The accompanying notes are an integral part of
these unaudited consolidated financial statements.
The accompanying notes are an integral part of
these unaudited consolidated financial statements.
The accompanying notes are an integral part of
these unaudited consolidated financial statements.
The accompanying notes are an integral
part of these unaudited consolidated financial statements.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – ORGANIZATION AND BASIS OF PRESENTATION
Organization
Atlas Technical Consultants, Inc. (the “Company”,
“We”, or “Atlas” and formerly named Boxwood Merger Corp. (“Boxwood”)) was a blank check company,
incorporated in Delaware on June 28, 2017. The Company was formed for the purpose of acquiring, through a merger, capital stock exchange,
asset acquisition, stock purchase, reorganization, recapitalization, or other similar business transaction, one or more operating businesses
or assets.
On February 14, 2020 (the “Closing Date”),
the Company consummated its acquisition of Atlas Intermediate Holdings LLC, a Delaware limited liability company (“Atlas Intermediate”),
pursuant to the Unit Purchase Agreement, dated as of August 12, 2019, as amended on January 22, 2020 (the “Purchase Agreement”),
by and among the Company, Atlas TC Holdings LLC, a wholly-owned subsidiary of the Company and a Delaware limited liability company (“Holdings”),
Atlas TC Buyer LLC, a wholly-owned subsidiary of Holdings and a Delaware limited liability company (the “Buyer”), Atlas Intermediate
and Atlas Technical Consultants Holdings LP, a Delaware limited partnership (the “Seller”). The acquisition of Atlas Intermediate
pursuant to the Purchase Agreement, together with the other transactions contemplated by the Purchase Agreement is referred to herein
as the “Atlas Business Combination.”
Following the consummation of the Atlas Business
Combination, the combined company is organized in an “Up-C” structure in which the business of Atlas Intermediate and its
subsidiaries is held by Holdings and will continue to operate through the subsidiaries of Atlas Intermediate, and in which the Company’s
only direct assets will consist of common units of Holdings (“Holdings Units”). The Company is the sole manager of Holdings
in accordance with the terms of the Amended and Restated Limited Liability Company Agreement of Holdings (the “Holdings LLC Agreement”)
entered into in connection with the consummation of the Atlas Business Combination.
The Company has approximately 124 offices in 41
states, employs approximately 3,600 employees and is headquartered in Austin, Texas.
The Company is an infrastructure and environmental
solutions company and a provider of professional testing, inspection, engineering, environmental, program management and consulting services,
offering solutions to public and private sector clients in the transportation, commercial, water, government, education, industrial,
healthcare and power markets.
Services are provided throughout the United States
and its territories to a broad base of clients, with no single client representing 10% or more of our revenues for either the three or
nine months ended September 30, 2022 or October 1, 2021. Services are rendered primarily on a time and materials and cost-plus basis
with approximately 90% of our contracts on that basis and the remainder represented by firm fixed price contracts.
Basis of Presentation
The acquisition of Atlas Intermediate has been
accounted for as a reverse recapitalization. Under this method of accounting, Atlas is treated as the acquired company and Atlas Intermediate
is treated as the acquirer for financial reporting purposes. Therefore, the consolidated financial results include information regarding
Atlas Intermediate as the Company’s predecessor entity. Thus, the financial statements included in this report reflect (i) the
historical operating results of Atlas Intermediate prior to the Atlas Business Combination; (ii) the combined results of the Company,
which does not have any operating results and includes only certain costs such as the compensation for the Company’s board of directors
(the “Board”), certain legal fees and taxes, and Atlas Intermediate following the Atlas Business Combination; (iii) the assets,
liabilities and members’ capital of Atlas Intermediate at their historical costs; and (iv) the Company’s equity and earnings
per share presented for the period from the Closing Date.
The accompanying interim statements of the Company
have been prepared in accordance with generally accepted accounting principles (GAAP) for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X issued by the United States Securities and Exchange Commission (the “SEC”).
Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements.
In the opinion of management, all adjustments,
consisting only of normal recurring adjustments and disclosures necessary for a fair statement of these interim statements have been included.
The results reported in these interim statements are not necessarily indicative of the results that may be reported for the entire year
or for any other period. These interim statements should be read in conjunction with the audited financial statements for the year ended
December 31, 2021 included in our Annual Report on Form 10-K that the Company filed with the SEC on March 16, 2022.
Emerging Growth Company
The Company is an “emerging growth company,”
as defined in Section 2(a) of the Securities Act (as defined herein), as modified by the Jumpstart Our Business Startups Act of 2012
(the “JOBS Act”), and it may take advantage of certain exemptions from various reporting requirements that are applicable
to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the
auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation
in its periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive
compensation and stockholder approval of any golden parachute payments not previously approved.
Further, Section 102(b)(1) of the JOBS Act exempts
emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that
is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered
under the Exchange Act) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company
can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but
any such election to opt out is irrevocable. The Company has elected not to opt out of such extended transition period which means that
when a standard is issued or revised and it has different application dates for public or private companies, the Company, as an emerging
growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard. This may make
comparison of the Company’s financial statements with another public company which is neither an emerging growth company nor an
emerging growth company which has opted out of using the extended transition period difficult or impossible because of the potential
differences in accounting standards used.
The Company will no longer be an emerging growth
company at the end of fiscal year 2023 based on five years since the date of our initial public offering.
Reclassification
Certain amounts reported in prior years in the
financial statements have been reclassified to conform to the current year’s presentation. This reclassification did not have any
impact to our reported net income or cash flows for the three or nine months ended October 1, 2021.
Fiscal Year
The Company’s fiscal year ends on the Friday
closest to December 31 with fiscal quarters based on thirteen- week periods ending on the Friday closest to March 31, June 30 and September
30.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounts Receivable and Accrued Billings
The Company records its trade accounts receivable
and unbilled receivables at their face amounts less allowances. On a periodic basis, the Company monitors the trade accounts receivable
and unbilled receivables from its customers for any collectability issues. The allowance for doubtful accounts is established based on
reviews of individual customer accounts, recent loss experience, current economic conditions, and other pertinent factors. The Company
writes off accounts after a determination has been made by management that the amounts at issue are no longer likely to be collected,
following the exercise of reasonable collection efforts, and upon management’s determination that the costs of pursuing collection
outweigh the likelihood of recovery. Payments subsequently received on such receivables are credited to the allowance for doubtful accounts.
As of September 30, 2022 and December 31, 2021,
the allowance for trade accounts receivable was $3.3 million and $3.3 million, respectively, while the allowance for unbilled receivables
was $0.5 million and $0.6 million, respectively. The allowances reflect the Company’s best estimate of collectability risks on
outstanding receivables and unbilled services.
Property and Equipment
Purchases of new assets and costs of improvement
to extend the useful life of existing assets are capitalized. Routine maintenance and repairs are charged to expenses as incurred. When
an asset is sold or retired, the costs and related accumulated depreciation are eliminated from the accounts, and the resulting gains
or losses on disposal are recognized in the accompanying Consolidated Statement of Operations. The Company depreciates its assets on
a straight-line basis over the assets’ useful lives, which range from three to ten years.
Impairment of Long-Lived Assets
The Company assesses long-lived assets for impairment
when events or circumstances indicate that the carrying value of an asset may not be recoverable. The Company recognizes an impairment
if the net book value of such assets exceeds the future undiscounted cash flows attributable to such assets. If an impairment is indicated
based on a comparison of the assets’ carrying amounts and the undiscounted cash flows, the impairment loss is measured as the amount
by which the carrying amounts of the assets exceed the respective fair values of the assets. There were no impairment charges during
the three or nine months ended September 30, 2022 and October 1, 2021.
Goodwill
Goodwill represents the excess of the cost of
net assets acquired over the fair value of the identifiable tangible and intangible assets acquired and liabilities assumed in a business
combination. In accordance with the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification
(“ASC”) Topic 350, Intangibles – Goodwill and Other, we evaluate goodwill annually for impairment on October 1, or
whenever events or changes in circumstances indicate the asset may be impaired, using the quantitative method. An entity has the option
to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is
more likely than not that the fair value of a reporting unit is less than its carrying amount. These qualitative factors include: macroeconomic
and industry conditions, cost factors, overall financial performance and other relevant entity-specific events. If we determine that
this threshold is met, then performing the two-step quantitative impairment test is unnecessary. We may elect to bypass the qualitative
assessment and proceed directly to the quantitative test for any reporting unit. The two-step impairment test requires a comparison of
the carrying value of the assets and liabilities associated with a reporting unit, including goodwill, with the fair value of the reporting
unit. We determine fair value through the discounted cash flow method. We make certain subjective and complex judgments in assessing
whether an event of impairment of goodwill has occurred, including assumptions and estimates used to determine the fair value of our
reporting units. If the carrying value of our reporting unit exceeds the fair value of our reporting unit, we would calculate the implied
fair value as compared to the carrying value to determine the appropriate impairment charge, if any. There were no impairment charges
for the three or nine months ended September 30, 2022 and October 1, 2021.
Revenue Recognition
Below is a description of the basic types of contracts
from which the Company may earn revenue:
Time and Materials Contracts
Under the time and materials (“T&M”)
arrangements, contract fees are based upon time and materials incurred. The contracts may be structured as basic time and materials,
cost plus a margin or time and materials subject to a maximum contract value (the “ceiling”). Due to the potential limitation
of the contract’s ceiling, the economic factors of the contracts subject to a ceiling differ from the economic factors of basic
T&M and cost-plus contracts.
The majority of the Company’s contracts
are for projects where it bills the client monthly at hourly billing or unit rates. The billing rates are determined by contract terms.
Under cost plus contracts, the Company charges its clients for contract related costs at cost, an agreed upon overhead rate plus a fixed
fee or rate.
Under time and materials contracts with a ceiling,
the Company charges the clients for time and materials based upon the work performed however there is a ceiling or a not to exceed value.
There are often instances that a contract is modified to extend the contract value past the original or amended ceiling. As the consideration
is variable depending on the outcome of the contract renegotiation, the Company will estimate the total contract price in accordance
with the variable consideration guidelines and will only include consideration that it expects to receive from the customer. When the
Company is reaching the ceiling, the contract will be renegotiated, or we cease work when the maximum contract value is reached. The
Company will continue to work if it is probable that the contract will be extended. The Company is only entitled to consideration for
the work it has performed, and the ceiling amount is not a guaranteed contract value. The Company earned approximately 90% of its revenues
under T&M contracts during the three and nine months ended September 30, 2022 and October 1, 2021, respectively.
Fixed Price Contracts
Under fixed price contracts, the Company’s
clients may pay an agreed amount negotiated in advance for a specified scope of work. The Company is guaranteed to receive the consideration
to the extent that the Company delivers under the contract. The Company assesses contracts quarterly and may recognize any expected future
loss before actually incurring the loss. When the Company is expecting to reach the total consideration under the contract or the scope
of work changes, the Company will attempt to negotiate a change order.
Change Orders and Claims
Change orders are modifications of an original
contract that effectively change the provisions of the contract. Either the Company or its client may initiate change orders. They may
include changes in specifications or design, manner of performance, facilities, equipment, materials, sites, and period of completion
of the work or changes in the amount of our compensation. Management evaluates when a change order is probable based upon its experience
in negotiating change orders, the customer’s written approval of such changes or separate documentation of change order costs that
are identifiable. Change orders may take time to be formally documented and terms of such change orders are agreed with the client before
the work is performed. Sometimes circumstances require that work progresses before an agreement is reached with the client. If the Company
is having difficulties in renegotiating the change order, the Company will stop work if possible, record all costs incurred to date,
and determine, on a project-by-project basis, the appropriate final revenue recognition.
Claims are amounts in excess of the agreed contract
price that the Company seeks to collect from its clients or others for client-caused delays, errors in specifications and designs, contract
terminations, change orders that are either in dispute or are unapproved as to both scope and price, or other causes of unanticipated
additional contract costs. Costs related to change orders and claims are recognized when they are incurred. The Company evaluates claims
on an individual basis and recognizes revenue it believes is probable to collect.
Performance Obligations
The majority of our contracts have a single performance
obligation as the promise to transfer the individual goods or services is not separately identifiable from other promises in the contracts
and, therefore, is not distinct. However, in some instances, we may also promise to provide distinct goods or services within a contract,
resulting in multiple performance obligations. For contracts with multiple performance obligations, we allocate the contract transaction
price to each performance obligation using the best estimate of the standalone selling price of each distinct good or service in the
contract. Typically, we sell a customer a specific service and use the expected cost plus a margin approach to estimate the standalone
selling price of each performance obligation.
The Company’s performance obligations are
satisfied as work progresses or at a point in time. Revenue on our cost-reimbursable contracts is recognized over time using direct costs
incurred or direct costs incurred to date as compared to the estimated total direct costs for performance obligations because it best
depicts the transfer of control to the customer. Contract costs include labor, subcontractors’ costs, and other direct costs.
Gross revenue from services transferred to customers
at a point in time is recognized when the customer obtains control of the asset, which is generally upon delivery and acceptance by the
customer of the reports and/or analysis performed.
As of September 30, 2022 and December 31, 2021,
we had $864 million and $808 million of remaining performance obligations, or backlog, respectively, of which $518 million and $485 million,
respectively, or 60% is expected to be recognized over the next 12 months and the majority of the balance over the next 24 months. Project
cancellations or scope adjustments may occur, from time to time, with respect to contracts reflected in backlog. Most of our government
contracts are multi-year contracts for which funding is appropriated on an annual basis, therefore backlog includes only those amounts
that have been funded and authorized and does not reflect the full amounts we may receive over the term of such contracts. In the case
of non-government contracts, backlog includes future revenue at contract rates, excluding contract renewals or extensions that are at
the discretion of the client. For contracts with a not-to-exceed maximum amount, we include revenue from such contracts in backlog to
the extent of the remaining estimated amount. Our backlog for the period beyond 12 months may be subject to variation from year-to-year
as existing contracts are completed, delayed, or renewed or new contracts are awarded, delayed, or cancelled. As a result, we believe
that year-to-year comparisons of the portion of backlog expected to be performed more than one year in the future are difficult to assess
and not necessarily indicative of future revenues or profitability.
U.S. Federal Acquisition Regulations
The Company has contracts with the U.S. federal,
state and local governments that contain provisions requiring compliance with the U.S. Federal Acquisition Regulations (“FAR”).
These regulations are generally applicable to all its contracts that are directly funded or partially funded by pass-through funds from
the U.S. federal government. These provisions limit the recovery of certain specified indirect costs on contracts subject to the FAR.
Cost-plus contracts covered by the FAR provide for upward or downward adjustments if actual recoverable costs differ from the estimate
billed under forward pricing arrangements. Most of the Company’s government contracts are subject to termination at the convenience
of the government. Contracts typically provide for reimbursement of costs incurred and payment of fees earned through the date of such
termination.
Government contracts that are subject to the FAR
are subject to audits performed by the Defense Contract Audit Agency (“DCAA”) and many other state governmental agencies.
As such, the Company’s overhead rates, cost proposals, incurred government contract costs and internal control systems are subject
to review. During the course of its audits, the DCAA or a state agency may question incurred costs if it believes the Company has accounted
for such costs in a manner inconsistent with the requirements of the FAR or Cost Accounting Standards and recommend that the applicable
contracting officer disallow such costs. Historically, the Company has not incurred significant disallowed costs because of such audits.
However, the Company can provide no assurance that the rate audits will not result in material disallowances of incurred costs in the
future. The Company provides for a refund liability to the extent that it expects to refund some of the consideration received from a
customer. The liability at September 30, 2022 and December 31, 2021 was $0, respectively.
Disaggregation of Revenues
As described further in Note 2 – Summary
of Significant Accounting Policies, the Company has one operating segment, Engineering, Testing, Inspection and Other Consultative Services,
which reflects how the Company is being managed. The Company provides public and private sector clients with comprehensive support in
managing large-scale infrastructure improvement programs including engineering, design, program development/management, compliance services,
acquisition and project control services, as well as construction engineering and inspection and materials testing. Approximately 50%
of the Company’s revenues in each reporting period presented are derived from federal, state and local government related projects.
All services performed by the Company are rendered
in the United States and its territories via two contract types, time and materials or fixed price contracts. The Company derives 90%
of its revenues from T&M contracts, the remainder are earned under fixed price contracts.
Cash Flows
The Company has presented its cash flows using
the indirect method and considers all highly liquid investments with original maturities of three months or less at acquisition to be
cash equivalents. At times, our cash and cash equivalents may be uninsured or in deposit accounts that exceed the Federal Deposit Insurance
limit.
Use of Estimates
The preparation of financial statements in conformity
with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from these estimates.
Concentration of Credit Risk
Financial instruments, which potentially subject
the Company to concentrations of credit risk, consist principally of trade accounts receivable. These risks primarily relate to the concentration
of customers who are large, governmental customers and regional governmental customers. The Company performs ongoing credit evaluations
of its customers’ financial condition and generally requires no collateral.
Fair Value of Financial Instruments
ASC Topic 820, Fair Value Measurements (“ASC
820”), establishes a framework for measuring fair value. That framework provides a fair value hierarchy that prioritizes the inputs
to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets
for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements).
The three levels of the fair value hierarchy under
ASC 820 are described as follows:
Level 1 — Inputs utilize quoted prices (unadjusted)
in active markets for identical assets or liabilities that management has the ability to access.
Level 2 — Inputs utilize data points that are observable
such as quoted prices, interest rates and yield curves.
Level 3 — Inputs are unobservable data points for
the asset or liability, and include situations where there is little, if any, market activity for the asset or liability.
The asset or liability’s fair value measurement
level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation
techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.
The Company has various financial instruments,
including cash and cash equivalents, accounts receivable and payable, accrued liabilities, and long-term debt. The carrying value of
the Company’s cash and cash equivalents, accounts receivable, and payable and accrued liabilities approximate their fair value
due to their short-term nature. The Company believes that the aggregate fair values of its long-term debt approximates their carrying
amounts as the interest rates on the debt are either reset on a frequent basis or reflect current market rates. See Note 6 for a discussion
of interest rate cap fair value.
The Company applies the provisions of ASC 805,
Business Combinations, in the accounting for its acquisitions, which requires recognition of the assets acquired and the liabilities
assumed at their acquisition date fair values, separately from goodwill. Goodwill as of the acquisition date is measured as the excess
of consideration transferred and the net of the acquisition date fair values of the tangible and identifiable intangible assets acquired
and liabilities assumed. The allocation of the purchase price to identifiable intangible assets is based on valuations performed to determine
the fair values of such assets as of the acquisition dates. Depending on the size and complexity of the acquisition, the Company may
engage a third-party independent valuation specialist to assist in management’s determination of fair values of tangible and intangible
assets acquired and liabilities assumed. The fair values of earn-out arrangements are included as part of the purchase price of the acquired
companies on their respective acquisition dates. The Company estimates the fair value of contingent earn-out payments as part of the
initial purchase price and records the estimated fair value of contingent consideration as a liability on the Consolidated Balance Sheet.
Changes in the estimated fair value of contingent earnout payments are included in operating expenses in the accompanying Consolidated
Statements of Operations.
Several factors are considered when determining
contingent consideration liabilities as part of the purchase price, including whether (i) the valuation of the acquisitions is not supported
solely by the initial consideration paid, and the contingent earn-out formula is a critical and material component of the valuation approach
to determining the purchase price; and (ii) the former owners of the acquired companies that remain as key employees receive compensation
other than contingent earn-out payments at a reasonable level compared with the compensation of other key employees. The contingent earn-out
payments are not affected by employment termination.
The Company reviews and re-assesses the estimated
fair value of contingent consideration liabilities on a quarterly basis, and the updated fair value could differ materially from the
initial estimates. The Company measures contingent consideration recognized in connection with business combinations at fair value on
a recurring basis using significant unobservable inputs classified as Level 3 inputs. The Company uses a probability-weighted discounted
cash flow approach as a valuation technique to determine the fair value of the contingent consideration liabilities on the acquisition
date and at each reporting period. The significant unobservable inputs used in the fair value measurements are projections over the earn-out
period, and the probability outcome percentages that are assigned to each scenario. Significant increases or decreases to either of these
inputs in isolation could result in a significantly higher or lower liability with a higher liability capped by the contractual maximum
of the contingent consideration liabilities. Ultimately, the liability will be equivalent to the amount paid, and the difference between
the fair value estimate on the acquisition date and amount paid will be recorded in earnings. The Company records the current portion
of contingent consideration liability within other current liabilities and the noncurrent portion of contingent consideration liability
within other long-term liabilities within its Consolidated Balance Sheet.
The following table summarizes the changes in
the fair value of estimated contingent consideration:
Contingent consideration, as of December 31, 2021 | |
$ | 31,461 | |
Additions for acquisitions | |
| 9,500 | |
Reduction of liability for payments made | |
| (3,270 | ) |
Total contingent consideration, as of September 30, 2022 | |
| 37,691 | |
Current portion of contingent consideration | |
| (16,577 | ) |
Contingent consideration, less current portion | |
$ | 21,114 | |
The Company may at its discretion settle the contingent
consideration with cash, common shares or a combination of cash and common shares. During the three months ended April 1, 2022, we settled
a portion of the $3.3 million payment with shares of Class A common stock. No additional payments were made during the three months ended
July 1, 2022 or September 30, 2022.
Equity Based Compensation
The Company recognizes the cost of services received
in an equity-based payment transaction with an employee as services are received and records either a corresponding increase in equity
or a liability, depending on whether the instruments granted satisfy the equity or liability classification criteria.
The measurement objective for these equity awards
is the estimated fair value at the grant date of the equity instruments that the Company is obligated to issue when employees have rendered
the requisite service and satisfied any other conditions necessary to earn the right to benefit from the instruments. The compensation
cost for an award classified as an equity instrument is recognized ratably over the requisite service period, including an estimate of
forfeitures. The requisite service period is the period during which an employee is required to provide service in exchange for an award.
Equity compensation was $2.0 million and $1.2
million for the three months ended September 30, 2022 and October 1, 2021, respectively, and $5.4 million and $2.5 million for the nine
months ended September 30, 2022 and October 1, 2021, respectively.
Income Taxes
The Company accounts for income taxes in accordance
with the FASB ASC Topic 740, Income Taxes, which requires an asset and liability approach to financial accounting and reporting for income
taxes. Deferred income tax assets and liabilities are computed for differences between the financial statement and tax bases of assets
and liabilities that will result in future taxable or deductible amounts based on enacted tax laws and rates applicable to the periods
in which the differences are expected to affect taxable income. In determining the need for a valuation allowance, management reviews
both positive and negative evidence, including current and historical results of operations, future income projections, scheduled reversals
of deferred tax amounts, availability of carrybacks, and potential tax planning strategies. Based on our assessment, we have concluded
that a portion of the deferred tax assets will not be realized.
According to the authoritative guidance on accounting
for uncertainty in income taxes, we may recognize the tax benefit from an uncertain tax position only if it is more likely than not that
the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. The tax benefits
recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than 50%
likelihood of being realized upon ultimate settlement. This guidance also addresses de-recognition, classification, interest and penalties
on income taxes, accounting in interim periods and disclosure requirements for uncertain tax positions.
Redeemable Preferred Stock
On February 14, 2020, in connection with the consummation
of the Atlas Business Combination, Holdings and GSO COF III AIV-2 LP (“GSO AIV-2”) entered into a subscription agreement,
dated February 14, 2020 (the “Subscription Agreement”) pursuant to which, GSO AIV-2 purchased 145,000 units of a new class
of Series A Senior Preferred Units of Holdings (the “Preferred Units”) at a price per Preferred Unit of $978.21 for an aggregate
cash purchase price of $141,840,450, which represented a 2.179% original issue discount on the Preferred Units (such purchase, the “GSO
Placement”).
The GSO Placement was made pursuant to the exemption
from registration contained in Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”), and/or Regulation
D promulgated thereunder.
The Preferred Units ranked senior in priority
to all other existing and future equity securities of Holdings with respect to liquidation preference and distribution rights.
The Preferred Units had a liquidation preference
of $1,000 per Preferred Unit (the “Liquidation Preference”).
Subject to any limitations set forth in the Atlas
Credit Agreement (as defined in Note 6 – Long-Term Debt), the Preferred Units were paid a dividend of 5% per annum, plus either
an additional 6.25% per annum in cash or 7.25% per annum in additional Preferred Units, at Holdings’ option, payable quarterly
in arrears.
If a cash dividend was not able to be made because
of a limitation under the Atlas Credit Agreement, then the Liquidation Preference with respect to any Preferred Unit would have increased
to 3.5625% in any quarter until a cash dividend could be made.
The Preferred Units did not possess voting rights
and were not convertible into any other security of Holdings.
Holdings was permitted to redeem the Preferred
Units beginning on the second anniversary of the Closing Date at a price of 103% of the Liquidation Preference (the “Redemption
Premium”), and on the third anniversary of their issuance at the Liquidation Preference, in each case plus accrued and unpaid dividends.
The Preferred Units could only be redeemed by Holdings within the first two years of the Closing Date upon a change of control as described
below, in which case such Preferred Units would have been redeemed at a customary make-whole amount as if the Preferred Units were redeemed
on the second anniversary.
Subject to the terms of Holdings’ and its
subsidiaries’ senior credit agreements, Holdings was required to redeem the Preferred Units at the Redemption Premium, plus accrued
and unpaid dividends, in the event of (i) a change of control, (ii) sales or other dispositions of all or substantially all of Holdings’
assets and (iii) the insolvency or bankruptcy of Holdings or any of its material subsidiaries.
Finally, holders of the Preferred Units were permitted
to require Holdings to redeem their Preferred Units at the Liquidation Preference, plus accrued and unpaid dividends, beginning on the
eighth anniversary of the Closing Date, subject to certain customary limitations.
The Preferred Units were redeemed in full at par
without a premium on February 25, 2021. The Company incurred redeemable preferred stock dividends of $5.9 million during the quarter
ended April 2, 2021.
Segment
The Company has one operating and reporting segment,
Engineering, Testing, Inspection and Other Consultative Services. This financial information is reviewed regularly by our chief operating
decision maker to assess performance and make decisions regarding the allocation of resources and is equivalent to our consolidated information.
Our chief operating decision maker does not review below the consolidated level. Our chief operating decision maker is our Chief Executive
Officer.
Recent Accounting Pronouncements
In February 2016, the FASB established Topic 842,
Leases, by issuing Accounting Standards Update (ASU) No. 2016-02, which requires lessees to recognize leases on-balance sheet and disclose
key information about leasing arrangements. Topic 842 was subsequently amended by ASU No. 2018-01, Land Easement Practical Expedient
for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842, Leases; and ASU No. 2018-11, Targeted Improvements.
The new standard establishes a right-of-use model (ROU) that requires a lessee to recognize a ROU asset and lease liability on the balance
sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting
the pattern and classification of expense recognition in the income statement. The new standard was effective and we adopted and implemented
the standard on January 1, 2022 with a modified retrospective transition approach, as permitted, applying the new standard to all leases
existing at the date of initial application. Consequently, financial information will not be updated and the disclosures required under
the new standard will not be provided for dates and periods before January 1, 2022. The new standard provides a number of optional practical
expedients in transition. We elected the ‘package of practical expedients’, which permits us not to reassess under the new
standard our prior conclusions about lease identification, lease classification and initial direct costs. The adoption of this standard
had a material effect on our balance sheet, the most significant effects relating to (1) the recognition of new ROU assets and lease
liabilities on our balance sheet for our office, vehicles and equipment operating leases and; (2) providing significant new disclosures
about our leasing activities. See Note 15 for further information.
In June 2016, the FASB issued ASU 2016-13, Financial
Instruments (Topic 326) - Credit Losses: Measurement of Credit Losses on Financial Instruments, which provides guidance regarding the
measurement of credit losses on financial instruments. The new guidance replaces the incurred loss impairment methodology in the current
guidance with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable
information to determine credit loss estimates. This ASU will be effective for the Company commencing after December 15, 2022. The Company
is in the process of assessing the impact of this ASU on our consolidated financial statements and disclosures.
NOTE 3 – ATLAS BUSINESS COMBINATION
On the Closing Date, the Company completed the
acquisition of Atlas Intermediate and its subsidiaries and in return the Atlas Intermediate members received 24.0 million shares of Class
B common stock in the Company amongst other consideration such as repayment of $171.5 million of debt in effect as of the closing date.
The shares of non-economic Class B common stock
of the Company entitle each holder to one vote per share, and each Class B share, along with its corresponding Holdings Unit, is redeemable
on a one-for-one basis for one share of Class A common stock at the option of the Unit Holders (formerly members) as their lock-up periods
expire. Upon the redemption by any Class B common stock, along with the corresponding Holdings Units, for Class A common stock, a corresponding
number of shares of Class B common stock will be cancelled.
Because the holders of our Class B common stock
have effective control of the combined company after the Closing Date through their majority voting interests in both the Company and,
accordingly, Atlas Intermediate, the Atlas Business Combination was accounted for as a reverse recapitalization. Although the Company
was the legal acquirer, Atlas Intermediate was the accounting acquirer. As a result, the reports filed by the Company subsequent to the
Atlas Business Combination are prepared “as if” Atlas Intermediate is the predecessor and legal successor to the Company.
The historical operations of Atlas Intermediate are deemed to be those of the Company. Thus, the financial statements included in this
report reflect (i) the historical operating results of Atlas Intermediate prior to the Atlas Business Combination; (ii) the combined
results of the Company, which does not have any operating results and includes only certain costs such as the compensation for the Company’s
Board, certain legal fees and taxes, and Atlas Intermediate following the Atlas Business Combination; (iii) the assets, liabilities and
members’ capital of Atlas Intermediate at their historical cost; and (iv) the Company’s equity and earnings per share for
the period from the Closing Date.
NOTE 4 – BUSINESS ACQUISITIONS
In April 2021, the Company acquired Atlantic Engineering
Laboratories, Inc. and Atlantic Engineering Laboratories of New York, Inc. (collectively, “AEL”) for cash and an amount of
equity consideration totaling $24.5 million, plus an earnout of up to $13.5 million. The Company issued 738,566 shares of Class A common
stock to the former owner of AEL, which represented $7.5 million of the total consideration paid. AEL is a materials testing and inspection
firm based in Avenel, New Jersey, and provides steel, concrete, soil and other testing and inspection services to a diverse mix of public
and private clients primarily in New York and New Jersey. AEL added approximately 290 professionals to the Company’s workforce
and is expected to strengthen the Company’s materials testing and inspection services in the Northeast. Total consideration may
also be increased or decreased based on results in future years. Final value will be subject to the resolution of certain contingencies.
In July 2021, the Company acquired O’Neill
Services Group (“O’Neill), a quality assurance and environmental services firm that services clients throughout the Pacific
Northwest. O’Neill, headquartered in Redmond, Washington, employs 90 people and received $24.4 million in the form of cash and
stock consideration, plus an earnout of up to $16.0 million. The Company issued 653,728 shares of Class A common stock which represented
$6.5 million of the total consideration received. Total consideration may also be increased or decreased based on results in future years.
Final value will be subject to the resolution of certain contingencies.
In March 2022, the Company acquired TranSmart
Technologies, Inc. (“TranSmart”) for an initial purchase price of $29.8 million which was paid in a combination of cash and
shares of our Class A common stock, plus an earnout of up to $7.0 million. TranSmart specializes in Intelligent Transportation Systems
(ITS) and engineering for transportation agencies and customers throughout the Midwest. TranSmart was founded in 1986 and is headquartered
in Chicago, Illinois employs approximately 100 employees specializing in ITS, engineering, design and construction/program management
services. The Company issued 872,752 of Class A common stock which represented $9.9 million of the total consideration received. Total
consideration may also be increased or decreased based on results in future years. Final value will be subject to the resolution of certain
contingencies.
In March 2022, the Company acquired 1 Alliance
Geomatics, LLC (“1 Alliance”) for an initial purchase price of $22.0 million which was paid in a combination of cash and
shares of our Class A common stock, plus an earnout of up to $8.3 million. 1 Alliance is a provider of geospatial services to transportation
and water resources clients from its four offices within the Pacific Northwest. 1 Alliance, based in Bellevue, Washington, was founded
in 2012 and employs approximately 70 people. The Company issued 355,649 of Class A common stock which represented $4.3 million of the
total consideration received. Total consideration may also be increased or decreased based on results in future years. Final value will
be subject to the resolution of certain contingencies.
Acquisition costs of approximately $0.0 million
and $0.5 million have been expensed in the three months ended September 30, 2022 and October 1, 2021, respectively, and $0.5 million
and $1.9 million for the nine months ended September 30, 2022 and October 1, 2021, respectively, in the Consolidated Statement of Operations
within operating expenses.
The following table summarizes the fair values
of the assets acquired and liabilities assumed as of the acquisition (in thousands):
| |
AEL | | |
O’Neill | | |
TranSmart* | | |
1 Alliance* | |
Cash | |
$ | 684 | | |
$ | 1,608 | | |
| - | | |
| - | |
Accounts receivable | |
| 6,026 | | |
| 4,201 | | |
| 6,244 | | |
| 2,489 | |
Unbilled receivable | |
| 858 | | |
| - | | |
| 1,832 | | |
| 2,115 | |
Property and equipment | |
| 52 | | |
| 1,049 | | |
| 139 | | |
| 1,733 | |
Other current and long-term assets | |
| 130 | | |
| - | | |
| 298 | | |
| 174 | |
Intangible assets | |
| 13,816 | | |
| 22,735 | | |
| 23,555 | | |
| 16,314 | |
Liabilities | |
| (3,065 | ) | |
| (1,546 | ) | |
| (5,062 | ) | |
| (3,557 | ) |
| |
| | | |
| | | |
| | | |
| | |
Net assets acquired | |
$ | 18,501 | | |
| 28,047 | | |
| 27,006 | | |
| 19,268 | |
| |
| | | |
| | | |
| | | |
| | |
Consideration paid (cash and equity consideration) | |
$ | 24,502 | | |
$ | 24,369 | | |
| 25,763 | | |
| 16,517 | |
Contingent earnout liability at fair value (cash) | |
| 7,045 | | |
| 7,106 | | |
| 4,000 | | |
| 5,500 | |
Total Consideration | |
| 31,547 | | |
| 31,475 | | |
| 29,763 | | |
| 22,017 | |
Excess consideration over the amounts assigned to the net assets acquired (goodwill) | |
$ | 13,046 | | |
| 3,428 | | |
| 2,757 | | |
| 2,749 | |
| * | The
above purchase price allocation is tentative and preliminary and subject to further updates as we complete the purchase price allocation. |
NOTE 5 – GOODWILL AND INTANGIBLES
The carrying amount, including changes therein,
of goodwill was as follows:
Balance as of December 31, 2021 | |
$ | 124,348 | |
Acquisitions | |
| 5,506 | |
Measurement period adjustments | |
| 3,000 | |
Balance as of September 30, 2022 | |
$ | 132,854 | |
The Company did not recognize any impairments
of goodwill in the nine months ended September 30, 2022 or October 1, 2021.
Intangible assets as of September 30, 2022 and
December 31, 2021 consist of the following:
| |
September 30, 2022 | | |
December 31, 2021 | | |
Remaining | |
| |
Gross | | |
Accumulated | | |
Net book | | |
Gross | | |
Accumulated | | |
Net book | | |
useful life | |
| |
amount | | |
amortization | | |
value | | |
amount | | |
amortization | | |
value | | |
(in years) | |
Definite life intangible assets: | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Customer relationships | |
$ | 187,126 | | |
$ | (61,644 | ) | |
$ | 125,482 | | |
$ | 149,917 | | |
$ | (47,310 | ) | |
$ | 102,607 | | |
| 6.2 | |
Tradenames | |
| 28,240 | | |
| (23,237 | ) | |
| 5,003 | | |
| 25,580 | | |
| (20,890 | ) | |
| 4,690 | | |
| 1.6 | |
Non-competes | |
| 600 | | |
| (600 | ) | |
| - | | |
| 600 | | |
| (583 | ) | |
| 17 | | |
| 0.0 | |
Total intangibles | |
$ | 215,966 | | |
$ | (85,481 | ) | |
$ | 130,485 | | |
$ | 176,097 | | |
$ | (68,783 | ) | |
$ | 107,314 | | |
| | |
Amortization expense was $6.2 million and $4.2
million for the three months ended September 30, 2022 and October 1, 2021 respectively, and $16.7 million and $10.9 million for the nine
months ended September 30, 2022 and October 1, 2021, respectively.
Amortization of intangible assets for the next
five years and thereafter is expected to be as follows:
2022 (three months remaining) | |
$ | 6,196 | |
2023 | |
| 24,280 | |
2024 | |
| 22,751 | |
2025 | |
| 21,433 | |
2026 | |
| 21,433 | |
Thereafter | |
| 34,392 | |
| |
$ | 130,485 | |
NOTE 6 – LONG-TERM DEBT
On February 25, 2021, Atlas Intermediate, as the
borrower, entered into two new credit facilities consisting of (i) a $432.0 million senior secured term loan at closing and, subject
to the satisfaction of certain terms and conditions, a committed delayed draw term loan facility to be used for future acquisitions,
within 18 month of February 25, 2021 and subject to certain conditions, in an aggregate principal amount of up to $75.0 million, of which
$61 million has been used ($26.0 million in connection with the acquisitions during the first quarter of 2022) and $14 million remains
available as of September 30, 2022, and an uncommitted incremental term loan facility that may be incurred after closing (the “Term
Loan”) pursuant to a Credit Agreement dated February 25, 2021, by and among Holdings, Atlas Intermediate, Wilmington Trust, National
Association, as administrative agent and collateral agent, and certain lenders thereto, including certain Blackstone entities, which
may include, Blackstone Alternative Credit Advisors LP, and its managed funds and accounts, and its affiliates, Blackstone Holdings Finance
Co. L.L.C. and its affiliates, and/or certain other of their respective funds, accounts, clients managed, advised or sub-advised, or
any of their respective affiliates (the “Term Loan Agreement”) and (ii) a $40.0 million senior secured revolver which aggregate
principal amount may be increased, subject to the satisfaction of certain terms and conditions, including obtaining commitments therefor,
by up to $20.0 million (the “Revolver”) pursuant to the Credit Agreement dated February 25, 2021, by and among Holdings,
Intermediate, JPMorgan Chase Bank, N.A., as administrative agent, swingline lender, issuing bank, lender, sole bookrunner and sole lead
arranger (the “ABL Revolver Agreement,” and together with the Term Loan Agreement, collectively the “Credit Agreements”).
The Term Loan Agreement refinances the Atlas Credit Agreement dated as of February 14, 2020, with Macquarie Capital Funding LLC, as administrative
agent and certain lenders, which repayment was effectuated partially in cash and partially by way of a cashless exchange of existing
term loans and preferred equity for Term Loans.
The Term Loan Agreement and ABL Revolver Agreement
are collectively referred to as the “Atlas 2021 Credit Agreements” by the Company.
The initial Term Loan will mature on February
25, 2028 and the Revolver will mature on February 25, 2026.
On August 4, 2022, Holdings, Intermediate, certain
subsidiaries of Holdings (collectively with Holdings and Intermediate, the “Loan Parties”) and the Administrative Agent (as
defined below) entered into the First Amendment to Credit Agreement (the “Credit Agreement Amendment”), which amends that
certain Credit Agreement, dated as of February 25, 2021 by and among the Loan Parties and JPMorgan Chase Bank, N.A., as administrative
agent, swingline lender, issuing bank, lender, sole bookrunner and sole lead arranger (the “Administrative Agent”). The Credit
Agreement Amendment amended the Credit Agreement to, among other matters, increase the revolving credit facility thereunder by $20.0
million to an aggregate principal amount of $60.0 million.
Interest on any outstanding borrowings is payable
monthly under the ABL Revolver Agreement, quarterly under the Term Loan Agreement or, in each case, at the end of the applicable interest
period in arrears. The cash interest rates under the Term Loan Agreement will be equal to either (i) the Adjusted LIBO Rate (as defined
in the Term Loan Agreement), plus 5.50%, or (ii) an Alternate Base Rate (as defined in the Term Loan Agreement), plus 4.50%. In addition,
the term loan requires an additional 2.0% interest that can be made at the option of the Company in cash or payment-in-kind (PIK). The
interest rates under the ABL Revolver Agreement will be equal to either (i) the Adjusted LIBO Rate (as defined in the ABL Revolver Agreement),
plus 2.50%, or (ii) the ABR (as defined in the ABL Revolver Agreement), plus 1.50%.
The Credit Agreements are guaranteed by Holdings
and secured by (i) In the case of the ABL Revolver Agreement, a first priority security interest in the current assets, including accounts
receivable, of Holdings, Intermediate and its subsidiaries and (ii) in the case of the Term Loan Agreement, a pledge of the equity interests
of the subsidiaries of Holdings and Intermediate, and subject to the first lien security interest on current assets under the Revolver,
a first priority lien on substantially all other assets of Holdings, Intermediate and all of their direct and indirect subsidiaries.
The Term Loan Agreement contains a financial covenant
which requires Holdings, Atlas Intermediate and all of their direct and indirect subsidiaries on a consolidated basis to maintain a Total
Net Leverage Ratio (as defined in each Credit Agreement) tested on a quarterly basis that does not exceed (i) 8.25 to 1.00 with respect
to the fiscal quarters ending on April 2, 2021 and July 2, 2021, (ii) 8.00 to 1.00 for the fiscal quarters ending October 1, 2021 and
December 31, 2021, (iii) 7.50 to 1.00 for the fiscal quarters ending April 1, 2022 and July 1, 2022, (iv) 7.25 to 1.00 for the fiscal
quarters ending September 30, 2022 and December 30, 2022, (v) 7.00 to 1.00 for the fiscal quarters ending March 31, 2023 and June 30,
2023, (vi) 6.75 to 1.00 for the fiscal quarters ending September 29, 2023 and December 29, 2023, and (vii) 6.50 to 1.00 for March 29,
2024 and each fiscal quarter ending thereafter.
The ABL Revolver Agreement contains a “springing”
financial covenant which requires Holdings, Intermediate and all their direct and indirect subsidiaries on a consolidated basis to maintain
a Fixed Charge Coverage Ratio (as defined in the ABL Revolver Agreement) of no less than 1.10 to 1.00 when the outstanding principal
amount of loans under the Revolver exceeds $0 or the aggregate exposure for letters of credit under the Revolver exceeds $5.0 million.
The Company has been in compliance with the terms
of the Atlas Credit Facility and Atlas Credit Agreement as of September 30, 2022 and December 31, 2021, respectively.
Long-term debt consisted of the following:
| |
September 30, 2022 | | |
December 31, 2021 | |
Atlas 2021 credit agreement – term loan | |
$ | 498,971 | | |
$ | 473,392 | |
| |
| | | |
| | |
Atlas 2021 credit agreement – revolving | |
| 23,588 | | |
| - | |
| |
| | | |
| | |
Subtotal | |
| 522,559 | | |
| 473,392 | |
| |
| | | |
| | |
Less: Loan costs, net | |
| (7,260 | ) | |
| (7,593 | ) |
| |
| | | |
| | |
Less current maturities of long-term debt | |
| (4,930 | ) | |
| (3,606 | ) |
| |
| | | |
| | |
Long-term debt | |
$ | 510,369 | | |
$ | 462,193 | |
Aggregate principal payments on debt subsequent
to September 30, 2022, are as follows (amounts in thousands):
2022 (three months remaining) | |
$ | 2,465 | |
2023 | |
| 4,930 | |
2024 | |
| 4,930 | |
2025 | |
| 4,930 | |
2026 | |
| 4,930 | |
Thereafter | |
| 500,374 | |
| |
$ | 522,559 | |
The 2021 Atlas Credit agreement requires annual
amortization of principal and interest amounts of 1% or 2.5% depending on certain ratios. The Company is currently within the ratio that
requires 1% annual amortization and expects to remain at the 1% level. Principal repayments commenced during the Company’s second
quarter 2022.
Interest Rate Cap
The Company is exposed to fluctuations in interest
rates on its senior secured credit facilities. Changes in interest rates will not affect the market value of such debt but will affect
the Company’s interest payments over the term of the loans. Likewise, an increase in interest rates could have a material impact
on the Company’s cash flow. The Company hedges the interest rate fluctuations on debt obligations through an interest rate cap agreement.
The Company records this agreement at fair value as an asset in its consolidated balance sheet. Based on the inherent nature of an interest
rate cap, the instrument can never result in a liability to the Company. As the derivative is designated and qualifies as a cash flow
hedge, the gains or losses on the interest rate cap agreement are recorded in stockholders’ equity as a component of OCI, net of
tax. Reclassifications of the gains and losses on the interest rate cap agreement into earnings are recorded as part of interest expense
in the consolidated statements of operations as the Company makes its interest payments on the hedged portion of its senior secured credit
facilities. Fair value is determined based on estimated amounts that would be received or paid to terminate the contracts at the reporting
date based on quoted market prices.
In June 2022, the Company entered into a deferred
premium interest rate cap which limits the Adjusted LIBOR rate noted above to 3%. The interest rate cap hedges $500.0 million of debt
and has a three-year term and will be paid for monthly at an annual rate of 0.69% or approximately $10.5 million over the three-year period.
This interest rate cap limits the overall interest rate on the Term Loan from exceeding 11.2% (Adjusted LIBOR of 3% maximum plus 5.50%
plus the additional 2.0% cash or payment-in-kind plus the 0.69% cost of the interest rate cap). The Company uses interest rate related
derivative instruments to manage its exposure to changes in interest rates on its variable-rate debt instruments. The Company does not
speculate using derivative instruments.
By using derivative financial instruments to hedge
exposures to changes in interest rates, the Company exposes itself to credit risk and market risk. Credit risk is the failure of the counterparty
to perform under the terms of the derivative contract. When the fair value of a derivative contract is an asset, the counterparty owes
the Company, which creates credit risk for the Company. When the fair value of a derivative contract is a liability, the Company owes
the counterparty and therefore, the Company is not exposed to the counterparty’s credit risk in those circumstances. The Company
minimizes counterparty credit risk in derivative instruments by entering into transactions with high quality counterparties. The derivative
instruments entered into by the Company do not contain credit-risk-related contingent features.
Market risk is the adverse effect on the value
of a derivative instrument that results from a change in interest rates. The market risk associated with the Company’s derivative
instruments is managed by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken.
As a result, the Company initially recorded an
asset and a corresponding liability of $10.5 million representing the fair value of the interest rate cap and the remaining payments of
the deferred premium. Four monthly payments have been made as of September 30, 2022. The fair value of the interest rate cap as of September
30, 2022 increased by $9.3 million and therefore there was a gain of $9.3 million recorded in OCI for the three and nine months ended
September 30, 2022. The asset is included in other long-term assets and the liability is recorded as an other current liability of $3.4
million and an other long-term liability of $5.5 million as of September 30, 2022.
NOTE 7- SHAREHOLDERS’ DEFICIT
Shares Outstanding
Prior to the Atlas Business Combination, the Company
was a special purpose acquisition company with no operations, formed as a vehicle to affect a business combination with one or more operating
businesses. After the consummation of the Atlas Business Combination, the Company became a holding company whose sole material operating
asset consists of its interest in Atlas Intermediate.
The following table summarizes the changes in
the outstanding stock from December 31, 2021 through September 30, 2022 (amounts in thousands):
| |
Class A Common Stock | | |
Class B Common Stock | |
Beginning Balance, as of December 31, 2021 | |
| 33,646 | | |
| 3,328 | |
Issuances | |
| 1,905 | | |
| 186 | |
Transfers to Class A from Class B | |
| 2,158 | | |
| (2,158 | ) |
Shares Outstanding at September 30, 2022 | |
| 37,709 | | |
| 1,356 | |
Class A Common Stock –At September
30, 2022 and December 31, 2021, there were 37,708,556 and 33,645,212 shares of Class A common stock issued and outstanding, respectively.
Holders of the Company’s Class A common stock are entitled to one vote for each share. The Company is authorized to issue 400,000,000
shares of Class A common stock with a par value of $0.0001 per share.
Class B Common Stock – At September
30, 2022 and December 31, 2021, there were 1,356,212 and 3,328,101 shares of Class B common stock issued and outstanding, respectively.
Class B common stock was initially issued to the
holders of Holdings Units in Atlas Intermediate in connection with the Atlas Business Combination and are non-economic but entitle the
holder to one vote per share and may be converted to Class A shares at any time by the holder. Conversion to Class A shares may result
in a taxable event for the holder at the time of conversion. Subsequent to the Atlas Business Combination, the Company has issued Class
B common stock to certain acquisitions. The Company is authorized to issue up to 100,000,000 shares of Class B common stock with a par
value of $0.0001 per share but it is not allowed to issue any Class B common stock to the public.
Non-controlling Interest
As of September 30, 2022 and December 31, 2021,
the Company ownership and voting structure was comprised of holders of our Class A common stock that participate 100% in the results
of Atlas Technical Consultants, Inc. and 97% and 91%, respectively, in Atlas Intermediate and its subsidiaries and holders of our Class
B common stock that participate in the results of Atlas Intermediate and its subsidiaries until their Class B common stock is converted
to Class A common stock. In connection with the Atlas Business Combination, it was determined that the results of Atlas Intermediate
and its subsidiaries would be fully consolidated within the results of the Company.
Due to the participation of the holders of our
Class B common stock in the results of Atlas Intermediate and subsidiaries, a non-controlling interest was deemed to exist. Non-controlling
ownership interests in Atlas Intermediate and its subsidiaries are presented in the Consolidated Balance Sheet within shareholders’
equity as a separate component. In addition, consolidated net income includes earnings attributable to both the shareholders and the
non-controlling interests.
We did not have any distributions during the three
or nine months ended September 30, 2022 and October 1, 2021.
NOTE 8 – INCOME (LOSS) PER SHARE
Income (loss) per share was calculated as follows:
| |
Three Months Ended | | |
Nine Months Ended | |
| |
September 30, 2022 | | |
October 1 2021 | | |
September 30, 2022 | | |
October 1, 2021 | |
Numerator: | |
| | |
| | |
| | |
| |
Net income (loss) | |
$ | 1,984 | | |
$ | (2,526 | ) | |
$ | (3,846 | ) | |
$ | (22,100 | ) |
Provision for non-controlling interest | |
| (79 | ) | |
| 233 | | |
| 419 | | |
| 13,019 | |
Redeemable preferred stock dividends | |
| - | | |
| - | | |
| - | | |
| (5,899 | ) |
Net income (loss) attributable to Class A common shares - basic and diluted | |
$ | 1,905 | | |
$ | (2,293 | ) | |
$ | (3,427 | ) | |
$ | (14,980 | ) |
| |
| | | |
| | | |
| | | |
| | |
Denominator: | |
| | | |
| | | |
| | | |
| | |
Weighted average shares outstanding - basic and diluted | |
| 37,511,678 | | |
| 32,826,431 | | |
| 35,822,028 | | |
| 25,862,913 | |
| |
| | | |
| | | |
| | | |
| | |
Net income (loss) per Class A common share, basic and diluted | |
$ | 0.05 | | |
$ | (0.07 | ) | |
$ | (0.10 | ) | |
$ | (0.58 | ) |
The Class B common shares are excluded as these
shareholders do not share in the income of Atlas Technical Consultants, Inc. and represent a non-controlling interest in the results
of Atlas Intermediate and its subsidiaries. Please refer to Note 7 “Shareholders’ Deficit” for further information.
NOTE 9 – EQUITY BASED COMPENSATION
Equity compensation was $2.0 million and $1.2
million for the three months ended September 30, 2022 and October 1, 2021, respectively, and $5.4 million and $2.5 million for the nine
months ended September 30, 2022 and October 1, 2021, respectively.
The Company granted restricted stock units (“RSUs”)
and performance stock units (“PSUs”) during 2022 and 2021 to reward, motivate and retain selected management personnel.
An additional grant of RSUs was made to a member
of the Company’s leadership team on December 31, 2020 to reflect an increase in responsibility.
The Company granted its Board of Directors RSUs
during 2022 and 2021 as part of their annual board compensation packages.
The Company estimates forfeitures of its stock
awards. Actual forfeitures may differ from those estimates. The Company currently estimates its forfeitures as 3% of the RSUs awards
granted each year but will continue to reassess its estimate on a quarterly basis.
Price-Vested Stock Options
During the third quarter of 2021, the Company
awarded 547,943 of price-vested stock options (the “options” or “stock options”) in aggregate to its Chief Executive,
Chief Financial, and Chief Strategy Officers collectively the “option awardees”). These options vested equally in four tranches
on the second, third, fourth and fifth anniversary of the option grant date and is dependent upon the option awardees remaining employed
by the Company and the stock price on the applicable tranche anniversary to be equal to or exceed a prescribed share price within the
stock option agreement. The strike price of each option for each tranche is $10.50, which was the Company’s closing stock price
on the option grant date. The Company has valued the options at fair market value based upon a Monte Carlo with Geometric Brown Motion
simulation and will recognize the compensation cost for each tranche over a range of 5.17 to 5.93 years with values per option ranging
from $2.29 to $3.55. The fair market value of the options as of the grant date was $1.6 million.
NOTE 10 – RELATED-PARTY TRANSACTIONS
During the three and nine months ended September
30, 2022 and October 1, 2021, the Company leased office space at fair value from former owners of acquired companies that became shareholders
and/or officers of the Company. The Company recognized lease expenses under these leases within the Statement of Operations in the amount
of $0.2 million for each of the three months ended September 30, 2022 and October 1, 2021 and $0.6 million for each of the nine months
ended September 30, 2022 and October 1, 2021.
During the nine months ended September 30, 2022
and October 1, 2021, the Company performed certain environmental consulting work for an affiliate of one of its principal shareholders
or members and collected fees related to these services in the amount of $0.0 and $0.1 million, respectively.
NOTE 11 — EMPLOYEE BENEFIT PLANS
The Company maintains employee savings plans which
allow for voluntary contributions into designated investment funds by eligible employees. The Company may, at the discretion of its Board,
make additional contributions to these plans. The Company has made total contributions of $0.4 million and $1.8 million for the three
months ended September 30, 2022 and October 1, 2021, respectively, and $4.3 million and $5.2 million for the nine months ended September
30, 2022 and October 1, 2021, respectively.
NOTE 12 – COMMITMENTS AND CONTINGENCIES
The Company is subject to certain claims and lawsuits
typically filed against engineering companies, alleging primarily professional errors or omissions. The Company carries professional
liability insurance, subject to certain deductibles and policy limits, against such claims. While management does not believe that the
resolution of these claims will have a material adverse effect, individually or in aggregate, on its financial position, results of operations
or cash flows, management acknowledges the uncertainty surrounding the ultimate resolution of these matters.
NOTE 13 – INCOME TAXES
Following the consummation of the Atlas Business
Combination, we are organized as an umbrella partnership C-Corporation structure also known as an “Up-C” structure in which
the business of Atlas Intermediate and its subsidiaries is held by Holdings and will continue to operate through the subsidiaries of
Atlas Intermediate, and in which our only direct assets consist of common units of Holdings. We are the sole manager of Holdings in accordance
with the terms of the Holdings LLC Agreement entered into in connection with the consummation of the Atlas Business Combination.
Previously, Atlas Intermediate was treated as
a partnership for federal and state income tax purposes with all income tax liabilities and/or benefits of the Company being passed through
to the partners and members. As such, no recognition of federal or state income taxes have been provided for in the accompanying consolidated
financial statements except for income taxes relating to the C-Corp subsidiaries directly owned by Atlas Intermediate and the State of
Texas Margin tax.
Subsequent to the Atlas Business Combination,
income taxes relating to Atlas Technical Consulting, Inc, the C-Corps owned directly by Atlas Intermediate and the State of Texas Margin
tax are considered within the provision of non-controlling interest as it is generated through the results of Atlas Intermediate and
its subsidiaries.
Our effective tax rate from continuing operations
was 16.5% and (19.3%) for the three months ended September 30, 2022 and October 1, 2021, respectively, and (23.9%) and (3.0%) for the
nine months ended September 30, 2022 and October 1, 2021, respectively. Reconciliation between the amount determined by applying the
U.S. federal income tax rate of 21% to pretax income from continuing operations and income tax expense is attributable to changes in
our mix of pre-tax losses/earnings, valuation allowance and the effect of non-controlling interest in income of consolidated subsidiaries.
The Company provides a valuation allowance when
it is more likely than not that some portion of the deferred tax assets will not be realized. Management assesses the available positive
and negative evidence to estimate if sufficient future taxable income will be generated to utilize the existing deferred tax assets.
Based on this evaluation, a valuation allowance has been recorded to reduce net deferred tax assets to an amount that management believes
is more than likely not to be realized.
The Company had no unrecognized tax benefits as
of September 30, 2022 or December 31, 2021. Interest and, if applicable, penalties are recognized related to unrecognized tax benefits
in income tax expense. There are no accruals for interest and penalties as of September 30, 2022 or December 31, 2021.
NOTE 14 – LEASES
The Company determines whether contractual arrangements
contain a lease by evaluating whether those arrangements either implicitly or explicitly identify an asset, whether the Company has the
right to obtain substantially all of the economic benefits from use of the asset throughout the term of the arrangement, and whether
the Company has the right to direct the use of the asset.
The Company has entered into various operating
leases primarily for office space, vehicles and office equipment. The office space leases generally have fixed payments with expiration
dates ranging from 2022 to 2026, some of which have options to extend the leases from 5 to 10 years and some have options to terminate
at the Company’s discretion. The Company’s vehicle and office equipment leases generally have fixed payments with expiration
dates ranging from 2022 to 2026. Renewal options are included in the lease term if it is reasonably certain that the Company will exercise
those options. Periods for which the Company is reasonably certain not to exercise termination options are also included in the lease
term. For leases with a term of 12 months or less, the Company has made an accounting policy election to not recognize right-of-use (ROU)
assets or lease liabilities for qualifying leases. For these leases, the Company recognizes lease expense on a straight-line basis over
the lease term.
The Company has certain agreements with lease
and non-lease components, such as office space leases, which are combined as a single lease component based on the Company’s practical
expedient election. The Company’s real estate leases require that it pay maintenance in addition to rent. Additionally, the real
estate leases generally require payment of real estate taxes and insurance. Maintenance, real estate taxes, and insurance payments are
generally variable and based on actual costs incurred by the lessor. Therefore, these amounts are not included in the consideration of
the contract when determining the ROU asset and lease liability.
Discount Rate
The discount rate for a lease is the rate implicit
in the lease unless that rate cannot be readily determined. In that case, the Company is required to use its incremental borrowing rate,
which is the rate the Registrants would have to pay to borrow, on a collateralized basis over a similar term, an amount equal to the
lease payments in a similar economic environment. The Company determines its incremental borrowing rate by obtaining interest rates from
various external financing sources and makes certain adjustments to reflect the terms of the lease and type of the asset leased. The
Company uses the secured rate which corresponds with the term of the applicable lease.
The following table provides the components of
lease cost for the Company’s operating leases for the three months ended September 30 (in thousands):
| |
2022 | |
Lease cost: | |
| |
Operating lease cost | |
$ | 3,598 | |
Short-term lease cost | |
| 195 | |
Total lease cost | |
$ | 3,793 | |
The following table provides other key information
related to the Company’s operating leases at September 30 (in thousands):
| |
2022 | |
Cash paid for amounts included in the measurement of lease liabilities | |
$ | - | |
Operating cash flows from operating leases | |
| 3,589 | |
Right-of-use asset obtained in exchange for new operating lease liabilities | |
$ | 3,589 | |
The following table provides the total future
minimum rental payments for operating leases, as well as a reconciliation of these undiscounted cash flows to the lease liabilities recognized
on the Balance Sheets as of September 30, 2022 (in thousands).
| |
Operating Leases | |
2022 (three months remaining) | |
$ | 3,489 | |
2023 | |
| 12,244 | |
2024 | |
| 8,085 | |
2025 | |
| 4,128 | |
2026 | |
| 2,695 | |
Thereafter | |
| 3,818 | |
Total | |
$ | 34,459 | |
Less: Present value discount | |
| (3,426 | ) |
Lease liability | |
$ | 31,033 | |
| |
| | |
Weighted-average discount rate | |
| 5.44 | % |
Weighted-average remaining lease term (in years) | |
| 3.65 | |
Current lease liabilities (included in other current liabilities) | |
$ | 11,578 | |
Non-current lease liabilities (included in other long-term liabilities) | |
$ | 19,455 | |
Right-of-use assets (included in other long-term assets) | |
$ | 29,480 | |