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 145 offices in 41 states, employs approximately
3,600 employees and is headquartered in Austin, Texas.
The Company provides public and private sector
clients with comprehensive support in managing infrastructure improvement and environmental programs including testing, inspection &
certification (TIC) services, complete array of environmental (ENV) services, program/construction/quality management (PCQM) services,
as well as engineering & design (E&D) services.
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 six months ended July
2, 2021 or June 30, 2020. 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, 2020 included in our Annual Report on Form 10-K that the Company filed with the SEC on March 23, 2021.
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.
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 six months ended June 30, 2020.
Fiscal Year
Prior to this fiscal year, the Company’s
subsidiaries reported their results of operations based on 52 or 53-week periods ending on the Friday nearest but not subsequent to December
31, while Atlas reported on a calendar year end. For clarity of presentation, all periods were presented as if the year ended on December
31. During each quarter, our subsidiaries would close on the Friday closest to March 31, June 30, and September 30, and Atlas closed on
the actual calendar day. The impact of the difference between these dates has been insignificant to date. The Company appropriately eliminated
all transactions between itself and its subsidiaries when presenting its Consolidated Balance Sheet.
On January 4, 2021 the Company’s Board voted unanimously to change
the Company’s fiscal year end from December 31 to a 52 or 53 week fiscal year ending on the Friday closest to December 31, effective
as of the commencement of the Company’s fiscal year beginning January 1, 2021. Unlike prior years, the Company’s fiscal year
can now end subsequent to December 31 if that is the Friday closest to the end of the calendar year. Beginning with the first quarter
of 2021, Atlas and its operating companies closed their quarterly books on the Fridays closest to March 31, June 30, and September 30,
respectively, and will close its fiscal year on the Friday closest to December 31. Had the Company made the change in 2020, the effect
on the Company’s Consolidated Statement of Operations would have been immaterial, however, we would have reported additional debt
repayments, interest payments and preferred stock dividends in the amount of $7.5 million in the six months ended July 2, 2021. These
payments were made at the end of the calendar year ended December 31, 2020 and were appropriately reflected in the financial statements
as of and for the year ended December 31, 2020.
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 July 2, 2021 and December 31, 2020, the allowance
for trade accounts receivable was $2.5 million and $2.2 million, respectively, while the allowance for unbilled receivables was $0.5 million
and $0.4 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 six months ended July 2, 2021 and June 30, 2020.
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 six months ended July 2, 2021 and June 30, 2020.
Revenue Recognition
We adopted ASC Topic 606, Revenue from Contracts
with Customers (“Topic 606”), using the modified retrospective approach to all contracts that were not completed as of the
beginning of fiscal year 2019. We utilize the portfolio method practical expedient, which allows companies to account for multiple contracts
as a portfolio, instead of accounting for them on a contract by contract basis (commonly known as the contract method). For our time and
materials contracts, we apply the as-invoiced practical expedient, which permits us to recognize revenue as the right to invoice for services
performed. The new standard did not materially affect our consolidated net income, financial position, or cash flows.
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 six months ended July 2, 2021 and June 30, 2020, respectively.
Fixed Price Contracts
Under fixed price contracts, the Company’s
clients 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, the Company
will begin 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 without adding new provisions. 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. 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 July 2, 2021 and December 31, 2020, we had
$751 million and $628 million of remaining performance obligations, or backlog, respectively, of which $451 million and $377 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.
Contract Assets and Liabilities
The timing of revenue recognition, billings and
cash collections results in billed receivables, unbilled receivables (contract assets), and billings in excess of costs and estimated
earnings on uncompleted contracts (contract liabilities). Billed and unbilled receivables are reflected on the face of the Consolidated
Balance Sheet. The liability “Billings in excess of costs and estimated earnings on uncompleted contracts” represents billings
in excess of revenues recognized on these contracts as of the reporting date and is reported within “other current liabilities”
on the Consolidated Balance Sheet. This liability was $0 as of July 2, 2021 and December 31, 2020. Revenue recognized that was included
in the contract liability balance at the beginning of the fiscal year was $0 and $32 thousand for the three months ended July 2, 2021
and June 30, 2020, respectively, and $0 and $64 thousand for the six months ended July 2, 2021 and June 30, 2020, respectively.
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 of 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 July 2, 2021 and December 31, 2020 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.
Comprehensive Income
There are no other components of comprehensive
income other than net income and the provision for non-controlling interest associated with Holdings Units.
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.
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, 2020
|
|
$
|
18,200
|
|
Additions for acquisitions
|
|
|
9,993
|
|
Adjustment to liability for changes in fair value
|
|
|
(6,538
|
)
|
Reduction of liability for payment made
|
|
|
(3,706
|
)
|
Total contingent consideration, as of July 2, 2021
|
|
|
17,949
|
|
Current portion of contingent consideration
|
|
|
(8,378
|
)
|
Contingent consideration, less current portion
|
|
$
|
9,571
|
|
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 July 2, 2021, we settled
a portion of the $3.7 million payment with 192,090 shares of Class A common stock.
The Company incurred a non-cash charge of $2.8
million during the three months ended July 2, 2021 to reflect the change in fair value of the contingent consideration liability relating
to an acquisition that had finalized its purchase price allocation.
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.
Consistent with the change in control provisions
within the applicable agreements, the Company fully expensed the remaining unamortized value of the stock awards that vested upon the
completion of the Atlas Business Combination during the quarter ended March 31, 2020.
The Company granted restricted stock units (“RSUs”)
during the second quarters of 2021 and 2020 as a means to reward and retain selected management personnel. Please refer to Note 10 –
Equity Based Compensation for further information.
An additional grant of RSUs was made to a member
of the Company’s leadership team on December 31, 2020.
During the second quarter of 2021, the Company granted certain members
of its leadership team performance share units (“PSUs”) with both performance and market conditions that may affect the ultimate
vesting of shares and also granted to its Board of Directors RSUs during the first quarter of 2021.
Equity compensation was $805 thousand and $190
thousand for the three months ended July 2, 2021 and June 30, 2020, respectively, and $1,251 thousand and $10,035 thousand for the six
months ended July 2, 2021 and June 30, 2020, 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 7 – 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.
Redeemable preferred stock, as of December 31, 2020
|
|
$
|
151,391
|
|
Accrued paid in-kind dividends
|
|
|
1,718
|
|
Accretion of discount
|
|
|
3,077
|
|
Redemption
|
|
|
(156,186
|
)
|
Redeemable preferred stock, as of July 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, FASB issued ASU 2016-02, Leases.
ASU 2016-02 requires lessees to recognize, in the balance sheet, a liability to make lease payments and a right-of-use asset representing
the right to use the underlying asset over the lease term. The amendments in this accounting standard update are to be applied using a
modified retrospective approach and are effective for fiscal years beginning after December 15, 2021. The Company is currently evaluating
the requirements of ASU 2016-02 and its impact on the consolidated and combined financial statements.
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: (i) received 24.0 million shares
of Class B common stock in the Company, (ii) repaid the $171.5 million of outstanding debt and interest accrued and due lender, (iii)
paid $10.9 million of Seller incurred acquisition-related costs, (iv) settled $1.1 million of contingent consideration associated with
the SCST, Inc. acquisition and (v) paid $2.2 million of change in control payments due certain executives. This was paid for with: (i)
$20.7 million of cash raised from special purpose acquisition company (“SPAC”) shareholders and the private placement discussed
herein, (ii) the issuance of redeemable preferred stock in the amount of $141.8 million and (iii) the issuance of new debt in the amount
of $271.0 million as discussed in Note 7 – Long-Term Debt.
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.
In connection with the Company’s entry into
the Atlas Business Combination, the Company agreed to issue and sell in a private placement an aggregate of 1,000,000 shares of Class
A common stock for a purchase price of $10.23 per share, and aggregate consideration of $10.2 million (the “Private Placement”).
The Private Placement was consummated concurrently with the Closing Date and the proceeds of the Private Placement were used to fund a
portion of the consideration paid to the Atlas Intermediate members.
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 February 2020, the Company acquired Long Engineering
LLC (“LONG”), a land surveying and engineering company headquartered in Atlanta, Georgia. The aggregate purchase price consideration
paid in connection with this stock acquisition was $10.7 million in cash, subject to customary closing working capital adjustments plus
an earnout of up to $12.0 million contingent upon the achievement of certain financial targets to be paid upon the first, second and third
anniversaries of the closing.
In September 2020, the Company acquired AltaVista
Solutions (“Alta Vista”), a provider of testing and inspection services primarily to infrastructure clients. Alta Vista is
headquartered in Oakland, California and has offices in California and New York. The purchase agreement called for the Company to pay
Alta Vista up to $15.1 million in the form of cash and stock consideration. The Company issued 776,197 shares of Class B common stock
to the former owners of Alta Vista, which represented $7.0 million of the total consideration paid. 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 November 2020, the Company acquired WesTest
LLC (“WesTest”), a testing and engineering services provider with operations in Colorado and Wyoming. WesTest, headquartered
in Lakewood, Colorado, received consideration of $4.1 million in the form of cash and stock consideration. The Company issued 285,115
shares of Class A common stock to the former owner of WesTest, which represented $1.6 million of the total consideration paid. 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.
On April 14, 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 totalling $24.5 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.
On July 1, 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. 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.
Acquisition costs of approximately $0.7 million
and $0.3 million have been expensed in the three months ended July 2, 2021 and June 30, 2020, respectively, and $1.4 million and $0.6
million for the six months ended July 2, 2021 and June 30, 2020, 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:
|
|
LONG
|
|
|
Alta Vista*
|
|
|
WesTest*
|
|
|
AEL*
|
|
|
O'Neill*
|
|
Cash
|
|
$
|
-
|
|
|
$
|
314
|
|
|
$
|
649
|
|
|
|
2,354
|
|
|
|
1,608
|
|
Accounts receivable
|
|
|
4,994
|
|
|
|
2,786
|
|
|
|
1,072
|
|
|
|
6,026
|
|
|
|
4,201
|
|
Unbilled receivable
|
|
|
-
|
|
|
|
4,258
|
|
|
|
-
|
|
|
|
1,094
|
|
|
|
-
|
|
Property and equipment
|
|
|
1,423
|
|
|
|
306
|
|
|
|
246
|
|
|
|
52
|
|
|
|
349
|
|
Other current and long-term assets
|
|
|
14
|
|
|
|
707
|
|
|
|
2
|
|
|
|
130
|
|
|
|
-
|
|
Intangible assets
|
|
|
7,290
|
|
|
|
4,957
|
|
|
|
1,459
|
|
|
|
13,816
|
|
|
|
22,735
|
|
Liabilities
|
|
|
(1,178
|
)
|
|
|
(2,767
|
)
|
|
|
(304
|
)
|
|
|
(3,066
|
)
|
|
|
(1,555
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets acquired
|
|
$
|
12,543
|
|
|
$
|
10,561
|
|
|
$
|
3,124
|
|
|
|
20,406
|
|
|
|
27,338
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consideration paid (cash and equity consideration)
|
|
$
|
10,748
|
|
|
$
|
15,098
|
|
|
$
|
4,055
|
|
|
$
|
24,502
|
|
|
$
|
24,369
|
|
Contingent earnout liability at fair value (cash)
|
|
|
6,700
|
|
|
|
1,904
|
|
|
|
234
|
|
|
|
5,596
|
|
|
|
4,397
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consideration
|
|
|
17,448
|
|
|
|
17,002
|
|
|
|
4,289
|
|
|
|
30,098
|
|
|
|
28,766
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excess consideration over the amounts assigned to the net assets acquired (goodwill)
|
|
$
|
4,905
|
|
|
$
|
6,441
|
|
|
$
|
1,165
|
|
|
$
|
9,692
|
|
|
$
|
1,428
|
|
*The above purchase price allocation is tentative
and preliminary and subject to further updates as we complete the purchase price allocation.
NOTE 5 – PROPERTY AND EQUIPMENT, NET
The Company depreciates its assets on a straight-line
basis over the assets’ useful lives, which range from 3 to 10 years. Property and equipment consist of the following:
|
|
July 2,
|
|
|
December 31,
|
|
|
Average
|
|
|
|
2021
|
|
|
2020
|
|
|
life
|
|
|
|
|
|
|
|
|
|
|
|
Furniture and fixtures
|
|
$
|
3,869
|
|
|
$
|
3,492
|
|
|
|
3-5 years
|
|
Equipment and vehicles
|
|
|
38,525
|
|
|
|
32,797
|
|
|
|
3-10 years
|
|
Computers
|
|
|
20,050
|
|
|
|
19,649
|
|
|
|
3 years
|
|
Leasehold improvements
|
|
|
5,696
|
|
|
|
5,548
|
|
|
|
3-5 years
|
|
Construction in progress
|
|
|
150
|
|
|
|
130
|
|
|
|
|
|
Less: Accumulated depreciation and amortization
|
|
|
(54,986
|
)
|
|
|
(47,482
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
13,304
|
|
|
$
|
14,134
|
|
|
|
|
|
Property and equipment under capital leases:
|
|
July 2,
|
|
|
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
|
|
Computer equipment
|
|
$
|
1,583
|
|
|
$
|
1,578
|
|
Less accumulated depreciation
|
|
|
(1,277
|
)
|
|
|
(1,021
|
)
|
|
|
$
|
306
|
|
|
$
|
557
|
|
Capital leases for computer equipment have an average
lease term of five years with minimum lease payments as follows:
2021 (six months remaining)
|
|
$
|
183
|
|
2022
|
|
|
365
|
|
2023
|
|
|
281
|
|
2024
|
|
|
99
|
|
2025
|
|
|
19
|
|
Thereafter
|
|
|
-
|
|
|
|
$
|
947
|
|
Depreciation expense was approximately $1.5 and $1.5 million for the
three months ended July 2, 2021 and June 30, 2020, respectively and $2.9 and $2.9 million for the six months ended July 2, 2021 and June
30, 2020, respectively.
NOTE 6 – GOODWILL AND INTANGIBLES
The carrying amount, including changes therein,
of goodwill was as follows:
Balance as of December 31, 2020
|
|
$
|
109,001
|
|
Acquisitions
|
|
|
11,120
|
|
Disposals
|
|
|
-
|
|
Measurement period adjustments
|
|
|
(7,966
|
)
|
Balance as of July 2, 2021
|
|
$
|
112,155
|
|
The Company did not recognize any impairments of
goodwill in the three or six months ended July 2, 2021 or June 30, 2020. The Company completed its valuation analysis for the contingent
consideration related to the LONG acquisition during the quarter ended April 2, 2021 resulting in an adjustment that is included in the
measurement period adjustments noted above.
Intangible assets as of July 2, 2021 and December
31, 2020 consist of the following:
|
|
July 2, 2021
|
|
|
December 31, 2020
|
|
|
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
|
|
$
|
149,917
|
|
|
$
|
(40,062
|
)
|
|
$
|
109,855
|
|
|
$
|
117,185
|
|
|
$
|
(34,214
|
)
|
|
$
|
82,971
|
|
|
|
11.0
|
|
Tradenames
|
|
|
25,580
|
|
|
|
(19,638
|
)
|
|
|
5,942
|
|
|
|
21,761
|
|
|
|
(18,759
|
)
|
|
|
3,002
|
|
|
|
2.5
|
|
Non-competes
|
|
|
600
|
|
|
|
(574
|
)
|
|
|
26
|
|
|
|
600
|
|
|
|
(565
|
)
|
|
|
35
|
|
|
|
0.4
|
|
Total intangibles
|
|
$
|
176,097
|
|
|
$
|
(60,274
|
)
|
|
$
|
115,823
|
|
|
$
|
139,546
|
|
|
$
|
(53,538
|
)
|
|
$
|
86,008
|
|
|
|
|
|
Amortization expense was $3.6 million and $3.8 million for the three
months ended July 2, 2021 and June 30, 2020 respectively, and $ 6.7 million and $7.5 million for the six months ended July 2, 2021 and
June 30, 2020, respectively.
Amortization of intangible assets for the next
five years and thereafter is expected to be as follows:
2021 (six months remaining)
|
|
$
|
7,954
|
|
2022
|
|
|
16,831
|
|
2023
|
|
|
16,309
|
|
2024
|
|
|
15,069
|
|
2025
|
|
|
14,494
|
|
Thereafter
|
|
|
45,166
|
|
|
|
$
|
115,823
|
|
NOTE 7 – LONG-TERM DEBT
In March 2019, subsequent to the merger with ATC
Group Partners (“ATC”), we repaid all outstanding balances on the combined entity’s loan agreements in full and terminated
our prior loan agreements. These loan agreements were replaced with a term loan of $145.0 million and a revolving credit facility of $50.0
million, of which $31.8 million was funded at closing (the “Atlas Credit Facility”). Proceeds of the Atlas Credit Facility
were used to repay existing debt of $123.9 million and fund a shareholder distribution of $52.8 million made in April 2019.
The Atlas Credit Facility was secured by assets
of Atlas Intermediate. The Atlas Credit Facility required quarterly principal payments of $2.719 million through March 31, 2023, and then
$3.625 million until the final maturity in March 2024, and bore interest at an annual rate of LIBOR plus a margin ranging from 275 to
425 basis points determined by the Company’s Consolidated Leverage Ratio, as defined in the Atlas Credit Facility. For the interest
payment made in the quarter ended December 31, 2019, the applicable margin was 375 basis points and the total interest rate was 5.50%.
The Atlas Credit Facility was scheduled to mature
in March 2024. However, in connection with the consummation of the Atlas Business Combination, the Atlas Credit Facility was repaid and
a new credit arrangement (the “Atlas Credit Agreement”) was entered into with Macquarie Capital Funding LLC (the “Lender”
or “Lead Arranger”). The Atlas Credit Agreement called for a term loan (the “Term Loan”) in the amount of $281.0
million and revolving letter of credit (the “Revolver”) in the amount of $40.0 million of which $24.0 million was drawn upon
through December 31, 2020. The term loan proceeds were used to repay the existing Atlas Credit Facility in the amount of $171.0 million
and partially fund the Atlas Business Combination and the LONG acquisition.
Under the terms of the Atlas Credit Agreement,
the Term Loan and Revolver were set to mature on February 14, 2027 and February 14, 2025, respectively. Interest was payable monthly or
at the end of the applicable interest period in arrears on any outstanding borrowings. The interest rates under the Atlas Credit Agreement
were equal to either (i) Adjusted LIBOR as defined in the Atlas Credit Agreement, plus 4.75%, or (ii) an Alternate Base Rate as defined
in the Atlas Credit Agreement, plus 3.75%.
The Atlas Credit Agreement was guaranteed by Holdings
and secured by (i) a first priority pledge of the equity interests of subsidiaries of Holdings and Atlas Intermediate and (ii) a first
priority lien on substantially all other assets of Holdings, Atlas Intermediate and all of their direct and indirect subsidiaries.
On March 31, 2020, the terms of the Atlas Credit
Agreement were modified to reduce the maturity of the Term Loan by one year to February 14, 2026 from February 14, 2027. The interest
rate for the Term Loan was increased to (i) Adjusted LIBOR as defined in the Atlas Credit Agreement, plus 6.25%, or (ii) an Alternate
Base Rate as defined in the Atlas Credit Agreement, plus 5.25%. The interest rate for the Revolver was increased to (i) Adjusted LIBOR
as defined in the Atlas Credit Agreement, plus 5.0%, or (ii) an Alternate Base Rate as defined in the Credit Agreement, plus 4.0%. The
modification also increased the rate of amortization applicable to the Term Loan to 5.0% per annum (commencing on June 30, 2020).
The modifications to the Atlas Credit Agreement
resulted from the exercise of the market-flex rights by the lead arranger in connection with the syndication process, which, in addition,
required the payment of an upfront fee in an amount equal to 2% of the currently outstanding Term Loans, which was paid during April 2020.
The market-flex rights were included in the Atlas Credit Agreement and were exercised by the lead arranger upon completion of the time
period allowed to complete a syndication process.
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 in an aggregate principal
amount of up to $75.0 million 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 $20,000,000
(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.
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 of 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 million.
The Company has been in compliance with the terms
of the Atlas Credit Facility and Atlas Credit Agreement as of July 2, 2021 and December 31, 2020, respectively.
Long-term debt consisted of the following:
|
|
July 2,
2021
|
|
|
December 31,
2020
|
|
Atlas 2021 credit agreement - term loan
|
|
$
|
467,000
|
|
|
$
|
-
|
|
Atlas credit agreement - term loan
|
|
|
-
|
|
|
|
270,463
|
|
Atlas 2021 credit agreement – revolving
|
|
|
17,594
|
|
|
|
-
|
|
Atlas credit agreement – revolving
|
|
|
-
|
|
|
|
24,000
|
|
Atlas 2021 credit agreement – PIK
|
|
|
3,154
|
|
|
|
-
|
|
Subtotal
|
|
|
487,748
|
|
|
|
294,463
|
|
|
|
|
|
|
|
|
|
|
Less: Loan costs, net
|
|
|
(8,145
|
)
|
|
|
(15,443
|
)
|
|
|
|
|
|
|
|
|
|
Less current maturities of long-term debt
|
|
|
-
|
|
|
|
(14,050
|
)
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
479,603
|
|
|
$
|
264,970
|
|
The Company in conjunction with the refinancing
of the Atlas Credit Agreement on February 25, 2021 wrote off $15.2 million of deferred loan acquisition costs that were attributable to
the agreement. The costs deferred as of July 2, 2021 relate to cost incurred with the Atlas 2021 Credit Agreement.
Aggregate long-term principal payments subsequent
to July 2, 2021, are as follows (amounts in thousands):
2021 (six months remaining)
|
|
$
|
-
|
|
2022
|
|
|
3,605
|
|
2023
|
|
|
4,849
|
|
2024
|
|
|
4,897
|
|
2025
|
|
|
4,946
|
|
Thereafter
|
|
|
469,451
|
|
|
|
$
|
487,748
|
|
The 2021 Atlas Credit agreement requires annual
amortization of principal and interest paid in kind amounts of 1% or 2.5% depending on certain ratios. The Company is currently within
the ratio that requires 1% annual amortization. Principal repayments commence during the Company’s second quarter 2022.
NOTE 8- SHAREHOLDERS’ EQUITY
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 and warrants from the December 31, 2020 through July 2, 2021:
|
|
Class A
Common
Stock
|
|
|
Class B
Common
Stock
|
|
|
Warrants
|
|
|
Private
Placement
Warrants
|
|
Beginning Balance, as of December 31, 2020
|
|
|
12,841,584
|
|
|
|
22,438,828
|
|
|
|
-
|
|
|
|
-
|
|
Issuances
|
|
|
1,692,901
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Transfers to Class A from Class B
|
|
|
18,204,505
|
|
|
|
(18,204,505
|
)
|
|
|
-
|
|
|
|
-
|
|
Shares Outstanding at July 2, 2021
|
|
|
32,738,990
|
|
|
|
4,234,323
|
|
|
|
-
|
|
|
|
-
|
|
Class A Common Stock –At July
2, 2021 and December 31, 2020, there were 32,738,990 and 12,841,584 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 July 2, 2021 and December 31, 2020, there were 4,234,323 and 22,438,828
shares of Class B common stock issued and outstanding, respectively. Class B common stock was 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.
The Company is not authorized to issue any shares of Class B common stock with a par value of $0.0001 per share to the general public
but can issue additional shares of Class B common stock to Atlas acquisition targets as part of the consideration paid with the approval
of the Company’s Board.
Public Warrants – In November 2018, the Company consummated its initial public offering
of units, each consisting of one share of Class A common stock and one warrant (each a “Public Warrant”). At the commencement
of the Atlas Business Combination, there were 20,000,000 Public Warrants outstanding. Each Public Warrant entitled the holder to purchase
one share of Class A common stock at a price of $11.50 per share. The Public Warrants were set to expire five years after the closing
of the Atlas Business Combination or earlier upon redemption or liquidation. The Company had the ability to call the Public Warrants for
redemption, in whole and not in part, at a price of $0.01 per warrant with not less than 30 days’ notice provided to the Public
Warrant holders. However, this redemption right could only be exercised if the last sale price of the Class A common stock equaled or
exceeded $18.00 per share for any 20 trading days within a 30-day trading period ending three business days before we send the notice
of redemption to the Public Warrant holders.
In October 2020, the Company offered each holder
of its outstanding warrants, including the Public Warrants and the Private Placement Warrants, the opportunity to exchange their warrants
for shares of the Company’s Class A common stock, par value $0.0001 per share. Each holder was set to receive 0.1665 or 0.185 shares
of Class A common stock in exchange for each outstanding warrant tendered by the holder and exchanged pursuant to the terms of the offer.
The redemption rate was dependent upon whether the warrant holder tendered their warrants prior to the offer deadline. Warrant holders
who tendered their warrants for exchange prior to the expiration of the tender offer period received the 0.185 conversion rate, and any
warrant holders who did not tender their warrants by the appropriate deadline received the 0.1665 conversion rate. The Company concluded
the offer in November 2020 and all warrants were converted to Class A common stock by December 31, 2020.
Private Placement Warrants –
Upon closing of the Boxwood initial public offering, Boxwood Sponsor LLC (the “Sponsor”) purchased an aggregate of 3,750,000
warrants at a price of $1.00 per warrant (the “Private Placement Warrants” and together with the Public Warrants, the “Warrants”).
Each Private Placement Warrant was exercisable for one share of Class A common stock at a price of $11.50. The Private Placement Warrants
were identical to the Public Warrants discussed above, except (i) they would not be redeemable by the Company so long as they were held
by the Sponsor and (ii) they were exercisable by the holders on a cashless basis. Unlike the public warrants, the private placement warrants
were determined to be a liability of the Company while outstanding. The impact of such liability was not material to the Company’s
Consolidated Balance Sheet or Statement of Operations.
In connection with the October 2020 offer to the warrant holders to
exchange their warrants for the Company’s Class A common stock, the Sponsor opted to fully exchange its Private Placement Warrants
for Class A common stock. As of December 31, 2020, there were no remaining Private Placement Warrants issued or outstanding.
Private Placement
In connection with the Company’s entry into
the Contribution Agreement, the Company agreed to issue and sell in a private placement an aggregate of 1,000,000 shares of Class A common
stock for a purchase price of $10.23 per share, and aggregate consideration of $10.2 million (the “Private Placement”). The
Private Placement was consummated concurrently with the Closing Date and the proceeds of the Private Placement were used to fund a portion
of the cash consideration paid to the Unit Holders.
Non-controlling Interest
As of July 2, 2021 and December 31, 2020, 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 88.6% and 36.4%, 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. The holders of our Class B common stock participate in 11.4% and 63.6% as of July 2, 2021 and December 31, 2020, respectively,
of Atlas Intermediate and its subsidiaries. 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.
As holders of our Class B common stock transition
to holders of Class A common stock, we adjust our additional paid in capital and non-controlling interest within our Consolidated Balance
Sheet and the provision for non-controlling interest in our Consolidated Statement of Operations. Holders of Class B common stock may
convert their shares to Class A common stock at their discretion as their contractual lock-ups expire after the Atlas Business Combination.
NOTE 9 – LOSS PER SHARE
The Atlas Business Combination was structured as
a reverse capitalization by which the Company issued stock for the net assets of Atlas Intermediate accompanied by a recapitalization.
Earnings per share is calculated for the Company only for periods after the Atlas Business Combination due to the reverse recapitalization.
(Loss) per share was calculated as follows:
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
Closing Date Through
|
|
|
|
July 2,
2020
|
|
|
June 30,
2020
|
|
|
July 2,
2021
|
|
|
June 30,
2020
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income post Atlas Business Combination
|
|
$
|
(4,783
|
)
|
|
$
|
2,245
|
|
|
$
|
(19,574
|
)
|
|
$
|
(277
|
)
|
Provision for non-controlling interest
|
|
|
617
|
|
|
|
1,881
|
|
|
|
12,786
|
|
|
|
5,141
|
|
Redeemable preferred stock dividends
|
|
|
-
|
|
|
|
(4,533
|
)
|
|
|
(5,899
|
)
|
|
|
(6,777
|
)
|
Net (loss) attributable to Class A common shares - basic and diluted
|
|
$
|
(4,166
|
)
|
|
$
|
(407
|
)
|
|
$
|
(12,687
|
)
|
|
$
|
(1,913
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding - basic and diluted
|
|
|
30,633,366
|
|
|
|
5,767,342
|
|
|
|
22,400,179
|
|
|
|
5,767,342
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) per Class A common share, basic and diluted
|
|
$
|
(0.14
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
(0.57
|
)
|
|
$
|
(0.33
|
)
|
The Company had the following shares that were
excluded from the computation of diluted earnings per share because their inclusion would have been anti-dilutive for the periods presented
but could potentially dilute basic earnings per share in future periods:
|
|
Three Months Ended June 30,
2020
|
|
|
Closing Date Through June 30,
2020
|
|
Public warrants
|
|
|
20,000,000
|
|
|
|
20,000,000
|
|
Private placement warrants
|
|
|
3,750,000
|
|
|
|
3,750,000
|
|
Total
|
|
|
23,750,000
|
|
|
|
23,750,000
|
|
The Company retired the warrants, both public and
private placement, via tender offer that concluded in November 2020 and as such is not presenting information for the three or six months
ended July 2, 2021.
NOTE 10 – EQUITY BASED COMPENSATION
In December 2017, Atlas Intermediate’s Parent
granted service-based Class A units to certain members of Atlas’ management. As of December 31, 2017, 1,000 units were authorized
and reserved for issuance with 504 granted in December 2017. The Class A units granted provide for service-based vesting annually over
4 years from the grant date.
In April 2019, Atlas Intermediate’s Parent
granted service-based Class A units to certain members of Atlas’ management. As of January 1, 2019, 1,666 units were authorized
and reserved for issuance with 973.65 units granted as of December 31, 2019. The Class A units granted provide for service-based
vesting annually over 4 years from the grant date. The grant date fair value was determined using assumptions about the current waterfall
expected payout.
In connection with the Atlas Business Combination,
the outstanding shares were vested under the change of control provisions within the agreements. The shares are currently reflected as
Class B Common Shares and may be converted to Class A Common Shares as the lock-up agreements expire.
During the second quarters of 2021 and 2020, the
Company awarded 378,353 and 510,136 restricted share units (“RSUs”) to approximately ninety employees at a grant day fair
market value of $11.42 and $8.95 per share, respectively. The Company estimates the fair value of the RSUs as the closing price of the
Company’s Class A common stock on the grant date of the award, which is expensed over the applicable vesting period. The vesting
period for these RSUs is equal annual tranches, pro-ratably over three years, and there is no performance requirement attached to the
RSUs other than continued service to the Company. During the three months ended July 2, 2021, 158,977 of the shares granted in 2020 vested
and 11,602 shares were forfeited.
On January 29, 2021, the Company granted to a member
of its executive team 75,000 RSUs of the Company’s Class A common stock, par value $0.0001, retroactive to December 31, 2020. The
value of these RSUs approximated $0.5 million and is set to cliff vest on December 31, 2022.
On March 3, 2021, the Company granted to its Board of Directors 60,921
RSUs with a one year vesting period and a grant date fair market value of $9.00 per share. There are no performance requirements to these
RSUs other than continued service to the Company throughout the one-year vesting period.
During the second quarter of 2021, the Company
also awarded 182,763 performance share units (“PSUs”) to its leadership team. The PSUs have both performance and market conditions
that are required to be met in order for the shares to vest. The split between performance and market conditions is approximately 66.7%
and 33.3%, respectively. If the conditions are met, the shares will cliff vest on the third anniversary of the award date. The Company
has accounted for the portion of the award tied to the achievement of performance conditions based upon share price of $11.38 on the date
of issuance and the probable number of shares anticipated to vest and accounted for the shares tied to market conditions based upon the
fair market value as calculated in a Monte Carlo simulation. The Company will assess the probability of the performance conditions being
achieved each quarter and adjust recorded stock compensation expense as appropriate.
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.
Equity compensation was $805 thousand and $190
thousand for the three months ended July 2, 2021 and June 30, 2020, respectively, and $1,251 thousand and $10,035 thousand for the six
months ended July 2, 2021 and June 30, 2020, respectively.
NOTE 11 – RELATED-PARTY TRANSACTIONS
During the six months ended July 2, 2021 and June
30, 2020, the Company leased office space 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 $244 thousand and $160 thousand
for the three months ended July 2, 2021 and June 30, 2020, respectively, and $400 thousand and $322 thousand for the six months ended
July 2, 2021 and June 30, 2020, respectively.
During the three months ended July 2, 2021 and
June 30, 2020, 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 $14 thousand and $73 thousand, respectively Related party revenues were
$55 thousand and $126 thousand for the six months ended July 2, 2021 and June 30, 2020, respectively.
On February 3, 2020, the Company entered into a
subscription agreement with SCST, Inc., a California corporation, pursuant to which it agreed to acquire 105,977 shares of Class A common
stock (the “SCST Stock”), for an aggregate purchase price of $1.1 million, in a private placement not registered under the
Securities Act, in reliance on the exemption from Registration provided by Section 4(a)(2) of the Securities Act and/or Regulation D promulgated
thereunder. The issuance of the SCST Stock was completed in connection with the Atlas Business Combination and served to settle the contingent
consideration to them as of December 31, 2019.
On February 14, 2020, the Company entered into
a non-interest bearing short-term loan with the former owners of Atlas Intermediate to purchase insurance contracts in the amount of $1.4
million. The loan has not been repaid as of the date of these financial statements and is accounted for in Accrued Liabilities within
the Consolidated Balance Sheet. This was repaid during the quarter ended June 30, 2020.
NOTE 12 — 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 $1.6 and $1.8 million for the three months ended
July 2, 2021 and June 30, 2020, respectively, and $3.4 million, and $3.1 million for the six months ended July 2, 2021 and June 30, 2020,
respectively.
NOTE 13 – 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.
The Company leases office space, laboratory facilities,
and automobiles under operating lease agreements and has options to renew most leases. These leases expire at varying dates through 2025.
The Company also rents equipment on a job-by-job basis.
Future minimum payments under non-cancelable operating
leases as of July 2, 2021 are as follows:
2021 (six months remaining)
|
|
$
|
7,813
|
|
2022
|
|
|
12,685
|
|
2023
|
|
|
9,975
|
|
2024
|
|
|
5,805
|
|
2025
|
|
|
3,143
|
|
Thereafter
|
|
|
3,162
|
|
|
|
$
|
42,583
|
|
Rental expense associated with facility and equipment operating leases
for the three months ended July 2, 2021 and June 30, 2020 was $3.3 million and $3.2 million, respectively, and $6.3 million and $6.3 million
for the six months ended July 2, 2021 and June 30, 2020, respectively.
NOTE 14 – COVID-19 PANDEMIC
In the first quarter of 2020, the COVID-19 outbreak
spread quickly across the globe. Federal, state and local governments mobilized to implement containment mechanisms and minimize impacts
to their populations and economies. Various containment measures, which included stay-at-home orders and restrictions on the operations
of businesses, while aiding in the prevention of further outbreak, have resulted in a severe drop in general economic activity, volatility
in the financial markets and an economic downturn.
As a result, there have been three financial responses
from the U.S. government, in addition to interest rate cuts by the U.S. Federal Reserve Board which were initially implemented to stabilize
the U.S. stock markets. The federal government’s stimulus legislation related to COVID-19 include: the Coronavirus Preparedness
and Response Supplemental Appropriations Act of 2020, the Families First Coronavirus Response Act, and the Coronavirus Aid,
Relief and Economic Security (CARES) Act of 2020 (the “CARES Act”).
In connection with the CARES Act, we have opted to defer the
deposit and payment of the employer’s share of Social Security taxes. Under the CARES Act, deferrals are currently allowed
from March 27, 2020 through December 31, 2020. The Company has not received any other assistance under the CARES Act, nor does
the Company expect to realize any other tax benefits from the program. As of July 2, 2021 and December 31, 2020, the Company has deferred
payment of $8.1 million relating to its share of Social Security taxes and $4.0 million of this liability is recorded within other long-term
liabilities on its Consolidated Balance Sheet. The remainder is recorded in Accrued Liabilities within the Company’s Consolidated
Balance Sheet. The Company has not deferred any additional tax payments subsequent to December 31, 2020.
During the second quarter of 2020, we reduced our
workforce through various actions. We routinely assess our staffing levels to make certain that we continue to appropriately service our
clients and maintain shareholder value. As a safety focused organization, since the outbreak of COVID-19 and continuing throughout the
remainder of 2020, we encouraged our employees to work from home wherever possible and to honor all shelter-in-place rules put forth by
their state or local governments. As shelter-in-place rules have been lifted and vaccination efforts are rolled out to the general public,
we have allowed our employees to return to our offices when it has been safe to do so and have begun to rehire additional staff.
We continue to monitor the credit quality and access
to capital for our non-governmental clients as this can be an indication of their ability to go forth with future projects and continue
to pay for contracted services. As an infrastructure company, the work we do is currently deemed essential by Federal, State and local
governments but any change from that designation could have a negative result on our business as well as our peers.
We are in compliance with our debt covenants as
of July 2, 2021 and we expect that we will continue to be for the foreseeable future.
NOTE 15 – INCOME TAXES
Following the consummation of the Atlas Business
Combination, we are 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 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 with the exception of 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 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 (3.8%) and 0.0% for the three months ending July 2, 2021 and June 30, 2020, respectively, and (1.2%) and 0.0% for the six months ended
July 2, 2021 and June 30, 2020, respectively. Reconciliation between the amount determined by applying the U.S. federal income tax rate
of 21% to pre-tax income from continuing operations and income tax expense is attributable to changes in our mix of pre-tax losses/earnings,
the effect of non-controlling interest in income of consolidated subsidiaries, non-deductible transaction costs and changes in our valuation
allowance.
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 July 2, 2021 or December 31, 2020. 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 July 2, 2021 or December 31, 2020.