Atlas Energy Solutions Inc. (AESI) FY 2023 MD&A

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

The following discussion and analysis of our financial condition and results of operations should be read together with Item 1, “Business,” and the Consolidated Financial Statements and the related notes in Item 8 of this Annual Report. For the purposes of this discussion, references to “Atlas Inc.” are to AESI Holdings Inc. (f/k/a Atlas Energy Solutions Inc.) for periods prior to the completion of the Up-C Simplification, and to Atlas Energy Solutions Inc. (f/k/a New Atlas HoldCo Inc.) for periods subsequent to the Up-C Simplification. References to the “Company,” “we,” “us,” “our” and like expressions are to Atlas Inc. together with its subsidiaries.

This discussion contains forward-looking statements as a result of many factors, including those set forth under the section titled “Cautionary Statement Regarding Forward-Looking Statements” and Item 1A. “Risk Factors,” and elsewhere in this Annual Report. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could differ materially from those discussed in or implied by forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Annual Report, particularly in Item 1A. “Risk Factors.” We do not undertake any obligation to publicly update any forward-looking statements except as otherwise required by applicable law.

We use 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 herein as non-GAAP measures of our financial performance. For further discussion of Contribution Margin, EBITDA, Adjusted EBITDA and Adjusted Free Cash Flow, see the section titled “Non-GAAP Financial Measures” in this Item 7 of this Annual Report. We define various terms to simplify the presentation of information in this Annual Report. All share amounts are presented in thousands.

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. One hundred percent of Atlas LLC’s sand reserves are located in Winkler and Ward Counties, Texas, within the Permian Basin, and our operations consist of proppant production and processing facilities, including two facilities near Kermit, Texas and a third facility near Monahans, Texas. As of December 31, 2023, our Kermit and Monahans facilities have a total combined annual production capacity of 16.5 million tons.

We also operate a logistics platform that is designed to increase the efficiency, safety and sustainability of the oil and natural gas industry within the Permian Basin. This includes our fleet of fit-for-purpose trucks and trailers and will include the Dune Express, an overland conveyor infrastructure solution currently under construction.

Our Predecessor

The predecessor of Atlas Inc. consists of Atlas LLC and certain of its wholly-owned subsidiaries: Atlas Sand Employee Holding Company, 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 (all of which we refer to collectively as “Atlas Predecessor”). Historical periods for Atlas Predecessor are presented on a consolidated basis given the common control ownership. Unless otherwise indicated, the historical consolidated financial information included in this Annual 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 Developments

Hi-Crush Acquisition

On February 26, 2024, Atlas entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Hi-Crush, pursuant to which Atlas will acquire substantially all of Hi-Crush’s Permian Basin proppant production and North American logistics businesses and operations (the “Hi-Crush Transaction”).

Under the terms and conditions of the Merger Agreement, which has an economic effective time of 11:59 p.m. CT on February 29, 2024, the aggregate consideration to be paid to the Hi-Crush stockholders in the Hi-Crush Transaction will consist of (i) cash consideration of $150 million at the closing of the Hi-Crush Transaction (the “Closing”), (ii) 9.7 million shares of Atlas’s Common Stock, par value $0.01 per share, issued at Closing (the “Common Stock,” and such issuance, the “Stock Consideration”), and (iii) a secured PIK toggle seller note in an initial aggregate principal amount of $125 million with a final maturity date of January 31, 2026 (the “Seller Note”), in each case, subject to customary closing adjustments. Upon consummation of the Hi-Crush Transaction, the Hi-Crush stockholders will collectively own approximately 8.8% of the Company’s outstanding Common Stock. Both the cash consideration and the original principal amount of the Seller Note are subject to revision for customary closing adjustments.

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The Merger Agreement and the Hi-Crush Transaction have been unanimously approved by a Special Committee of the Atlas board of directors composed of a majority of independent directors, as well as the boards of directors of both companies. The completion of the Hi-Crush Transaction is subject to the satisfaction or waiver of customary closing conditions, including Hi-Crush’s delivery of a written consent approving the Hi-Crush Transaction signed by Hi-Crush stockholders holding at least 95% of the voting power. The Hi-Crush Transaction is expected to close in the first quarter of 2024.

Corporate Developments

On March 13, 2023, Old Atlas completed its initial public offering of 18,000,000 shares of Old Atlas Class A Common Stock at a price of $18.00 per share. The IPO generated $324.0 million of gross proceeds and net proceeds of approximately $291.2 million, after deducting underwriter discounts and commissions and estimated offering costs. In connection with the IPO, pursuant to a master reorganization agreement dated March 8, 2023, by and among Old Atlas, ASMC, Atlas LLC, Holdings, Atlas Operating, Holdings II, ASMC II, and Atlas Sand Merger Sub, LLC, a Delaware limited liability company, Old Atlas and the parties thereto completed certain restructuring transactions. As a result of these restructuring transactions, Atlas Operating became the wholly-owned operating subsidiary of Old Atlas, Atlas LLC became a wholly-owned subsidiary of Atlas Operating, and Atlas LLC continued to own all of the Company’s operating assets.

On October 2, 2023, Old Atlas and the Company completed the Up-C Simplification as contemplated by the Master Reorganization Agreement in order to, among other things, reorganize under a new public holding company and eliminate Old Atlas’s “up-C” and dual-class stock structure. Pursuant to the Master Reorganization Agreement, (a) PubCo Merger Sub merged with and into Old Atlas, as a result of which (i) each share of Old Atlas Class A Common Stock then issued and outstanding was exchanged for one share of Common Stock of the Company, (ii) all of the shares of Old Atlas Class B Common Stock then issued and outstanding were surrendered and cancelled for no consideration and (iii) Old Atlas survived the PubCo Merger as a direct, wholly-owned subsidiary of the Company; and (b) Opco Merger Sub merged with and into Atlas Operating, as a result of which (i) each Operating Unit then issued and outstanding, other than those Operating Units held by Old Atlas, was exchanged for one share of Common Stock of the Company and (ii) Atlas Operating became a wholly-owned subsidiary of the Company.

After completion of the Up-C Simplification, the Company replaced Old Atlas as the publicly held entity and, through its subsidiaries, conducts all of the operations previously conducted by Old Atlas, and Old Atlas remains the managing member of Atlas Operating.

Operational Developments

We commenced or completed several significant operational developments over the course of 2023. First, we expanded our Kermit production capacity by adding a new facility with 5.5 million tons of annual production capacity, for a combined total production capacity of 16.5 million tons annually from all three of our facilities as of December 31, 2023.

We also expanded our logistics offering. As of February 27, 2024, we added 120 trucks and 323 trailers to our fit-for-purpose trucking fleet, which we expect to improve our productivity, as measured by tons per truck that can be delivered daily, compared to the throughput performance of traditional trucking assets.

Finally, we broke ground on construction of the Dune Express in March of 2023. As of December 31, 2023, 90% of equipment and materials and 80% of installation and services for construction of the Dune Express have been ordered and contracted. Additionally, we have cleared, graded and laid caliche on vast majority of the right-of-way and have taken delivery of approximately 150 conveyor belt sections, equivalent to approximately 57 miles of total conveyor belt and over 100 miles of fiberoptic cable. The Dune Express is expected to be in service during the fourth quarter of 2024.

Financial Developments

On July 31, 2023, Atlas LLC entered into the 2023 Term Loan Credit Agreement with Stonebriar, as administrative agent and initial lender, pursuant to which Stonebriar extended Atlas LLC a term loan credit facility comprised of a $180.0 million single advance term loan that was made on July 31, 2023, and commitments to provide up to $100.0 million of delayed draw term loans.

The Initial Term Loan is payable in eighty-four consecutive monthly installments and a final payment of the remaining outstanding principal balance at maturity. The Initial Term Loan has a final maturity date of August 1, 2030. The Initial Term Loan bears interest at a rate equal to 9.50% per annum.

Each delayed draw term loan under the 2023 Term Loan Credit Facility other than the term loan that may be incurred in connection with the closing of the Hi-Crush Transaction (“DDT Loans”) will be payable in equal monthly installments, with the monthly installments comprising 80% of the delayed draw term loan and a final payment of the remaining 20% of the outstanding principal balance due at maturity, unless earlier prepaid. The DDT Loans will bear interest at a rate equal to the applicable Term SOFR Rate as of each Delayed Draw Funding Date (each as defined in the 2023 Term Loan Credit Agreement) plus 5.95% per annum. All monthly installments with respect to the Initial Term Loan and the DDT Loans payable on or prior to January 1, 2025 will be interest only. See Note 7—Debt to the consolidated financial statements for more information.

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In connection with the Hi-Crush Transaction in Q1 of 2024, Atlas LLC amended the 2023 ABL Credit Facility and the 2023 Term Loan Credit Facility. The 2023 ABL Credit Facility amendment, among other things and subject to certain conditions set forth therein, provides for an increase to the revolving credit commitment amount from $50.0 million to $125.0 million and an extension of the maturity date to February 26, 2029. The 2023 Term Loan Credit Facility amendment, among other things, provides for an incremental delayed draw term loan facility in the aggregate principal amount of up to $150.0 million at an interest rate expected to be approximately 10.5%. Furthermore, concurrently with the closing of the Hi-Crush Transaction, the Company will enter into the Seller Note. See Note 15—Subsequent Events to the consolidated financial statements for more information.

Recent Trends and Outlook

Drilling and completions activities for oil and gas are highly correlated to oil and gas prices. The price for West Texas Intermediate (“WTI”) crude oil averaged $77.61 per barrel (“Bbl”) in 2023, as compared to $94.33 per Bbl in 2022, representing a decrease of more than 15%. Global oil prices declined over the course of the year, reflecting a more balanced market, led by declining macroeconomic sentiment and decreased global oil demand, despite the ongoing geopolitical tensions related to the conflicts in both Europe and the Middle East. As a result, oilfield activity levels remain relatively muted, or marginally lower, as we exited the year. The Permian Basin drilling rig count declined by 45 rigs year-over-year, ending the period at 307 active rigs. Despite the slowdown in completions activity, we anticipate a tightening supply dynamic due to lower global oil supply from Middle East resulting from geopolitical tensions, which may lead to supply chain disruptions, and OPEC+ rational guardianship, which could lead to increased activity levels during 2024 at higher commodity price levels.

Notwithstanding the volatility in the oil and gas markets, there are two potential positive long-term trends developing in the market:

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First, E&P companies are drilling longer lateral wells, which drives up proppant demand for each well completed in the Permian Basin. Longer laterals increase the number of frac stages required to frac as well. As lateral lengths continue to increase, the aggregate amount of proppant per well increases.

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Second, increased frac sand demand via improved completion efficiencies, driven by steady improvement in the average tons of sand pumped per frac crew per month. As frac crews become more efficient, they are able to increase their monthly sand consumption.

Despite some softness in current drilling and completions activity, the Permian Basin proppant market remains healthy. While the available Permian Basin proppant supply experienced marginal growth during the course of 2023, we believe the market remains balanced with potential to tighten up in 2024 with increased activity as demand for more Permian barrels is needed to balance the global oil markets.

In addition, the Permian Basin experienced a significant amount of consolidation among E&P companies in 2023. We believe our enhanced scale due to the recent addition of our new Kermit facility leaves us well-positioned to match the growing needs of our high-quality customer base, as E&P companies continue to scale up their operations.

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, the distance between our facilities and our customers, and prevailing freight rates. 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.

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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 sales 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, equipment leases, 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, 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 before depreciation, depletion and accretion, interest expense, income tax expense, stock and unit-based compensation, loss on extinguishment of debt, unrealized commodity derivative gain (loss), and non-recurring transaction costs. 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 finance 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.

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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.

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(1) Atlas Energy Solutions Inc. is a corporation and is subject to U.S. federal income tax. Atlas LLC has either been treated as a disregarded entity or 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.

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(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.

(4) On January 1, 2022, the Company adopted ASU 2016-02, Leases (Topic 842), which resulted in the recognition of $0.6 million of finance right-of-use lease liabilities, previously recognized as capital lease liabilities. Information prior to January 1, 2022 has not been restated and continues to be reported under the accounting standards in effect for the period (Accounting Standards Codification (“ASC”) Topic 840).

Factors Affecting the Comparability of Our Results of Operations

Long-Term Incentive Plan

In order to incentivize management members, in March 2023, our Board adopted 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.

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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 22%.

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 ASC 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 $27.5 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.

On October 2, 2023, the date on which the Company completed the Up-C Simplification, a corresponding deferred tax liability of approximately $62.7 million was recorded associated with the exchange of the redeemable noncontrolling interest in Old Atlas for shares of the Company's Common Stock. The offset of the deferred tax liability was recorded to additional paid-in capital.

Results of Operations

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

Product sales. Product sales increased by $59.7 million to $468.1 million for the year ended December 31, 2023, as compared to $408.4 million for the year ended December 31, 2022. An increase in proppant prices between the periods contributed to a $27.9 million positive impact and an increase in sales volume contributed a $31.8 million positive impact.

Service sales. Services sales, which includes freight for last-mile logistics services, increased by $71.5 million to $145.8 million for the year ended December 31, 2023, as compared to $74.3 million for the year ended December 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 $61.5 million to $260.4 million for the year ended December 31, 2023, as compared to $198.9 million for the year ended December 31, 2022.

Cost of sales (excluding depreciation, depletion and accretion) related to product sales increased by $1.0 million to $131.8 million for the year ended December 31, 2023, as compared to $130.8 million for the year ended December 31, 2022, due to higher sales volumes, which increased maintenance expense and mining costs.

Cost of sales (excluding depreciation, depletion and accretion expense) related to services increased by $60.5 million to $128.6 million for the year ended December 31, 2023, as compared to $68.1 million for the year ended December 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 $12.3 million to $39.8 million for the year ended December 31, 2023, as compared to $27.5 million for the year ended December 31, 2022. The increase in depreciation, depletion and accretion expense was 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 $24.3 million to $48.6 million for the year ended December 31, 2023, as compared to $24.3 million for the year ended December 31, 2022. The increase was primarily due to an increase of $10.7 million of employee costs, including an increase of $6.7 million of stock- and unit-based compensation expense, $8.3 million of travel, sales and other corporate expenses associated with increased opportunities to conduct commercial business development efforts, incremental costs incurred in conjunction with our transition to a publicly traded company, and broadening sales efforts due to our substantial growth in the logistics space, and $5.3 million for non-recurring transaction costs related to the Up-C Simplification and the refinancing of the 2023 Term Loan Credit Facility during the year ended December 31, 2023.

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 year ended December 31, 2023, unit-based compensation expense was $0.3 million and stock-based compensation expense was $7.1 million, as compared to $0.7 million of unit-based compensation expense and no stock-based compensation expense for the year ended December 31, 2022.

Interest expense, net. Interest expense, net decreased by $8.1 million to $7.7 million for the year ended December 31, 2023, as compared to $15.8 million for the year ended December 31, 2022. The decrease was driven by an increase in interest income of $9.8 million related to interest earned on net IPO proceeds.

Income tax expense. Income tax expense increased by $29.5 million to $31.4 million for the year ended December 31, 2023, as compared to $1.9 million for the year ended December 31, 2022. The increase was primarily due to Atlas Inc. incurring U.S. federal income taxes subsequent to our IPO-related reorganization in March of 2023.

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

Product sales. Product sales increased by $265.9 million to $408.4 million for the year ended December 31, 2022, as compared to $142.5 million for the year ended December 31, 2021. An increase in proppant prices between the periods contributed to a $233.1 million positive impact, while an increase in sales volume contributed a $32.8 million positive impact.

Service sales. Services sales, which includes freight for last-mile logistics services, increased by $44.4 million to $74.3 million for the year ended December 31, 2022, as compared to $29.9 million for the year ended December 31, 2021. 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 $114.2 million to $198.9 million for the year ended December 31, 2022, as compared to $84.7 million for the year ended December 31, 2021.

Cost of sales (excluding depreciation, depletion and accretion) related to product sales increased by $73.0 million to $130.8 million for the year ended December 31, 2022, as compared to $57.8 million for the year ended December 31, 2021, due to higher sales volumes, which increased costs for utilities, maintenance, royalties and transition costs related to purchase of dredge equipment, requiring temporary usage of traditional mining rental equipment.

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Cost of sales (excluding depreciation, depletion and accretion expense) related to services increased by $41.2 million to $68.1 million for the year ended December 31, 2022, as compared to $26.9 million for the year ended December 31, 2021, 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 $3.8 million to $27.5 million for the year ended December 31, 2022, as compared to $23.7 million for the year ended December 31, 2021. The increase in depreciation, depletion and accretion expense was due to increased units of production depletion due to higher sand 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 $7.2 million to $24.3 million for the year ended December 31, 2022, as compared to $17.1 million for the year ended December 31, 2021. The increase is primarily due to an increase of $5.1 million of employee costs, including an increase of $0.6 million of unit-based compensation expense, and $2.1 million of travel, sales and other corporate expenses associated with increased opportunities to conduct commercial business development efforts in person during the year ended December 31, 2022.

Our selling, general and administrative expenses include the non-cash expense for unit-based compensation for equity awards granted to our employees. For the year ended December 31, 2022, unit-based compensation expense was $0.7 million, as compared to $0.1 million of unit-based compensation expense for the year ended December 31, 2021.

Interest expense, net. Interest expense, net decreased by $26.4 million to $15.8 million for the year ended December 31, 2022, as compared to $42.2 million for the year ended December 31, 2021. The decrease is primarily due to the recognition of a loss on extinguishment of debt of $16.4 million resulting from the recognition of unamortized debt discount and deferred financing costs of $11.9 million and a make-whole premium of $4.5 million paid upon redemption of the 2018 Term Loan Credit Facility during the year ended December 31, 2021. This decrease was partially offset by the recognition of gain on extinguishment of debt of $4.5 million due to the forgiveness of an SBA Paycheck Protection Program Loan and the related accrued interest expense during the year ended December 31, 2021. The remaining decrease is due to the outstanding 2021 Term Loan Credit Facility, which accrued $14.0 million of interest expense and $0.7 million of amortization of debt discount and deferred financing costs during the year ended December 31, 2022, as compared to the 2018 Term Loan Credit Facility and 2021 Term Loan Facility, which accrued $22.0 million of interest expense and $7.7 million of amortization of debt discount and deferred financing costs during the year ended December 31, 2021.

Income tax expense. Income tax expense increased by $1.1 million to $1.9 million for the year ended December 31, 2022, as compared to $0.8 million for the year ended December 31, 2021. The increase is primarily due to increased revenues, which increased our liability related to Texas franchise 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, and our previous asset-based loan credit facility, the 2018 ABL Credit Facility. Going forward, we expect our primary sources of liquidity to be cash flows from operations, the net proceeds retained from the IPO, availability under our 2023 ABL Credit Facility, borrowings under our 2023 Term Loan Credit Facility 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 used for the financing of the Hi-Crush Transaction, payment of any distributions and dividends to our stockholders and for investing in our business, specifically for construction of the Dune Express, 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 December 31, 2023, we had working capital, defined as current assets less current liabilities, of $226.1 million, $73.9 million of availability under the 2023 ABL Credit Facility, and $100.0 million of DDT Loans under the 2023 Term Loan Credit Facility. Our cash and cash equivalents totaled $210.2 million.

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Cash Flow

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

Year Ended December 31, 2023 Compared To The Year Ended December 31, 2022

Net Cash Provided by Operating Activities. Net cash provided by operating activities was $299.0 million and $206.0 million for the years ended December 31, 2023 and 2022, respectively. The increase was attributable to increased revenues of $131.2 million, offset by a $61.5 million increase in cost of sales (excluding depreciation, depletion and accretion expense) and a $34.8 million increase in cash from changes in working capital primarily attributable to a decrease in our accounts receivable balance from December 31, 2022 to December 31, 2023.

Net Cash Used in Investing Activities. Net cash used in investing activities was $365.5 million and $89.6 million for the years ended December 31, 2023 and 2022, respectively. The increase was due to an increase in capital spending in connection with the Dune Express, plant capacity expansion at our Kermit location, and logistics assets during the year ended December 31, 2023, when compared to the year ended December 31, 2022.

Net Cash Provided by (Used in) Financing Activities. Net cash provided by financing activities was $194.6 million and net cash used in financing activities was $74.8 million for the years ended December 31, 2023 and 2022, respectively. The increase is primarily due to cash inflows of $303.4 million from net IPO proceeds during the year ended December 31, 2023. This was offset by an increase of cash outflows of $32.1 million of dividends and distributions during the year ended December 31, 2023 compared to the year ended December 31, 2022.

Year Ended December 31, 2022 Compared To The Year Ended December 31, 2021

Net Cash Provided by Operating Activities. Net cash provided by operating activities was $206.0 million and $21.4 million for the years ended December 31, 2022 and 2021, respectively. The increase was attributable to increased revenues of $310.3 million offset by a $114.3 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 $89.6 million and $19.4 million for the years ended December 31, 2022 and 2021, respectively. The increase was due to an increase in capital spending in connection with the plant capacity expansion at our Kermit location, Dune Express and logistics assets during the year ended December 31, 2022, when compared to the year ended December 31, 2021.

Net Cash Provided by (Used in) Financing Activities. Net cash used in financing activities was $74.8 million year ended December 31, 2022. Net cash provided by financing activities was $2.3 million for the year ended December 31, 2021. The change was due to a decrease of $178.2 million of proceeds from term loan borrowings related to the funding of the 2021 Term Loan Credit Facility, a decrease of $148.8 million of payments on term loan borrowings and debt prepayment and extinguishment costs related to the repayment of the 2018 Term Loan Credit Facility, an increase of $35.0 million for member distributions, and a decrease in proceeds from equity issuances of $12.6 million during the year ended December 31, 2022, compared to the year ended December 31, 2021.

Capital Requirements

Our primary growth and technology initiatives include continued construction of the Dune Express 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 expenditures, we have certain contractual long-term capital requirements associated with our lease, royalty payments and debt. See Note 6 - Leases, Note 7 - Debt and Note 8 - Commitments and Contingencies of the consolidated financial statements included elsewhere in this Annual Report. Our current level of maintenance capital expenditures is expected to remain within our cash on hand and internally generated cash flow.

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We expect to use the remaining net proceeds from the IPO to fund construction of the Dune Express over the next approximately 12 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, availability under our 2023 ABL Credit Facility and borrowings under our 2023 Term Loan Credit Facility.

At any time that our Board declares a dividend to holders of our 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 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 Term Loan Credit Facility

On July 31, 2023, Atlas LLC entered into the 2023 Term Loan Credit Agreement with Stonebriar, as administrative agent and initial lender, pursuant to which Stonebriar extended Atlas LLC a term loan credit facility comprised of a $180.0 million single advance term loan that was made on July 31, 2023 and commitments to provide up to $100.0 million of DDT Loans. The Initial Term Loan is payable in eighty-four consecutive monthly installments and a final payment of the remaining outstanding principal balance at maturity. The Initial Term Loan has a final maturity date of August 1, 2030 (the “Maturity Date”). The Initial Term Loan bears interest at a rate equal to 9.50% per annum.

Each DDT Loan under the 2023 Term Loan Credit Facility will be payable in equal monthly installments, with the monthly installments comprising 80% of the DDT Loan and a final payment of the remaining 20% of the outstanding principal balance due at maturity, unless earlier prepaid. The DDT Loans will bear interest at a rate equal to the applicable Term SOFR Rate (as defined in the 2023 Term Loan Credit Agreement) plus 5.95% per annum. All monthly installments with respect to the Initial Term Loan and the DDT Loans payable on or prior to January 1, 2025 will be interest only.

At any time prior to the Maturity Date, Atlas LLC may redeem loans outstanding under the 2023 Term Loan Credit Facility, in whole or in part, at a price equal to 100% of the Prepayment Amount (as defined in the 2023 Term Loan Credit Agreement) plus a prepayment fee. The prepayment fee is 8% of the Prepayment Amount for any prepayment that occurs on or prior to December 31, 2024, 4% of the Prepayment Amount for any prepayment that occurs after December 31, 2024 but on or prior to December 31, 2025, 3% of the Prepayment Amount for any prepayment that occurs after December 31, 2025 but on or prior to December 31, 2026 and 2% of the Prepayment Amount for any prepayment that occurs thereafter. Upon the maturity of the 2023 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.

Dividends and distributions to equity holders are permitted to be made pursuant to certain limited exceptions and baskets described in the 2023 Term Loan Credit Agreement and otherwise generally subject to certain restrictions set forth in the 2023 Term Loan Credit Agreement, including the requirements that (a) no Event of Default (as defined under the 2023 Term Loan Credit Agreement) has occurred and is continuing and (b) Atlas LLC maintains at least $30.0 million of Liquidity (as defined under the 2023 Term Loan Credit Agreement) pro forma for the Restricted Payment (as defined under the 2023 Term Loan Credit Agreement).

The 2023 Term Loan Credit Facility includes certain non-financial covenants, including but not limited to restrictions on incurring additional debt and certain distributions. The 2023 Term Loan Credit Facility is subject to a maximum 4.0 to 1.0 Leverage Ratio (as defined in the 2023 Term Loan Credit Agreement) financial covenant. Such financial covenant is tested as of the last day of each fiscal quarter.

Proceeds from the 2023 Term Loan Credit Facility were used to repay outstanding indebtedness under our previous 2021 Term Loan Credit Facility with Stonebriar, to repay obligations outstanding under certain equipment lease arrangements with Stonebriar and for general corporate purposes.

The 2023 Term Loan Credit Facility is unconditionally guaranteed, jointly and severally, by Atlas LLC and its subsidiaries and secured by substantially all of the assets of Atlas LLC and its subsidiaries. The 2023 Term Loan Credit Facility is unconditionally guaranteed on an unsecured basis by Atlas Inc.

2023 ABL Credit Facility

On February 22, 2023, Atlas LLC, certain of its subsidiaries, as guarantors, Bank of America, N.A., as agent, and certain financial institutions party thereto as lenders (the “ABL Lenders”) entered into 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, 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 2023 Term Loan Credit Facility that has a maturity date less than 91 days prior to February 22, 2028 is outstanding on June 30, 2027.

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Borrowings under the 2023 ABL Credit Facility bear interest, at the Company’s option, at either a base rate or Term Secured Overnight Financing Rate (“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, and (ii) no loans and no more than $7.5 million in letters of credit that have not been cash collateralized 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, then Atlas LLC is permitted to make payments of dividends and distributions if, (i) Availability (as defined under the 2023 ABL Credit Agreement) is higher than the greater of (a) $12 million and (b) 20% of the pro forma Borrowing Base then in effect and during the 30 days prior to the date of the dividend or distribution as if such dividend or distribution had been made at the beginning of such period, or if (ii) (a) Availability is higher than the greater of (x) $9 million and (y) 15% of the pro forma Borrowing Base then in effect and during the 30 days prior to the date of the dividend or distributions as if such dividend or distribution had been made at the beginning of such period and (b) the Fixed Charge Coverage Ratio (as defined under the 2023 ABL Credit Agreement), as calculated on a pro forma basis, is greater than 1.00 to 1.00, 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 its subsidiaries and secured by substantially all of the assets of Atlas LLC and its subsidiaries.

2021 Term Loan Credit Facility

Prior to entering into the 2023 Term Loan Credit Facility, the Company had borrowings and accrued interest of $133.4 million under the 2021 Term Loan Credit Facility. On July 31, 2023, the Company entered into the 2023 Term Loan Credit Facility. Proceeds from the 2023 Term Loan Credit Facility were used to repay $133.4 million of 2021 Term Loan Credit Facility principal and accrued interest, repay $42.8 million of finance lease liabilities as well as acquire $39.5 million of finance lease assets associated with certain equipment lease arrangements with Stonebriar.

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.

Off Balance Sheet Arrangements

We currently have no material off-balance sheet arrangements.

Critical Accounting Policies and Estimates

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

We base our estimates on historical experience and on various other assumptions we believe to be reasonable according to the current facts and circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. A summary of our significant accounting policies is included in Note 2 - Summary of Significant Accounting Policies to the Consolidated Financial Statements in Item 8. “Financial Statements and Supplementary Data” of this Annual Report.

We prepare our consolidated financial statements in conformity with GAAP, which require us to make estimates and assumptions about future events that affect the amounts reported in the consolidated financial statements and accompanying footnotes. Actual results could differ from those estimates. We believe that the following discussion addresses our most critical accounting estimates, which require management’s most subjective and complex judgments.

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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 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 subsequently elect instead to comply with these public company effective dates, such election would be irrevocable pursuant to Section 107 of the JOBS Act.

Recent Accounting Pronouncements

See Note 2 - Summary of Significant Accounting Policies in the notes to our consolidated financial statements for further discussion regarding recently issued accounting standards.