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 3,550 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 nine months ended October 1, 2021 or September 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 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 nine months ended September 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 after 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 nine months ended October
1, 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 October 1, 2021 and December 31, 2020, the
allowance for trade accounts receivable was $2.9 million and $2.2 million, respectively, while the allowance for unbilled receivables
was $0.6 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 nine months ended October 1, 2021 and September 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 nine months ended October 1, 2021 and September 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 nine months ended October 1, 2021 and September
30, 2020, 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 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 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 October 1, 2021 and December 31, 2020, we
had $757 million and $628 million of remaining performance obligations, or backlog, respectively, of which $454 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 October 1, 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 October 1, 2021 and September 30, 2020, respectively, and $0 and $96 thousand for the six months ended October
1, 2021 and September 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 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 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 October 1, 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 value 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
|
|
|
12,064
|
|
Adjustment to liability for changes in fair value
|
|
|
(212
|
)
|
Reduction of liability for payment made
|
|
|
(3,706
|
)
|
Total contingent consideration, as of October 1, 2021
|
|
|
26,346
|
|
Current portion of contingent consideration
|
|
|
(15,031
|
)
|
Contingent consideration, less current portion
|
|
$
|
11,315
|
|
The Company may at its discretion settle the contingent
consideration with cash, common shares or a combination of cash and common shares. During the nine months ended October 1, 2021, we settled
a portion of the $3.7 million payment with 192,090 shares of Class A common stock.
The Company incurred non-cash charges of $0 and
$2.8 million during the three months and nine months ended October 1, 2021, respectively, to reflect the changes 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 unamortized value of the stock awards at the time of the
Atlas Business Combination was $9,845 thousand.
The Company granted restricted stock units (“RSUs”)
during the second quarters of 2021 and 2020 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 granted to its Board of Directors RSUs during the first quarter of 2021.
During
the third quarter of 2021, the Company granted its Chief Executive Officer, Chief Financial Officer and Chief Strategy Officer stock
options with market conditions that may affect their ultimate vesting.
Equity compensation was $1,203 thousand and $380
thousand for the three months ended October 1, 2021 and September 30, 2020, respectively, and $2,454 thousand and $10,415 thousand for
the nine months ended October 1, 2021 and September 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 October 1, 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 after 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.
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 totaling $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 $0.5 million and $0 million have been expensed in the three months ended October 1, 2021 and September 30, 2020,
respectively, and $1.9 million and $0.6 million for the nine months ended October 1, 2021 and September 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
|
)
|
|
|
(3,517
|
)
|
|
|
(304
|
)
|
|
|
(3,065
|
)
|
|
|
(1,546
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets acquired
|
|
$
|
12,543
|
|
|
$
|
9,811
|
|
|
$
|
3,124
|
|
|
|
20,407
|
|
|
|
27,347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
8,064
|
|
|
|
400
|
|
|
|
6,618
|
|
|
|
5,446
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consideration
|
|
|
17,448
|
|
|
|
23,162
|
|
|
|
4,455
|
|
|
|
31,120
|
|
|
|
29,815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excess consideration over the amounts assigned to the net assets acquired (goodwill)
|
|
$
|
4,905
|
|
|
$
|
13,351
|
|
|
$
|
1,331
|
|
|
$
|
10,713
|
|
|
$
|
2,468
|
|
*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:
|
|
October 1,
|
|
|
December 31,
|
|
|
Average
|
|
|
|
2021
|
|
|
2020
|
|
|
life
|
|
|
|
|
|
|
|
|
|
|
|
Furniture and fixtures
|
|
$
|
3,891
|
|
|
$
|
3,492
|
|
|
|
3-5 years
|
|
Equipment and vehicles
|
|
|
38,903
|
|
|
|
32,797
|
|
|
|
3-10 years
|
|
Computers
|
|
|
20,287
|
|
|
|
19,649
|
|
|
|
3 years
|
|
Leasehold improvements
|
|
|
5,757
|
|
|
|
5,548
|
|
|
|
3-5 years
|
|
Construction in progress
|
|
|
453
|
|
|
|
130
|
|
|
|
|
|
Less: Accumulated depreciation and amortization
|
|
|
(56,232
|
)
|
|
|
(47,482
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
13,059
|
|
|
$
|
14,134
|
|
|
|
|
|
Property
and equipment under capital leases:
|
|
October 1,
|
|
|
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
|
|
Computer equipment
|
|
$
|
1,583
|
|
|
$
|
1,578
|
|
Less accumulated depreciation
|
|
|
(1,334
|
)
|
|
|
(1,021
|
)
|
|
|
$
|
249
|
|
|
$
|
557
|
|
Capital
leases for computer equipment have an average lease term of five years with minimum lease payments as follows:
2021 (three months remaining)
|
$
|
91
|
|
2022
|
|
365
|
|
2023
|
|
281
|
|
2024
|
|
99
|
|
2025
|
|
19
|
|
Thereafter
|
|
-
|
|
|
$
|
855
|
|
Depreciation expense was approximately $1.2 and
$1.3 million for the three months ended October 1, 2021 and September 30, 2020, respectively and $4.1 and $4.2 million for the nine months
ended October 1, 2021 and September 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
|
|
|
13,181
|
|
Disposals
|
|
|
-
|
|
Measurement period adjustments
|
|
|
(891
|
)
|
Balance as of October 1, 2021
|
|
$
|
121,291
|
|
The
Company did not recognize any impairments of goodwill in the three or nine months ended October 1, 2021 or September 30, 2020. The Company
completed its valuation analysis for the contingent consideration related to the LONG and Alta Vista acquisitions during the quarters
ended April 2, 2021 and October 1, 2021, respectively, resulting in an adjustment that is included in the measurement period adjustments
noted above.
Intangible
assets as of October 1, 2021 and December 31, 2020 consist of the following:
|
|
October 1, 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
|
|
|
$
|
(43,686
|
)
|
|
$
|
106,231
|
|
|
$
|
117,185
|
|
|
$
|
(34,214
|
)
|
|
$
|
82,971
|
|
|
|
11.0
|
|
Tradenames
|
|
|
25,580
|
|
|
|
(20,218
|
)
|
|
|
5,362
|
|
|
|
21,761
|
|
|
|
(18,759
|
)
|
|
|
3,002
|
|
|
|
2.5
|
|
Non-competes
|
|
|
600
|
|
|
|
(578
|
)
|
|
|
22
|
|
|
|
600
|
|
|
|
(565
|
)
|
|
|
35
|
|
|
|
0.4
|
|
Total intangibles
|
|
$
|
176,097
|
|
|
$
|
(64,482
|
)
|
|
$
|
111,615
|
|
|
$
|
139,546
|
|
|
$
|
(53,538
|
)
|
|
$
|
86,008
|
|
|
|
|
|
Amortization
expense was $4.2 million and $3.8 million for the three months ended October 1, 2021 and September 30, 2020 respectively, and $10.9 million
and $11.3 million for the nine months ended October 1, 2021 and September 30, 2020, respectively.
Amortization
of intangible assets for the next five years and thereafter is expected to be as follows:
2021 (three months remaining)
|
|
$
|
3,746
|
|
2022
|
|
|
16,831
|
|
2023
|
|
|
16,309
|
|
2024
|
|
|
15,069
|
|
2025
|
|
|
14,494
|
|
Thereafter
|
|
|
45,166
|
|
|
|
$
|
111,615
|
|
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 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 within 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, 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 $35
million has been used and $40 million remains available as of October 1, 2021, 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 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 October 1, 2021 and December
31, 2020, respectively.
Long-term
debt consisted of the following:
|
|
October 1,
2021
|
|
|
December 31,
2020
|
|
Atlas 2021 credit agreement - term loan
|
|
$
|
467,000
|
|
|
$
|
-
|
|
Atlas credit agreement - term loan
|
|
|
-
|
|
|
|
270,463
|
|
Atlas 2021 credit agreement – revolving
|
|
|
17,917
|
|
|
|
-
|
|
Atlas credit agreement – revolving
|
|
|
-
|
|
|
|
24,000
|
|
Atlas 2021 credit agreement – PIK
|
|
|
5,536
|
|
|
|
-
|
|
Subtotal
|
|
|
490,453
|
|
|
|
294,463
|
|
|
|
|
|
|
|
|
|
|
Less: Loan costs, net
|
|
|
(7,868
|
)
|
|
|
(15,443
|
)
|
|
|
|
|
|
|
|
|
|
Less current maturities of long-term debt
|
|
|
(2,401
|
)
|
|
|
(14,050
|
)
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
480,184
|
|
|
$
|
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 October 1, 2021 relate to cost incurred with the
Atlas 2021 Credit Agreement.
Aggregate
long-term principal payments subsequent to October 1, 2021, are as follows (amounts in thousands):
2021 (three months remaining)
|
|
$
|
-
|
|
2022
|
|
|
3,606
|
|
2023
|
|
|
4,851
|
|
2024
|
|
|
4,899
|
|
2025
|
|
|
4,948
|
|
Thereafter
|
|
|
472,149
|
|
|
|
$
|
490,453
|
|
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 October 1, 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
|
|
|
19,085,727
|
|
|
|
(19,085,727
|
)
|
|
|
-
|
|
|
|
-
|
|
Shares Outstanding at October 1, 2021
|
|
|
33,620,212
|
|
|
|
3,353,101
|
|
|
|
-
|
|
|
|
-
|
|
Class
A Common Stock –At October 1, 2021 and December 31, 2020, there were 33,620,212 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 October
1, 2021 and December 31, 2020, there were 3,353,101 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 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 October 1, 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 90.9% 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 9.1% and 63.6%
as of October 1, 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 lockups 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
|
|
|
Nine Months
Ended
|
|
|
Closing Date
Through
|
|
|
|
October 1,
2021
|
|
|
September 30,
2020
|
|
|
October 1,
2021
|
|
|
September 30,
2020
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income post Atlas Business Combination
|
|
$
|
(2,526
|
)
|
|
$
|
561
|
|
|
$
|
(22,100
|
)
|
|
$
|
284
|
|
Provision for non-controlling interest
|
|
|
233
|
|
|
|
3,003
|
|
|
|
13,019
|
|
|
|
8,144
|
|
Redeemable preferred stock dividends
|
|
|
-
|
|
|
|
(4,501
|
)
|
|
|
(5,899
|
)
|
|
|
(11,278
|
)
|
Net (loss) attributable to Class A common shares - basic and diluted
|
|
$
|
(2,293
|
)
|
|
$
|
(937
|
)
|
|
$
|
(14,980
|
)
|
|
$
|
(2,850
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding - basic and diluted
|
|
|
32,826,431
|
|
|
|
5,774,882
|
|
|
|
25,862,913
|
|
|
|
5,770,411
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) per Class A common share, basic and diluted
|
|
$
|
(0.07
|
)
|
|
$
|
(0.16
|
)
|
|
$
|
(0.58
|
)
|
|
$
|
(0.49
|
)
|
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
September 30,
2020
|
|
|
Closing Date Through
September 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 nine months ended October 1, 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 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.
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 options 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
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 $1,203 thousand and $380 thousand for the three months ended October 1, 2021 and September 30, 2020, respectively, and
$2,454 thousand and $10,415 thousand for the nine months ended October 1, 2021 and September 30, 2020, respectively.
NOTE
11 – RELATED-PARTY TRANSACTIONS
During the nine months ended October 1, 2021 and
September 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 $201 thousand
and $161 thousand for the three months ended October 1, 2021 and September 30, 2020, respectively, and $601 thousand and $483 thousand
for the nine months ended October 1, 2021 and September 30, 2020, respectively.
During
the three months ended October 1, 2021 and September 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 $26 thousand and $135 thousand,
respectively Related party revenues were $91 thousand and $261 thousand for the nine months ended October 1, 2021 and September 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 $1.8 and $1.6 million for the three months ended October 1, 2021 and September 30, 2020, respectively, and $5.2 million, and $4.7
million for the nine months ended October 1, 2021 and September 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 October 1, 2021 are as follows:
2021 (three months remaining)
|
|
$
|
3,907
|
|
2022
|
|
|
12,685
|
|
2023
|
|
|
9,975
|
|
2024
|
|
|
5,805
|
|
2025
|
|
|
3,143
|
|
Thereafter
|
|
|
3,162
|
|
|
|
$
|
38,677
|
|
Rental
expense associated with facility and equipment operating leases for the three months ended October 1, 2021 and September 30, 2020 was
$3.2 million and $3.3 million, respectively, and $9.5 million and $9.6 million for the nine months ended October 1, 2021 and September
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 October 1, 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 after 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 assessing the
impact that proposed Federal vaccination mandates may have on our ability to service our clients as well as our retention (and potential
recruitment) of our employees.
We
are in compliance with our debt covenants as of October 1, 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 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 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 (19.3%) and 0.0%
for the three months ending October 1, 2021 and September 30, 2020, respectively, and (3.0%) and 0.0% for the nine months ended October
1, 2021 and September 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 October 1, 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 October 1, 2021 or
December 31, 2020.