IPO Readiness for Energy Companies - ReadyTalk

IPO Readiness for Energy Companies October 19, 2016

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© 2016 Hein & Associates LLP. All rights reserved.

Legal Considerations When Preparing for an IPO

Presentation by Wesley P. Williams Partner | Corporate and Securities Practice Leader Thompson & Knight LLP

October 19, 2016

IPO Process

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Begin corporate housekeeping and IPO preparations

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Select underwriters and assemble team

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“Quiet Period”

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Hold organizational meeting

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Underwriter due diligence commences and continues

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Prepare and file Form S-1

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Clear SEC comments

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Commence road show

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Execution and delivery of Underwriting Agreement and Pricing

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Closing

Composition of Working Group • Hire the team

• Organize the internal team to address the following:

› Lead manager › Structure › Co-managers

› Strategy › Issuer’s counsel › Due diligence › Underwriters’ counsel › Disclosure

› Accountants

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Structure of Offering • Size of offering • Primary and secondary components

• Number of shares authorized • Status of mezzanine financing • Existing shareholder list • Lock-up agreements with company, principal shareholders, officers, directors

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• Distribution objectives/syndication • Directed share program

• Selection of listing exchange • Selection of ticker symbol

• Use of proceeds

Legal Considerations

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Outstanding claims

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Loan agreement restrictions or other consents needed to offer shares

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Blue Sky Issues

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Board meetings

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Disclosure of confidential agreements

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Request of confidentiality or treatment of confidential information

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Possible lawsuits

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Possible acquisitions, divestitures, restructuring, management changes

Publicity • Quiet period › Generally begins at the time underwriters are selected or the organizational meeting › avoid public communications having the intent or effect of promoting the company or arousing public interest in the company or its securities › Terminates 25 days after the offering date › A number of safe harbors are available

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JOBS Act “Emerging Growth Company” • An “emerging growth company” is any issuer that had total gross revenues of less than $1 billion during its most recently competed fiscal year, other than an issuer that completed its IPO on or before December 8, 2011 • EGCs have up to five years following an IPO to come into full compliance with certain disclosure regulations and accounting and auditing standards that are otherwise applicable to all U.S. public companies

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JOBS Act Reduced Financial Statement and Other Requirements • EGCs are required to provide audited financial statements for only two years • Separate financial statements of acquired business is also limited to two years

• Selected financial data is not required for any period prior to the earliest audited period • MD&A covers only the fiscal periods presented in the required financial statements • EGCs are not required to obtain audits of their internal control over financial reporting

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JOBS Act Disclosure Relief for EGCs • Not required to provide a CD&A • “Scaled” executive compensation disclosures • Exemptions from several executive compensation requirements imposed by the Dodd-Frank Act › Say-on-pay, say-when-on-pay and say-on-parachute votes › Pay ratio and pay-for-performance compensation disclosures

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JOBS Act Conduct of Offerings • EGCs and their representatives may engage in oral and written communications with “qualified institutional buyers” and “institutional accredited investors” to determine their interest in investing (“test the waters”) both before and after the filing of a registration statement • Research analysts have greater ability to communicate with investors and with the EGC's management

• Participating underwriters have more flexibility to publish research reports regarding the EGC

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JOBS Act Confidential Review of Form S-1 • EGCs can submit “draft” Form S-1 for confidential SEC review, enabling EGC to maintain its IPO plans and disclosures in secrecy until much later in the process • Form S-1 must be substantially complete, including all required financial statements and audit reports, but need not be signed by the company or include consents from auditors or other experts • SEC review process unchanged

• Form S-1 and amendments must be publicly filed on EDGAR not later than 15 days before road show

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Time Schedule Pre-filing Phase

Org. Meeting

Due Diligence

Develop Financial Model

Drafting

Filing

Roadshow Preparation

SEC Review Period

Print Red Herrings

Confidentially submit Form S-1

Receive and respond to SEC comments

File Form S-1

Sales Force Presentation

Receive and respond to SEC comments

8 Weeks 8-12 Weeks 4 Weeks

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Roadshow

Pricing

Closing

Board Governance • Majority must be independent within one year • Target having at least five independent directors to allow sufficient sharing of board committee duties

• Independence determined on quantitative and qualitative basis, including SEC and stock exchange rules • Indemnity agreements • D&O insurance

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Board of Directors Board Committees—Audit • Audit Committee › Three independent directors (phasing-in is acceptable) › Additional independence standards required › “Audit Committee Financial Expert” › Many responsibilities prescribed by SEC and stock exchange rules

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Board of Directors Board Committees—Compensation • Compensation Committee › Key role is to determine compensation for the CEO and other senior executives.

› Dodd-Frank Act imposed additional independence requirements for compensation committee members and required committees to consider specific independence factors for their advisors.

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Board of Directors Board Committees—Governance • Nominating and Corporate Governance Committee › takes the lead in identifying director candidates, recommending governance

› principles and practices, and organizing board and committee membership and evaluations. › Many times, the lead or presiding director chairs this committee

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Corporate and Capital Structure • Evaluate current corporate structure and discuss restructuring needs • Authorized shares should be sufficient for public company

• Amend charter bylaws for public company form • Business opportunities • Exclusive forum provisions • Takeover defenses

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For More Information

Wesley P. Williams Partner | Corporate and Securities Practice Leader Thompson & Knight LLP 214.969.1324 [email protected]

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Pre-IPO Tax Considerations

Agenda • • • •

Financial statements Tax structure Due diligence Other considerations


Financial Statements • Evaluate tax personnel/processes – Assess who, if anyone, has been preparing your computations under ASC 740 – Determine if this expertise is available internally – Consider engaging a third party • May require historical preparation of provisions

– Implement internal controls/processes for meeting tax compliance and reporting requirements as a public company © 2016 Hein & Associates LLP. All rights reserved.

Financial Statements • Get financial statements in order – Identify uncertain tax positions – those not “more likely than not” to be sustained if challenged - and address/document – Analyze deferred tax assets (DTA) and liabilities (DTL) • May not have recorded if flow-through prior to IPO • Substantiate DTAs and DTLs • Substantiate DTA related to NOLs and credits and consider limitations as a result of ownership changes • Review DTAs under “more likely than not” criteria and record valuation allowance (VA) if necessary © 2016 Hein & Associates LLP. All rights reserved.

Tax Structure of the IPO Transaction In general, simpler is better.


Tax Structure of the IPO Transaction • Before you start restructuring, make sure to talk to your tax advisors! • S corporation – IPO will likely terminate S status – Last S corp year ends on day before IPO and first C corp year begins on day of IPO – Generally, accounting methods carry over • Limitations on use of cash method as C corp

– Accumulated Adjustments Account (AAA) – must be distributed to shareholders within 12 months of termination of S status; should be declared prior to IPO

• LLC – Generally I.R.C. §351 transaction to incorporate – Accounting methods generally do not carryover • New C corp adopts new methods prospectively • Exception – depreciation methods generally carryover to extent of tax basis carried over


Due Diligence • Have all required federal, state or foreign returns been filed? – – – – – – –

Income tax (1120/various state forms) Excise tax (720) Sales/use tax (withholding certificates) Payroll tax (940/941) Pension plans (5500) Withholding tax Information returns (Forms 1099, W-2, 5471, 5472, 1042, FinCen, etc.) © 2016 Hein & Associates LLP. All rights reserved.

Due Diligence • What do you do if you identify compliance failures? – Closing or compliance agreements (state VDAs) • Reduced penalty framework • Restore compliance history

– Penalty abatement requests – Delinquent filings


Due Diligence • Any open IRS, state or foreign examinations? – Timeline to completion? – Can/should timeline be accelerated? – Be aware of amended return rules

• Audit vulnerabilities? Issues of interest to tax authorities?


Other Considerations • NOLs – Could be limited if “ownership change” upon IPO – Plan in advance of IPO possible utilization of NOLs, if expecting significant limit

• Earnings & Profits (E&P) – – – –

Post IPO, possibility to distribute dividends in future Distributions are dividends to extent of E&P Must advise shareholders if return of capital or taxable dividend Requires E&P study – consider performing for historic periods prior to IPO

• Management incentives – 162(m) – limitation on compensation paid to certain named executives – 280G – golden parachutes © 2016 Hein & Associates LLP. All rights reserved.

Contact Information Lori Mettille Partner [email protected] (972) 687-7847


IPO Disclosure Considerations

Overview • Focusing on expanded disclosure and audit requirements, including: – S-K 1200 disclosures – MD&A – Expanded financial statement disclosures – Auditor independence and related issues


S-K 1200 disclosures • Located in Item 1 – description of properties • Tabular disclosure of reserves information • Discussion of internal controls used in the reserves estimation effort, including thirdparty preparation


S-K 1200 disclosures • Discussion of PUD reserves – Material changes during the period – Investments and progress made to develop – Reasons for continuing to report PUDs for more than five years from initial booking – All of these tend to draw SEC staff comments


S-K 1200 disclosures • Production, prices and costs • Net productive and dry exploratory and development wells completed during the year • Present (means subsequent) activities • Delivery commitments


S-K 1200 disclosures • Wells, gross and net • Gross and net undeveloped acreage


MD&A • • • •

Results of operations Liquidity and capital resources Critical accounting policies This is management’s opportunity to really communicate with stakeholders – What happened – What management sees for the future – The impact of sensitive estimates on the entity’s financial position, results of operations and cash flows © 2016 Hein & Associates LLP. All rights reserved.

Expanded Financial Statement Disclosures • Earnings per share • Income taxes • Disclosures about oil and gas producing activities • Unaudited condensed pro forma information on significant acquisitions


O&G Producing Activities • • • • • •

Capitalized cost Results of oil and gas operations Costs incurred Rollforward of total proved reserves Proved developed reserves Narrative explanation of significant changes in reserves © 2016 Hein & Associates LLP. All rights reserved.

O&G Producing Activities • Standardized Measure of Oil and Gas reserves (SMOG) • Changes in SMOG


Auditor Independence Issues • Convert GAAS audits to PCAOB audits • Impact of non-attest services – Preparation, or assistance in preparation of financial statements – Income tax provisions – Other prohibited non-attest services

• Impact of non-attest services provided to affiliates • Partner rotation issues © 2016 Hein & Associates LLP. All rights reserved.

Other Financial Statements • Predecessor issues • Significant acquisitions – Significance tests – assets, investments, and income – Historical summaries versus full financials – Seller participation implications – Pro forma presentation requirements


Comfort Letters • Underwriter’s due diligence performed by auditors • Typical issues: – Numbers the auditor cannot comfort – Participation of more than one audit firm

• Additional matters: – Reviews of interim financial information – Limited procedures on subsequent periods – Reading of minutes and other inquiries of mgmt. © 2016 Hein & Associates LLP. All rights reserved.

Contact Information Joe Blice Partner, Director of Audit Quality [email protected] (972) 687-7818


Q&A Session • We would now like to give our attendees a chance to ask questions. • To ask a question, please submit a question via the chat box on the bottom left-hand corner of your screen. • If we don’t get to your question during the webinar, our presenters will follow up with you via email.

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Thank You

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IPO Readiness for Energy Companies - ReadyTalk

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