2 million for the three months ended June 30, 2022. The costs incurred in the three months ended June 30, 2023 primarily related to integration cost, legal, accounting, and other professional services provided in connection with the Siren Acquisition, while costs incurred during the three months ended June 30, 2022 related to ongoing integration costs from prior period acquisitions.

Depreciation, Depletion, and Amortization

Depreciation, depletion, and amortization expense increased $22.3 million, or 28.8%, to $99.7 million for the three months ended June 30, 2023 compared to $77.4 million for the three months ended June 30, 2022. The increase in 2023 was due to additional equipment placed in service since the prior year period, including the deployment of our digiTechnologies.

Gain on Disposal of Assets

Gain on disposal of assets increased $0.3 million, or 6.5% to $3.7 million for the three months ended June 30, 2023 compared to $3.4 million for the three months ended June 30, 2022 primarily related to sales of used field equipment and light duty trucks in a strong used vehicle and equipment market. All disposals were in the normal course of business.

Operating Income

The Company recorded operating income of $206.5 million for the three months ended June 30, 2023 compared to operating income of $110.6 million for the three months ended June 30, 2022. The increase in operating income is primarily due to the $252.4 million, or 26.8%, increase in total revenue only partially offset by a $156.5 million increase in total operating expenses, the significant components of which are discussed above.

Other Expense, net

Other expense, net increased by $1.4 million, or 28.7%, to $6.5 million for the three months ended June 30, 2023 compared to $5.0 million for the three months ended June 30, 2022. Other expense, net is primarily comprised of interest income—related party and interest expense, net. Interest income—related party increased $0.4 million related to a note receivable agreement executed in December 2022. Additionally, interest expense, net increased $2.0 million as a result of increased borrowings and higher interest rates under the ABL Facility during the three months ended June 30, 2023 compared to the three months ended June 30, 2022.

Net Income before Income Taxes

The Company realized net income before income taxes of $200.0 million for the three months ended June 30, 2023 compared to net income before income taxes of $105.6 million for the three months ended June 30, 2022. The increase in results is primarily attributable to an increase in revenue, as discussed above, related to the fleet deployments and an increase in activity and service pricing.

Income Tax Expense

The Company recognized income tax expense of $47.3 million for the three months ended June 30, 2023, at an effective rate of 23.7%, compared to $0.2 million, at an effective rate of 0.2%, recognized during the three months ended June 30, 2022. The increase in income tax expense is primarily attributable to the Company recording taxes on the Company’s U.S. activity during the three months ended June 30, 2023, compared to having a valuation allowance on its U.S. net deferred tax assets for the three months ended June 30, 2022.

Six Months Ended June 30, 2023, Compared to Six Months Ended June 30, 2022

(in thousands)

Revenue

Our revenue increased $721.7 million, or 41.6%, to $2.5 billion for the six months ended June 30, 2023 compared to $1.7 billion for the six months ended June 30, 2022. The increase in revenue is attributable to higher service pricing, the addition and reactivation of several fleets subsequent to the prior year period, and an activity-driven increase in fleet efficiency commensurate with consistent demand for hydraulic fracturing services.

Cost of Services

Cost of services (excluding depreciation, depletion, and amortization) increased $338.1 million, or 24.4%, to $1.7 billion for the six months ended June 30, 2023 compared to $1.4 billion for the six months ended June 30, 2022. The increase in expense was primarily related to increases in materials and parts consumption and higher labor costs related to additional fleets and higher fleet efficiency as well as ongoing inflationary increases impacting costs for materials, labor, and maintenance parts.

General and Administrative

General and administrative expenses increased $30.6 million, or 38.0%, to $111.1 million for the six months ended June 30, 2023 compared to $80.5 million for the six months ended June 30, 2022 primarily related to an increase in performance-based variable compensation, labor cost inflation, and corporate costs related to increased levels of activity.

Transaction, Severance, and Other Costs

Transaction, severance, and other costs decreased $1.9 million, or 54.6%, to $1.6 million for the six months ended June 30, 2023 compared to $3.5 million for the six months ended June 30, 2022. The costs incurred in the six months ended June 30, 2023 primarily related to integration cost, legal, accounting, and other professional services provided in connection with the Siren Acquisition, while costs incurred during the six months ended June 30, 2022 related to ongoing integration costs from prior period acquisitions.

Depreciation, Depletion, and Amortization

Depreciation, depletion, and amortization expense increased $42.1 million, or 27.7%, to $194.1 million for the six months ended June 30, 2023 compared to $152.0 million for the six months ended June 30, 2022. The increase in 2023 was due to additional equipment placed in service since the prior year period, including the deployment of our digiTechnologies.

(Gain) loss on disposal of assets

The Company recognized a gain on disposal of assets of $3.2 million for the six months ended June 30, 2023 compared to a loss of $1.2 million for the six months ended June 30, 2022. The gain recognized in the six months ended June 30, 2023 was a result of the Company selling used field equipment and light duty trucks in a strong used vehicle and equipment market. The loss recognized for the six months ended June 30, 2022 was a result of the sale of one and a plan of sale for another non-strategic facility.

Operating Income

The Company recorded operating income of $431.6 million for the six months ended June 30, 2023 compared to operating income of $114.4 million for the six months ended June 30, 2022. The increase in operating income is primarily due to the $721.7 million, or 41.6%, increase in total revenue partially offset by a $404.5 million increase in total operating expenses, the significant components of which are discussed above.

Other Expense, net

Other expense, net increased by $0.9 million to $14.4 million for the six months ended June 30, 2023 compared to $13.5 million for the six months ended June 30, 2022. Other expense, net is comprised of loss on remeasurement of liability under the TRAs, interest income—related party, and interest expense, net. The Company remeasured the liability under the TRAs resulting in a loss of $4.3 million for the six months ended June 30, 2022, and there was no such remeasurement required during the six months ended June 30, 2023. Interest income—related party increased $0.7 million related to a note receivable agreement executed in December 2022. Additionally, interest expense, net increased $5.9 million as a result of increased borrowings and higher interest rates under the ABL Facility during the six months ended June 30, 2023 compared to the six months ended June 30, 2022.

Net Income before Income Taxes

The Company realized net income before income taxes of $417.2 million for the six months ended June 30, 2023 compared to net income before income taxes of $100.9 million for the six months ended June 30, 2022. The increase in results is primarily attributable to an increase in revenue, as discussed above, related to the fleet deployments and an increase in activity and service pricing.

Income Tax Expense

The Company recognized income tax expense of $101.8 million for the six months ended June 30, 2023, an effective rate of 24.4%, compared to $1.1 million, at an effective rate of 1.1%, recognized during the six months ended June 30, 2022. The increase in income tax expense is primarily attributable to the Company recording taxes on the Company’s U.S. activity during the six months ended June 30, 2023, compared to having a valuation allowance on its U.S. net deferred tax assets for the six months ended June 30, 2022.

Comparison of Non-GAAP Financial Measures

We view EBITDA and Adjusted EBITDA as important indicators of performance. We define EBITDA as net income before interest, income taxes, and depreciation, depletion, and amortization. We define Adjusted EBITDA as EBITDA adjusted to eliminate the effects of items such as non-cash stock-based compensation, new fleet or new basin start-up costs, fleet lay-down costs, costs of asset acquisitions, gain or loss on the disposal of assets, bad debt reserves, transaction, severance, and other costs, the loss or gain on remeasurement of liability under our tax receivable agreements, the gain or loss on investments, and other non-recurring expenses that management does not consider in assessing ongoing performance.

Our board of directors, management, investors, and lenders use EBITDA and Adjusted EBITDA to assess our financial performance because it allows them to compare our operating performance on a consistent basis across periods by removing the effects of our capital structure (such as varying levels of interest expense), asset base (such as depreciation, depletion, and amortization) and other items that impact the comparability of financial results from period to period. We present EBITDA and Adjusted EBITDA because we believe they provide useful information regarding the factors and trends affecting our business in addition to measures calculated under GAAP.

Note Regarding Non-GAAP Financial Measures

EBITDA and Adjusted EBITDA are not financial measures presented in accordance with GAAP. We believe that the presentation of these non-GAAP financial measures will provide useful information to investors in assessing our financial performance and results of operations. Net income 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 an analytical tool due to exclusion of 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.

The following tables present a reconciliation of EBITDA and Adjusted EBITDA to our net income, which is the most directly comparable GAAP financial measure for the periods presented:

Three and Six Months Ended June 30, 2023, Compared to Three and Six Months Ended June 30, 2022: EBITDA and Adjusted EBITDA

(in thousands)

EBITDA was $306.2 million for the three months ended June 30, 2023 compared to $187.8 million for the three months ended June 30, 2022. Adjusted EBITDA was $311.5 million for the three months ended June 30, 2023 compared to $196.1 million for the three months ended June 30, 2022. The increases in EBITDA and Adjusted EBITDA primarily resulted from improved market conditions and increased activity levels as described above under the captions Revenue, Cost of Services, and General and Administrative for the Three Months Ended June 30, 2023, Compared to the Three Months Ended June 30, 2022.

EBITDA was $625.7 million for the six months ended June 30, 2023 compared to $262.1 million for the six months ended June 30, 2022. Adjusted EBITDA was $641.3 million for the six months ended June 30, 2023 compared to $287.9 million for the six months ended June 30, 2022. The increases in EBITDA and Adjusted EBITDA primarily resulted from improved market conditions and increased activity levels as described above under the captions Revenue, Cost of Services, and General and Administrative for the Six Months Ended June 30, 2023, Compared to the Six Months Ended June 30, 2022.

Liquidity and Capital Resources

Overview

Our primary sources of liquidity consist of cash flows from operations, and borrowings under our ABL Facility. We expect to fund operations and organic growth with these sources. We monitor the availability and cost of capital resources such as equity and debt financings that could be leverage for current or future financial obligations including those related to acquisitions, capital expenditures, working capital, and other liquidity requirements. We may incur additional indebtedness or issue equity in order to meet our capital expenditure activities and liquidity requirements, as well as to fund growth opportunities that we pursue, including via acquisition. Our primary uses of capital have been capital expenditures to support organic growth and funding ongoing operations, including maintenance and fleet upgrades, as well as the repurchases of, and dividends on, shares of our Class A Common Stock.

Cash and cash equivalents decreased by $12.0 million to $31.7 million as of June 30, 2023 compared to $43.7 million as of December 31, 2022, while working capital excluding cash and current liabilities under debt and lease arrangements increased $33.4 million.

We have $525.0 million committed under the ABL Facility subject to certain borrowing base limitations based on a percentage of eligible accounts receivable and inventory available to finance working capital needs. As of June 30, 2023, the borrowing base was calculated to be $485.7 million, and the Company had $288.0 million outstanding, in addition to letters of credit in the amount of $3.5 million, with $194.2 million of remaining availability.

On January 23, 2023, the Company entered into an Eighth Amendment to the ABL Facility (the “Eighth ABL Amendment”). The Eighth ABL Amendment amends certain terms, provisions and covenants of the ABL Facility, including, among other things: (i) increasing the maximum revolver amount from $425.0 million to $525.0 million (the “Upsized Revolver”); (ii) increasing the amount of the accordion feature from $75.0 million to $100.0 million; (iii) extending the maturity date from October 22, 2026 to January 23, 2028; (iv) modifying the dollar amounts of various credit facility triggers and tests proportionally to the Upsized Revolver; (v) permitting repayment under the Term Loan Facility prior to February 10, 2023; and (vi) increasing certain indebtedness, intercompany advance, and investment baskets. The Eighth ABL Amendment also includes an agreement from Wells Fargo Bank, National Association, as administrative agent, to release its second priority liens and security interests on all collateral that served as first priority collateral under the Term Loan Facility. This release was completed during the three months ended June 30, 2023.

Additionally, on January 23, 2023, the Company borrowed $106.7 million on the ABL Facility and used the proceeds to pay off the Term Loan Facility. The amount paid includes the balance of the Term Loan Facility upon pay off of $104.7 million, $0.9 million of accrued interest, and a $1.1 million prepayment premium or 1% of the principal. Additionally, there were $0.2 million in bank and legal fees included in the pay off.

The ABL Facility contains covenants that restrict our ability to take certain actions. At June 30, 2023, the Company was in compliance with all debt covenants.

See Note 7—Debt to the unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report for further details.

We have no material off balance sheet arrangements as of June 30, 2023, except for purchase commitments under supply agreements as disclosed above under Note 14—Commitments & Contingencies to the unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report. As such, we are not materially exposed to any other financing, liquidity, market, or credit risk that could arise if we had engaged in such financing arrangements.

Share Repurchase Program

Under our share repurchase program, the Company is authorized to repurchase up to $250.0 million of outstanding Class A Common Stock through and including July 31, 2024. Additionally, on January 24, 2023 the Board authorized and the Company announced an increase to the share repurchase program that increased the Company’s cumulative repurchase authorization to $500.0 million. Shares may be repurchased from time to time for cash in the open market transactions, through block trades, in privately negotiated transactions, through derivative transactions or by other means in accordance with applicable federal securities laws. The timing and the amount of repurchases will be determined by the Company at its discretion based on an evaluation of market conditions, capital allocation alternatives and other factors. The share repurchase program does not require us to purchase any dollar amount or number of shares of our Class A Common Stock and may be modified, suspended, extended or terminated at any time without prior notice. The Company expects to fund the repurchases by using cash on hand, borrowings under its revolving credit facility and expected free cash flow to be generated over the next two years. During the three and six months ended June 30, 2023, the Company repurchased and retired shares of Class A Common Stock for $60.1 million and $134.7 million, respectively, under the share repurchase program.

Cash Flows

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

(in thousands)

Analysis of Cash Flow Changes Between the Six Months Ended June 30, 2023 and 2022

Operating Activities. Net cash provided by operating activities was $444.4 million for the six months ended June 30, 2023, compared to $135.6 million for the six months ended June 30, 2022. The $308.8 million increase in cash from operating activities is primarily attributable to a $721.7 million increase in revenues, offset by a $366.8 million increase in cash operating expenses and a $79.4 million decrease in cash from changes in working capital for the six months ended June 30, 2023, compared to a $134.3 million decrease in cash from changes in working capital for the six months ended June 30, 2022.

Investing Activities. Net cash used in investing activities was $356.3 million for the six months ended June 30, 2023, compared to $232.8 million for the six months ended June 30, 2022. Cash used in investing activities was higher during the six months ended June 30, 2023, compared to the six months ended June 30, 2022 as the Company continued to invest in equipment, including the new digiTechnologies™ suite, to support increased customer demand in next generation equipment and technology. Additionally, the Company purchased Siren Energy for $74.9 million in cash, net of cash received, refer to Note 2—Significant Accounting Policies to the unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report for additional information related to the acquisition.

Financing Activities. Net cash used in financing activities was $100.2 million for the six months ended June 30, 2023, compared to net cash provided by financing activities of $118.8 million for the six months ended June 30, 2022. The $219.0 million change in cash financing activities was primarily due to $134.7 million of cash payments made in connection with share repurchases for the six months ended June 30, 2023, compared to none in the six months ended June 30, 2022 as the Company reinstated the share buyback program since the prior year period. Additionally, the Company reinstated quarterly dividends during the fourth quarter of 2022 resulting in a $17.4 million increase in dividends paid. Net borrowings of $68.3 million on the Credit Facilities, including the $104.7 million pay off of the Term Loan Facility, were lower during the six months ended June 30, 2023, compared to net borrowings of $132.0 million of net borrowings on the ABL Facility for the six months ended June 30, 2022.

Cash Requirements

Our material cash commitments consist primarily of obligations under long-term debt, TRAs, finance and operating leases for property and equipment, cash used to pay for repurchases of, and dividends on, shares of our Class A Common Stock, and purchase obligations as part of normal operations. We have no material off balance sheet arrangements as of June 30, 2023, except for obligations of $134.6 million payable within 2023, and $70.8 million payable thereafter. See Note 14—Commitments & Contingencies to the unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report for information regarding scheduled contractual obligations. There have been no other material changes to cash requirements since the year ended December 31, 2022.

Income Taxes

The Company is a corporation and is subject to U.S. federal, state, and local income tax on its share of Liberty LLC’s taxable income. The Company is also subject to Canada federal and provincial income tax on its foreign operations.

The effective global income tax rate applicable to the Company for the six months ended June 30, 2023 was 24.4% compared to 1.1%, for the period ended June 30, 2022. The Company’s effective tax rate is greater than the statutory federal income tax rate of 21.0% due to the Company’s Canadian operations, state income taxes in the states the Company operates, as well as nondeductible executive compensation. The Company recognized an income tax expense of $47.3 million and $101.8 million during the three and six months ended June 30, 2023, respectively, and $0.2 million and $1.1 million for the three and six months ended June 30, 2022, respectively.

Deferred income tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial reporting and tax bases of assets and liabilities, and are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. In the year ended December 31, 2022, we released a valuation allowance on our U.S. net deferred tax assets. As of June 30, 2023, the Company’s net deferred tax assets were primarily comprised of federal and state U.S. Net Operating Losses (“NOLs”) and TRA tax attributes, net of Property and equipment deferred tax liabilities.

Refer to Note 11— Income Taxes to the unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report for additional information related to income tax expense.

Tax Receivable Agreements

Refer to Note 11— Income Taxes to the unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report for additional information related to tax receivable agreements.

Critical Accounting Estimates

The Company’s unaudited condensed consolidated financial statements are prepared in accordance with GAAP, which require us to make estimates and assumptions (see Note 2—Significant Accounting Policies to the unaudited condensed consolidated financial statements in this Quarterly Report and Note 2—Significant Accounting Policies and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Annual Report). 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.

There have been no material changes in our evaluation of our critical accounting policies and estimates since our Annual Report.

Our consolidated financial statements are expressed in U.S. dollars, but, effective January 1, 2021, a portion of our operations is conducted in a currency other than U.S. dollars. The Canadian dollar is the functional currency of the Company’s foreign subsidiary as it is the primary currency within the economic environment in which the subsidiary operates. Changes in the exchange rate can affect our revenues, earnings, and the carrying value of our assets and liabilities in our consolidated balance sheet, either positively or negatively. Adjustments resulting from the translation of the subsidiary’s financial statements are reported in other comprehensive income (loss). For the three and six months ended June 30, 2023, the Company recorded foreign currency translation gain of $2.0 million and $1.5 million, respectively, to comprehensive income. For the three and six months ended June 30, 2022, the Company recorded foreign currency translation losses of $3.0 million and $2.0 million, respectively, to comprehensive income.

Other exposures to market risk have not changed materially since December 31, 2022. For quantitative and qualitative disclosures about market risk, in addition to foreign currency translation, see Part II, Item 7(a), “Quantitative and Qualitative Disclosures About Market Risk,” in the Annual Report.

In accordance with Rules 13a-15 and 15d-15 of the Exchange Act, we carried out an evaluation, under the supervision and with the participation of management, including our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this report. Based on that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of June 30, 2023 to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. Our disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosures.

Changes in Internal Control over Financial Reporting

During the quarter ended June 30, 2023, we integrated accounting functions of the entity acquired in the Siren Acquisition, on April 6, 2023. In connection with the integration, we updated documentation of our internal controls over financial reporting, as necessary, to reflect modifications to business processes and accounting procedures impacted.

There were no other changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended June 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

In addition to the other information set forth in this Quarterly Report, you should carefully consider the risk factors and other cautionary statements described under the heading “Item 1A. Risk Factors” included in the Annual Report and the risk factors and other cautionary statements contained in our other SEC filings, which could materially affect our businesses, financial condition or future results.

No other risk factors were identified in addition to the risk factors set forth in the Annual Report. There have been no material changes to the risk factors in the Annual Report.