UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
For
the quarterly period ended
OR
For the transition period from to
Commission File Number:
(Exact name of registrant as specified in its charter)
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Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| Warrants, each exercisable for one share of Class A common stock | ATCXW | Nasdaq Stock Market LLC |
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant
to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | ☒ | |
| Non-accelerated filer | ☐ | Smaller reporting company | |
| Emerging growth company |
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
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by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
As
of August 10, 2020,
ATLAS TECHNICAL CONSULTANTS, INC.
Form 10-Q
For the Three and Six Months Ended June 30, 2020
TABLE OF CONTENTS
| i |
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
The statements contained in this Form 10-Q for the period ended June 30, 2020 ( the “Quarterly Report”) of Atlas Technical Consultants, Inc. (the “Company”) on Form 10-Q that are not purely historical are forward-looking statements and involve a number of risks and uncertainties. Our forward-looking statements include, but are not limited to, statements regarding our or our management team’s expectations, hopes, beliefs, intentions or strategies regarding the future. In addition, any statements that refer to projections, forecasts or other characterizations of future events or circumstances, including any underlying assumptions and estimates, are forward-looking statements. The words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intends,” “may,” “might,” “plan,” “possible,” “potential,” “predict,” “project,” “should,” “would” and variations of such words and similar expressions may identify forward- looking statements, but the absence of these words does not mean that a statement is not forward-looking. The forward-looking statements contained in this Quarterly Report are based on our expectations and beliefs as of the date of this filing concerning future developments and their potential effects on us. There can be no assurance that future developments affecting us will be those that we have anticipated. These forward- looking statements involve a number of risks, uncertainties (some of which are beyond our control) or other assumptions or estimates that may cause actual results or performance to be materially different from those expressed or implied by these forward-looking statements.
These risks and uncertainties include, but are not limited to, those described throughout this report, our annual report on Form 10-K for the year ended December 31, 2019 and filed with the Securities and Exchange Commission (“SEC”) on March, 16, 2020, and our quarterly report on Form 10-Q for the period ended March 31, 2020 and filed with the SEC on May 11, 2020, particularly the “Risk Factors” sections of such reports and the factors described below:
| ● | the effect, impact, potential duration or other implications of the novel coronavirus 2019 (“COVID-19”) pandemic and any expectations we may have with respect thereto; |
| ● | the adequacy of our efforts to mitigate cyber security risks and threats, especially with employees working remotely due to the COVID-19 pandemic; |
| ● | the ability to maintain the listing of our Class A common stock on NASDAQ following the Atlas Business Combination; |
| ● | our ability to raise financing in the future; |
| ● | our success in retaining or recruiting, or changes required in, our officers, key employees or directors; |
| ● | our officers and directors allocating their time to other businesses and potentially having conflicts of interest with our business; |
| ● | our public securities’ potential liquidity and trading; |
| ● | changes adversely affecting the business in which we are engaged; |
| ● | the risks associated with cyclical demand for our services and vulnerability to industry downturns and regional national downturns; |
| ● | fluctuations in our revenue and operating results; |
| ● | unfavorable conditions or further disruptions in the capital and credit markets; |
| ii |
| ● | our ability to generate cash, service indebtedness and incur additional indebtedness; |
| ● | competition from existing and new competitors; |
| ● | our ability to integrate any businesses we acquire and achieve projected synergies; |
| ● | the impact of potential information technology or data security breaches or other cyber-attacks or other disruptions; |
| ● | our failure to maintain appropriate internal controls over financial reporting and disclosure controls and procedures; |
| ● | our ability to recruit and retain qualified personnel; |
| ● | risks related to legal proceedings or claims, including liability claims; |
| ● | our dependence on third-party contractors to provide various services; |
| ● | our ability to obtain additional capital on commercially reasonable terms; |
| ● | safety and environmental requirements and governmental regulations that may subject us to unanticipated liabilities; and |
| ● | general economic conditions. |
Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. Readers are urged to carefully review and consider the various disclosures made in this Form 10-Q and in other documents we file from time to time with the SEC that disclose risks and uncertainties that may affect our business. Unless specifically indicated otherwise, the forward looking statements in this Form 10-Q do not reflect the potential impact of any divestitures, mergers, acquisitions, or other business combinations that have not been completed as of the date of this filing. In addition, the forward-looking statements in this Form 10-Q are made as of the date of this filing, including expectations based on third-party information and projections that management believes to be reputable, and the Company does not undertake, and expressly disclaims any duty, to update such statements, whether as a result of new information, new developments, or otherwise, except to the extent that disclosure may be required by law.
| iii |
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ATLAS TECHNICAL CONSULTANTS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
| June 30, | December 31, | |||||||
| 2020 | 2019 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and equivalents | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Unbilled receivables, net | ||||||||
| Prepaid expenses | ||||||||
| Other current assets | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Intangible assets, net | ||||||||
| Goodwill | ||||||||
| Other long-term assets | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES, REDEEMABLE PREFERRED STOCK, SHAREHOLDERS’ EQUITY AND MEMBERS’ CAPITAL | ||||||||
| Current liabilities: | ||||||||
| Trade accounts payable | $ | $ | ||||||
| Accrued liabilities | ||||||||
| Current maturities of long-term debt | ||||||||
| Other current liabilities | ||||||||
| Total current liabilities | ||||||||
| Long-term debt, net of current maturities and loan costs | ||||||||
| Other long-term liabilities | ||||||||
| Total liabilities | ||||||||
| COMMITMENTS AND CONTINGENCIES (NOTE 14) | ||||||||
| Redeemable preferred stock | ||||||||
| Members’ Capital | ||||||||
| Class A common stock, $ | ||||||||
| Additional paid in capital | ( | ) | ||||||
| Non-controlling interest | ( | ) | ||||||
| Retained (deficit) | ( | ) | ||||||
| Total shareholders’ equity/members’ capital | ( | ) | ||||||
| TOTAL LIABILITIES, REDEEMABLE PREFERRED STOCK. SHAREHOLDERS’ EQUITY AND MEMBERS’ CAPITAL | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
1
ATLAS TECHNICAL CONSULTANTS, INC. AND SUBSIDIARIES
UNAUDITED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Revenues | $ | $ | $ | $ | ||||||||||||
| Cost of revenues | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Operating expenses | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Operating income (loss) | ( | ) | ||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income (expense) | ( | ) | ( | ) | ||||||||||||
| Income (loss) before income taxes | ( | ) | ||||||||||||||
| Income tax expense | ( | ) | ( | ) | ||||||||||||
| Net income (loss) from continuing operations | ( | ) | ||||||||||||||
| Loss from discontinued operations | ( | ) | ( | ) | ||||||||||||
| Net income (loss) | ( | ) | ||||||||||||||
| Provision for non-controlling interest | ||||||||||||||||
| Redeemable preferred stock dividends | ( | ) | ( | ) | ||||||||||||
| Net (loss) income attributable to Class A common stock shareholders/members | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
| (Loss) Per Class A Common Share | $ | ( | ) | $ | ( | ) | ||||||||||
| Weighted average of shares outstanding: | ||||||||||||||||
| Class A common shares (basic and diluted) | ||||||||||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
2
ATLAS TECHNICAL CONSULTANTS, INC. AND SUBSIDIARIES
UNAUDITED STATEMENTS OF CASH FLOWS
(in thousands)
| For the six months ended June 30, | ||||||||
| 2020 | 2019 | |||||||
| Cash flows from operating activities: | ||||||||
| Net (loss) income | $ | ( | ) | $ | ||||
| Adjustments to reconcile net income to net cash (used in) provided by operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Equity based compensation expense | ||||||||
| (Gain) on sale of property and equipment | ( | ) | ( | ) | ||||
| Write-off of deferred financing costs related to debt extinguishment | ||||||||
| Amortization of deferred financing costs | ||||||||
| Provision for bad debts | ||||||||
| Changes in assets & liabilities: | ||||||||
| Decrease (increase) in accounts receivable and unbilled receivable | ( | ) | ||||||
| Decrease (increase) in prepaid expenses | ( | ) | ||||||
| (Increase) decrease in other current assets | ( | ) | ||||||
| (Decrease) in trade accounts payable | ( | ) | ( | ) | ||||
| (Decrease) in accrued liabilities | ( | ) | ( | ) | ||||
| (Decrease) in other current and long-term liabilities | ( | ) | ( | ) | ||||
| (Increase) in other long-term assets | ( | ) | ( | ) | ||||
| Net cash (used in) provided by operating activities | ( | ) | ||||||
| Cash flows from investing activities: | ||||||||
| Purchases of property and equipment | ( | ) | ( | ) | ||||
| Proceeds from disposal of property and equipment | ||||||||
| Purchase of business, net of cash acquired | ( | ) | ||||||
| Net cash (used in) investing activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from issuance of debt | ||||||||
| Payment of loan acquisition costs | ( | ) | ||||||
| Repayments of debt | ( | ) | ( | ) | ||||
| Proceeds from issuance of redeemable preferred stock | ||||||||
| Payments of redeemable preferred stock dividends | ( | ) | ||||||
| Issuance of common stock | ||||||||
| Member distributions | ( | ) | ( | ) | ||||
| Payment to shareholders associated with Atlas Business Combination | ( | ) | ||||||
| Payment of contingent earn-out | ( | ) | ||||||
| Net cash provided by financing activities | ||||||||
| Net change in cash and equivalents | ( | ) | ||||||
| Cash and equivalents - beginning of period | ||||||||
| Cash and equivalents - end of period | $ | $ | ||||||
| Supplemental information: | ||||||||
| Cash paid during the period for: | ||||||||
| Interest | $ | $ | ||||||
| Taxes | ||||||||
| Capital assets financed | ||||||||
| Contingent consideration share settled | ||||||||
| Dividends due on redeemable preferred stock | ||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
3
ATLAS TECHNICAL CONSULTANTS, INC. AND SUBSIDIARIES
UNAUDITED STATEMENTS OF SHAREHOLDERS’ EQUITY AND MEMBERS’ CAPITAL
(in thousands)
| Consolidated Statement of Shareholders’ Equity and Members’ Capital | ||||||||||||||||||||||||||||||||||||
| Class A Common Stock | Class B Common Stock | Additional Paid in | Members’ | Non- Controlling | Retained | Total Shareholders’ | ||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Capital | Interests | Earnings | Equity | ||||||||||||||||||||||||||||
| Balance at December 31, 2018 | ||||||||||||||||||||||||||||||||||||
| Member distributions | ||||||||||||||||||||||||||||||||||||
| Equity based compensation | ||||||||||||||||||||||||||||||||||||
| Net income | ||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2019 | ||||||||||||||||||||||||||||||||||||
| Member distributions | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Equity based compensation | ||||||||||||||||||||||||||||||||||||
| Net income | ||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2019 | ||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2019 | ||||||||||||||||||||||||||||||||||||
| Member distributions | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Equity based compensation | ||||||||||||||||||||||||||||||||||||
| Net (loss) prior to Atlas Business Combination | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Recapitalization in connection with Atlas Business Combination | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Net (loss) post Atlas Business Combination | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Dividends on redeemable preferred stock | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Balance at March 31, 2020 | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Equity based compensation | ||||||||||||||||||||||||||||||||||||
| Net income | ||||||||||||||||||||||||||||||||||||
| Dividends on redeemable preferred stock | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Balance at June 30, 2020 | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
4
ATLAS TECHNICAL CONSULTANTS, INC. AND SUBSIDIARIES
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
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 more than 135 offices in 41 states and employs more than 3,200 employees and is headquartered in Austin, Texas.
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.
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 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.
5
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, 2019 included in our Annual Report on Form 10-K that the Company filed with the SEC on March 16, 2020 and Form 8-K/A filed with the SEC on March 16, 2020.
Emerging Growth Company
The Company is an “emerging growth company,” as defined in Section 2(a) of the Securities Act, 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.
Fiscal Year
The Company’s subsidiaries report the results of operations based on 52 or 53-week periods ending on the Friday nearest December 31 while Atlas reports on a calendar year end. For clarity of presentation, all periods are presented as if the year ended on December 31. During each quarter, our subsidiaries will close on the Friday closest to March 31, June 30, and September 30 and Atlas will close on the actual calendar day. The impact of the difference between these dates was insignificant. The Company has appropriately eliminated all transactions between itself and its subsidiaries when presenting its balance sheet.
6
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. As
of June 30, 2020 and December 31, 2019, the allowance for trade accounts receivable was $
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 combined statement of operations. The Company depreciates its assets
on a straight-line basis over the assets’ useful lives, which range from
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. There were no impairment charges for the three months or six months ended June 30, 2020 and 2019.
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 multiple valuation techniques, and weight the results accordingly. 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 June 30, 2020 and 2019.
Revenue Recognition
During the fourth quarter of 2019, 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.
7
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
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 recognizes revenue over a period of time on fixed price contracts using the input method based upon direct costs incurred to date, which are compared to total projected direct costs. Costs are the most relevant measure to determine the transfer of the service to the customer. The Company assess 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.
8
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 June 30, 2020 and December 31, 2019, we had $621 million and $601 million of remaining performance obligations, or backlog, respectively of which $373 million and $371 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. Contracts for which work authorizations have been received are included in backlog. 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 $
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.
9
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 June 30, 2020 and December 31, 2019 was $
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. Public sector clients approximate one-third of the Company’s revenues in each reporting period presented.
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
Comprehensive Income
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.
10
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. Generally, the Company engages 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 combined 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.
11
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 following table summarizes the changes in the fair value of estimated contingent consideration:
| Contingent consideration, as of December 31, 2019 | $ | |||
| Additions for acquisitions | ||||
| Reduction of liability for payment made | ( | ) | ||
| Total contingent consideration, as of June 30, 2020 | ||||
| Current portion of contingent consideration | ||||
| Contingent consideration, less current portion | $ |
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 record 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 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. However, the Company granted restricted stock units during the second quarter of its fiscal year as a means to reward and retain selected management personnel. Please refer to Note 10 – Equity Based Compensation for further information.
Equity compensation was $
12
Income Taxes
Following the consummation of the Atlas Business Combination, the 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 Units. The Company is 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 for the Company or its subsidiaries have been provided for in the accompanying consolidated financial statements except as disclosed below.
The State of Texas imposes a margin tax,
with an effective rate of
In addition, there are two C-Corporations (“C-Corp”) subsidiaries for which we account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, we determine deferred tax assets and liabilities on the basis of the differences between the financial statement and tax bases of assets and liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
The results of operations prior to the Atlas Business Combination were treated consistently in this manner.
Subsequent to the Atlas Business Combination,
the Up-C structure allowed the holders of our Class B common stock, par value $
Income tax relating to the C-Corps is not
considered in the provision for non-controlling interest calculation as it is solely the responsibility of the holders of our Class
A common stock, par value $
We recognize deferred tax assets to the extent that we believe that these assets are more likely than not to be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If we determine that we would be able to realize our deferred tax assets in the future in excess of their net recorded amount, we would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.
13
Deferred taxes consisted of the following:
| June 30, 2020 | December 31, 2019 | |||||||
| ($’s in millions) | ||||||||
| Asset: | ||||||||
| Current | $ | $ | ||||||
| Noncurrent | ||||||||
| Deferred tax asset, gross | ||||||||
| Valuation allowance | ( | ) | ||||||
| Deferred tax asset, net | $ | $ | ||||||
| Liability: | ||||||||
| Current | $ | $ | ||||||
| Noncurrent | ||||||||
| Deferred tax liability, gross | ||||||||
| Valuation allowance | ||||||||
| Deferred tax liability, net | $ | $ | ||||||
There are no net operating loss carryforwards. The Company records its deferred tax liabilities in other long-term liabilities within its Consolidated Balance Sheet.
Income tax expense was $
Income tax expense for the three and six
months ended June 30, 2019 and the period beginning January 1, 2020 through the Closing Date differs from the
The rate reconciliation for the period from the Atlas Business Combination through June 30, 2020 is as follows:
| Three Months Ended June 30, 2020 | Atlas Business Combination Through June 30, 2020 | |||||||
| Pre-tax (income) loss | ( | ) | $ | |||||
| Statutory tax rate | % | % | ||||||
| Tax (expense) benefit | ( | ) | ||||||
| Deferred tax asset valuation reserve | ( | ) | ||||||
| Income tax expense, net | $ | $ | - | |||||
Redeemable Preferred Stock
On February 14, 2020, in connection with
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.
14
The Preferred Units rank senior in priority to all other existing and future equity securities of Holdings with respect to liquidation preference and distribution rights.
The Preferred Units have a liquidation preference of $
Subject to any limitations set forth in the Atlas Credit Agreement (as defined in Note 7 – Long-Term Debt), the Preferred Units pay 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 is not able to be made
because of a limitation under the Atlas Credit Agreement, then the Liquidation Preference with respect to any Unit shall increase
to
The Preferred Units do not possess voting rights and are not convertible into any other security of Holdings.
Holdings may redeem the Preferred Units
beginning on the second anniversary of the Closing Date at a price of
Subject to the terms of Holdings’ and its subsidiaries’ senior credit agreements, Holdings will be 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 may 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.
| Redeemable preferred stock, as of December 31, 2019 | $ | |||
| Additions | ||||
| Accrued paid in kind dividends | ||||
| Accretion of discount | ||||
| Redeemable preferred stock, as of June 30, 2020 | $ |
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.
15
NOTE 3 – ATLAS BUSINESS COMBINATION
On the Closing Date,
The shares of non-economic Class B common stock of the Company, which entitles each holder to one vote per share, are redeemable on a one-for-one basis for shares of Class A common stock at the option of the Unit Holders (formerly members) as their lock-up period expire. Upon the redemption by any Class B common stock shares 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
Because the holders of our Class B common stock have effective control of the combined company after the Closing Date through its 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 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 (“LONG”), a land surveying and engineering company headquartered in Atlanta, Georgia.
The Company did not acquire any entities during 2019.
Acquisition costs of approximately $
16
The following table summarizes the preliminary fair values of the assets acquired and liabilities assumed as of the acquisition:
| Cash | $ | |||
| Accounts receivable | ||||
| Property and equipment | ||||
| Other long-term assets | ||||
| Intangible assets | ||||
| Liabilities | ( | ) | ||
| Net assets acquired | $ | |||
| Consideration paid (cash and rollover equity) | $ | |||
| Contingent earnout liability at fair value (cash) | ||||
| Total consideration | ||||
| Excess consideration over the preliminary amounts assigned to the net assets acquired (goodwill) | $ |
NOTE 5 –
The Company depreciates its assets on a straight-line basis
over the assets’ useful lives, which range from
| June 30, | December 31, | Average | ||||||||
| 2020 | 2019 | life | ||||||||
| Furniture and fixtures | $ | $ | ||||||||
| Equipment and vehicles | ||||||||||
| Computers | ||||||||||
| Leasehold improvements | ||||||||||
| Construction in progress | ||||||||||
| Less: Accumulated depreciation and amortization | ( | ) | ( | ) | ||||||
| $ | $ | |||||||||
Property and equipment under capital leases:
| June 30, | December 31, | |||||||
| 2020 | 2019 | |||||||
| Computer equipment | $ | $ | ||||||
| Less accumulated depreciation | ( | ) | ( | ) | ||||
| $ | $ | |||||||
17
Capital leases for computer equipment have an average lease
term of
| 2020 (six months remaining) | $ | |||
| 2021 | ||||
| 2022 | ||||
| 2023 | ||||
| 2024 | ||||
| Thereafter | ||||
| $ |
Depreciation expense was approximately $
NOTE 6 – GOODWILL AND INTANGIBLES
The carrying amount, including changes therein, of goodwill was as follows:
| Balance as of December 31, 2019 | $ | |||
| Acquisitions | ||||
| Disposals | ||||
| Measurement period adjustments | ||||
| Balance as of June 30, 2020 | $ |
The Company did not recognize any impairments of goodwill in the three or six months ended June 30, 2020 or 2019.
Intangible assets as of June 30, 2020 and December 31, 2019 consist of the following:
| June 30, 2020 | December 31, 2019 | Remaining | ||||||||||||||||||||||||||
| Gross amount | Accumulated amortization | Net book value | Gross amount | Accumulated amortization | Net book value | useful life (in years) | ||||||||||||||||||||||
| Definite life intangible assets: | ||||||||||||||||||||||||||||
| Customer relationships | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | ||||||||||||||||||
| Tradenames | ( | ) | ( | ) | ||||||||||||||||||||||||
| Non-competes | ( | ) | ( | ) | ||||||||||||||||||||||||
| Total intangibles | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | ||||||||||||||||||
Amortization expense for the three months
ended June 30, 2020 and 2019 was $
Amortization of intangible assets for the next five years and thereafter is expected to be as follows:
| 2020 (six months remaining) | $ | |||
| 2021 | ||||
| 2022 | ||||
| 2023 | ||||
| 2024 | ||||
| Thereafter | ||||
| $ |
18
NOTE 7 – LONG-TERM DEBT
In October 2017, concurrent with the closing
of the acquisition of Moreland Altobelli Associates, LLC (“Moreland”), Atlas Intermediate obtained a bridge loan from
Regions Bank in the amount of $
ATC Group Partners (“ATC”) had
a business loan agreement (the “Loan Agreement”) maturing on January 29, 2020. The Loan Agreement included a revolving
credit facility that shall not exceed $
In March 2019, subsequent to the merger
with ATC, the outstanding balance on the Loan Agreement was paid in full and terminated, and the existing Atlas credit facility
was amended to provide a term loan of $
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 (the “Lender” or “Lead Arranger”).
The Atlas Credit Agreement is 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,
19
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
The Company has been in compliance with the terms of the Atlas Credit Facility and Atlas Credit Agreement as of June 30, 2020 and December 31, 2019, respectively.
Long-term debt consisted of the following:
June 30, 2020 | December 31, 2019 | |||||||
| Atlas credit facility - term loan | $ | $ | ||||||
| Atlas credit agreement - term loan | ||||||||
| Atlas credit facility - revolving loan | ||||||||
| Atlas credit agreement - revolving | ||||||||
| Subtotal | ||||||||
| Less: Loan costs, net | ( | ) | ( | ) | ||||
| Less current maturities of long-term debt | ( | ) | ( | ) | ||||
| Long-term debt | $ | $ | ||||||
Aggregate long-term principal payments subsequent to June 30, 2020, are as follows (amounts in thousands):
| 2020 (six months remaining) | $ | |||
| 2021 | ||||
| 2022 | ||||
| 2023 | ||||
| 2024 | ||||
| Thereafter | ||||
| $ |
20
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 Closing Date through June 30, 2020:
| Class A Common Stock | Class B Common Stock | Warrants | Private Placement Warrants | |||||||||||||
| Beginning Balance, as of Closing Date | ||||||||||||||||
| Issuances | ||||||||||||||||
| Transfers to Class A from Class B | ||||||||||||||||
| Shares Outstanding at June 30, 2020 | ||||||||||||||||
Class A Common Stock – At June 30, 2020,
there were
Class B Common Stock –
At June 30, 2020, there were
Public Warrants –
Private Placement Warrants
– Upon closing of the Boxwood initial public offering, the Sponsor purchased an aggregate of
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
Non-controlling Interest
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.
21
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 June 30, 2020 | Closing Date Through June 30, 2020 | |||||||
| Numerator: | ||||||||
| Net income (loss) post Atlas Business Combination | $ | $ | ( | ) | ||||
| Provision for non-controlling interest | ||||||||
| Redeemable preferred stock dividends | ( | ) | ( | ) | ||||
| Net (loss) attributable to Class A common shares - basic and diluted | $ | ( | ) | $ | ( | ) | ||
| Denominator: | ||||||||
| Weighted average shares outstanding - basic and diluted | ||||||||
| Net (loss) per Class A common share, basic and diluted | $ | ( | ) | $ | ( | ) | ||
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 | |||||||
| Warrants | ||||||||
| Private placement warrants | ||||||||
| Total | ||||||||
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,
In April 2019, Atlas Intermediate’s
Parent granted service-based Class A units to certain members of Atlas’ management. As of January 1, 2019,
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.
The following summarizes the activity of Class A unit awards during the period ended June 30, 2020:
| Number of unvested Class A units | Grant date fair value | |||||||
| Unvested Class A units as of December 31, 2019 | $ | |||||||
| Granted | ||||||||
| Vested and converted to Class B Common Stock | ( | ) | ||||||
| Forfeited | ||||||||
| Unvested Class A units as of June 30, 2020 | $ | |||||||
Equity compensation relating to
the Class A units that were converted to Class B Common Shares upon the Atlas Business Combination was $
During the second quarter of 2020, the Company
awarded
22
NOTE 11 – RELATED-PARTY TRANSACTIONS
During the six months ended
June 30, 2020 and 2019, 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 $
During the three months ended June 30, 2020
and 2019, 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 $
$
On February 3, 2020, the
Company entered into a subscription agreement with SCST, Inc., a California corporation, pursuant to which it agreed to acquire
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 $
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 of Managers, make additional contributions to these plans. The Company has expensed $
NOTE 13 – DISCONTINUED OPERATIONS
In June 2017, ATC decided that it would wind down the operations of its Power and Industrial (P&I) operation by the end of 2017 due to the loss of one of P&I’s major customers. On December 27, 2017, ATC entered into an asset purchase agreement with a third party, which was the final step in finalizing the terms of the shutdown of the P&I service line. ATC completed the sale during 2018 which resulted in an immaterial gain. No other operations were discontinued from January 1, 2019 through December 31, 2019.
The P&I service line’s activity in the combined balance sheet and combined statement of cash flows were not material. The loss from discontinued operations presented in the combined statement of operations for the three and six months ended June 30, 2020 and 2019 consisted of the following:
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Revenues | $ | $ | $ | $ | ||||||||||||
| Cost of revenues | ( | ) | ( | ) | ||||||||||||
| Operating expenses | ( | ) | ||||||||||||||
| Operating loss | ( | ) | ( | ) | ||||||||||||
| Depreciation and amortization | ||||||||||||||||
| Other Income/(Expense) | ||||||||||||||||
| Loss from discontinued operations | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
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NOTE 14 – 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.
Future minimum payments under noncancelable operating leases as of June 30, 2020 are as follows:
| 2020 (six months remaining) | $ | |||
| 2021 | ||||
| 2022 | ||||
| 2023 | ||||
| 2024 | ||||
| Thereafter | ||||
| $ |
Rental expense associated with facility and equipment
operating leases for the three months ended June 30, 2020 and 2019 was $
NOTE 15 – 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 done to stabilize the U.S. stock markets. They 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 taken any other additional assistance under the CARES Act nor expects any other tax benefits derived from the program.
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, we have 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.
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 June 30, 2020 and we expect that we will continue to be for the foreseeable future.
NOTE 16 – SUBSEQUENT EVENT
On July 29, 2020,
Alta Vista is headquartered in Oakland, California and provides testing and inspection services primarily to infrastructure clients. Alta Vista has 100 employees and has offices in California and New York.
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| ITEM 2 | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion and analysis should be read in conjunction with our unaudited financial statements and accompanying notes included herein. This discussion contains “forward-looking statements” reflecting our current expectations, estimates and assumptions concerning events and financial trends that may affect our future operating results or financial position. Actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors. Factors that could cause or contribute to such differences include, but are not limited to, economic and competitive conditions, regulatory changes and other uncertainties, as well as those factors included in our Annual Report on Form 10-K, all of which are difficult to predict. In light of these risks, uncertainties and assumptions, the forward-looking events discussed may not occur. We assume no obligation to update any of these forward-looking statements.
For purposes of this section, “we,” “us,” “our,” the “Company” and “Atlas” refers to Atlas Technical Consultants, Inc.(formerly named Boxwood Merger Corp.) and its subsidiaries. The Atlas Business Combination (as defined below) was accounted for as a reverse recapitalization where the Company was the legal acquirer but treated as the accounting acquiree. All references to operations prior to the Atlas Business Combination reflect the results of Atlas Intermediate Holdings LLC, a Delaware limited liability company (“Atlas Intermediate”) and its subsidiaries. Since Atlas Intermediate was determined to be the accounting acquirer, the information included below will include the results of Atlas Intermediate and its subsidiaries through the Atlas Business Combination and will include the Company, including Atlas Intermediate, for transactions occurring after the Atlas Business Combination.
OVERVIEW
On February 14, 2020 (the “Closing Date”), the Company consummated its acquisition of 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, 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, we are organized in an “Up-C” structure in which the business of Atlas Intermediate and its subsidiaries is held by Holdings and continues to operate through the subsidiaries of Atlas Intermediate, and in which our only direct assets consist of common units of Holdings (the “Holdings Units”). We are the sole manager of Holdings in accordance with the terms of the amended and restated limited liability company agreement of Holdings entered into in connection with the consummation of the Atlas Business Combination.
Headquartered in Austin, Texas, we are a leading provider of professional and technical testing, inspection engineering and consulting services, offering solutions to public and private sector clients in the transportation, commercial, water, government, education and industrial markets. With approximately 135 offices located throughout the United States, we provide a broad range of mission-critical technical services, helping our clients test, inspect, plan, design, certify and manage a wide variety of projects across diverse end markets.
We act as a trusted advisor to our clients, helping our clients design, engineer, inspect, manage and maintain civil and commercial infrastructure, servicing the existing structures as well as helping to build new structures. However, we do not perform any construction, and do not take construction risk.
We provide a broad range of mission-critical technical services, ranging from providing inspection services in small projects to managing significant aspects of large, multi-year projects. For the six months ending June 30, 2020, we:
| ● | Performed more than 20,000 projects, with average revenue per project of less than $10,000; and |
| ● | Delivered more than 90% of our projects under “time & material” and “cost-plus” contracts. |
We have long-term relationships with a diverse set of clients, providing a base of repeating clients, projects and revenues. Approximately 90% of our revenues are derived from projects that have used our services at least twice in the past three years and more than 95% of our revenues are generated from client relationships longer than 10 years, with greater than 25% of revenues generated from relationships longer than 30 years. Examples of such long-term customers include the Texas Department of Transportation, US Postal Service, Gwinnett County Georgia, New York City Housing Authority, San Francisco International Airport, Stanford University, Port of Oakland, United Rentals, Inc., Speedway, Walmart, Inc., and Apple Inc.
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Our broad base of customers spans a diverse set of end markets including the transportation, commercial, water, government, education and industrial sectors. Our customers include government agencies, quasi-public entities, schools, hospitals, utilities and airports, as well as private sector clients across many industries.
Our services require a high degree of technical expertise, as our clients rely on us to provide testing, inspection and quality assurance services to ensure that structures are designed, engineered, built and maintained in accordance with building codes, regulations and the highest safety standards. As such, our services are delivered by a highly-skilled, technical employee base that includes scientists, engineers, inspectors and other field experts. As of June 30, 2020, our technical staff represented 75% of our 3,200 employees. Our services are typically provided under contracts, some of which are long-term with long lead times between when contracts are signed and when our services are performed. As such, we have a significant amount of contracted backlog, providing for a high degree of visibility with respect to revenues expected to be generated from such backlog. As of June 30, 2020, our contracted backlog was estimated to be approximately $621 million. See “—Backlog” below for additional information relating to our backlog.
For the three months ended June 30, 2020, we recognized approximately $112.7 million of gross revenues, ($0.4) million of net loss relating to the holders of our Class A common stock, par value $0.0001 per share (the “Class A common stock”), and $15.4 million of adjusted EBITDA. For the six months ended June 30, 2020, we recognized approximately $222.0 million of gross revenues, ($1.9) million of net loss relating to the holders of our Class A common stock, par value $0.0001 per share (the “Class A common stock”), and $28.3 million of adjusted EBITDA. For a definition of adjusted EBITDA and a reconciliation of adjusted EBITDA to historical combined net income (loss), see “—Non-GAAP Financial Matters” below.
COVID-19 Pandemic
The domestic and global crisis resulting from the outbreak of the COVID-19 pandemic, and the measures being taken to address and limit the spread of the virus, have already adversely affected the U.S. economy and financial markets, resulting in an economic downturn that has negatively impacted the demand for our services. This crisis has affected our operations and liquidity in a number of ways. Project delays have negatively impacted our revenue, and if continued or exacerbated, could result in a material adverse effect to our business. Additionally, a prolonged downturn could ultimately result in an overall decrease in demand for our services. Although we cannot currently predict with certainty the full extent to which our business, results of operations, financial condition or liquidity will ultimately be impacted, we will continue to monitor the safety of our employees during the COVID-19 pandemic, and we are evaluating, and will continue to evaluate, the impact of COVID-19 on our current projects. Our top priority is to protect our employees and their families, as well as our clients.
HOW WE EVALUATE OUR OPERATIONS
We use a variety of financial and other information in monitoring the financial condition and operating performance of our business. Some of this information is financial information that is prepared in accordance with generally accepted accounting principles (“GAAP”), while other information may be financial in nature and may not be prepared in accordance with GAAP. Historical information is periodically compared to budgets, as well as against industry-wide information. We use this information for planning and monitoring our business, as well as in determining management and employee compensation.
We evaluate our overall business performance based primarily on a combination of four financial metrics: revenue, backlog, adjusted EBITDA and liquidity measures. These are key measures used by our management team and board of directors to understand and evaluate our operational performance, to establish budgets and to develop short and long-term operational goals.
Revenue
Revenues for services are derived from billings under contracts (which are typically of short duration) that provide for specific time, material and equipment charges, or lump sum payments and are reported net of any taxes collected from customers. We recognize revenue as it is earned at estimated collectible amounts.
Revenue is recognized as services are performed and amounts are earned in accordance with the terms of a contract. We generally contract for services to customers based on either a fixed fee or hourly rates. In such contracts, our efforts, measured by time incurred, typically are provided in less than a year and represent the contractual milestones or output measure, which is the contractual earnings pattern. For contracts with fixed fees, we recognize revenues as amounts become billable in accordance with contract terms, provided the billable amounts are consistent with the services delivered and are earned. Expenses associated with performance of work may be reimbursed with a markup depending on contractual terms. Revenues include the markup, if any, earned on reimbursable expenses. Reimbursements include billings for travel and other out-of-pocket expenses and third-party costs, such as equipment rentals, materials, subcontractor costs and outside laboratories, which is included in cost of revenues in the accompanying combined statement of income.
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Backlog
We analyze our backlog, which we define as fully awarded and contracted work or revenue we expect to realize for work completed, to evaluate operations and future revenue potential. Our contracted backlog includes revenue we expect to record in the future from signed contracts. In order to calculate backlog, we determine the amounts for contracted projects that are fully funded, and then determine the respective revenues expected to be realized upon completion of work. We use backlog to evaluate company revenue growth as it typically follows growth in backlog.
Adjusted EBITDA
We view adjusted EBITDA, which is a non-GAAP financial measure, as an important indicator of performance. We define adjusted EBITDA as net income before interest expense, income taxes, depreciation and amortization and adjustments for certain one- time or non-recurring items adjustments. For more information on adjusted EBITDA, as well as a reconciliation to the most directly comparable GAAP measure, please see “—Non-GAAP Financial Measures” below.
COMPONENTS AND FACTORS AFFECTING OUR OPERATING RESULTS
Revenue
We generate revenue primarily by providing infrastructure-based testing, inspection, certification, engineering, and compliance services to a wide range of public- and private-sector clients. Our revenue consists of both services provided by our employees and pass-through fees from subcontractors and other direct costs. We generally utilize a cost-to-cost approach in applying the percentage-of-completion method of revenue recognition. Under this approach, revenue is earned in proportion to total costs incurred, divided by total costs expected to be incurred.
Cost of Revenue
Cost of revenue reflects the cost of personnel and specifically identifiable costs associated with revenue.
Operating Expense
Operating expense includes corporate expenses, including personnel, occupancy, and administrative expenses, including depreciation and amortization.
Interest Expense
Interest expense consists of contractual interest expense on outstanding debt obligations including amortization of deferred financing costs and other related financing expenses.
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Other Income (Expense)
Other income or expense reflects the gains or losses, including the costs and related accumulated depreciation recapture, resulting from the disposal of an asset when such asset is sold or retired.
Income Tax Expense
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 the our only direct assets will consist of common units of Holdings Units. 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 for us or our subsidiaries have been provided for in the accompanying consolidated financial statements except as disclosed below.
The State of Texas imposes a margin tax, with an effective rate of 0.7%, based on the prior year’s Texas-sourced gross receipts. This tax is treated as an income tax and accrued in the accounting period in which the taxable gross receipts are recognized. The State of Texas margin tax was insignificant in 2019 and 2018. In addition, there are two C-Corp subsidiaries for which we account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, we determine deferred tax assets and liabilities on the basis of the differences between the financial statement and tax bases of assets and liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
The results of operations prior to the Atlas Business Combination were treated consistently in this manner.
Subsequent to the Atlas Business Combination, the Up-C structure allowed the holders of our Class B common stock, par value $0.0001 per share (the “Class B common stock”) to continue to realize tax benefits associated with owning interests in an entity that is treated as a partnership, or “pass through” entity, for U.S. federal income (and certain state and local) tax purposes following the Atlas Business Combination. One of these benefits is that, for U.S. federal income (and certain state and local) purposes, our future taxable income that is allocated to Seller and its limited partners will be taxed on a flow-through basis and therefore will not be subject to corporate taxes at the entity level.
Income tax relating to the C-Corps is not considered in the provision for non-controlling interest calculation as it is solely the responsibility of the holders of our Class A common stock. The Texas margin tax is considered within the provision of non-controlling interest as it generated through the results of Atlas Intermediate and its subsidiaries.
Although the majority of our wholly-owned subsidiaries are structured as limited liability companies and considered pass through entities for federal and state income tax purposes, we do have two entities that are registered as C-Corps under federal income tax law. For those C-Corp entities, we are subject to income tax assessments within their jurisdictions on their current operations. Additionally, our Texas domiciled subsidiaries are subject to the Texas Franchise Tax.
Income tax expense and our effective tax rates can be affected by many factors, including changes in our mix of pre-tax losses/earnings, the effect of non-controlling interest in income of consolidated subsidiaries, our acquisition strategy, available tax incentives and credits, changes in judgment regarding the realizability of our deferred tax assets, changes in existing tax laws and our assessment of uncertain tax positions. Our tax returns are routinely audited by the taxing authorities and settlements of issues raised in these audits may affect our effective tax rate.
Net Income (loss) From Continuing Operations
Net income from continuing operations reflects our operating income after taking into account costs and expenses for a given period, while excluding any gain or loss from discontinued operations.
Loss From Discontinued Operations
Loss from discontinued operations includes our non-recurring gains or losses realized in connection with the disposition of an asset or component of the business that results in discontinued operations.
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Provision for Non-controlling Interest
Our ownership and voting structure is comprised of holders of our Class A common stock that participate 100% in the results of Atlas Technical Consultants, Inc. and 19.4% 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 80.6% 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. Consolidated net income includes earnings attributable to both the shareholders and the non-controlling interests.
The provision for non-controlling interest relates to pre-tax income subsequent to the Atlas Business Combination and does not include a pro-rata share of taxes as federal and state income taxes are attributable only to the holders of our Class A common stock under the Up-C structure.
Redeemable Preferred Stock Dividends
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 (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 represents 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 rank senior in priority to all other existing and future equity securities of Holdings with respect to liquidation preference and distribution rights.
The Preferred Units have 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 below), the Preferred Units pay 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 is not able to be made because of a limitation under the Atlas Credit Agreement, then the Liquidation Preference with respect to any Unit shall increase to 3.5625% in any quarter until a cash dividend can be made.
The Preferred Units do not possess voting rights and are not convertible into any other security of Holdings.
Holdings may 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 may 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 will be 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 will be 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 may 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.
Net Income (loss) Attributable to Class A Common Stock (Previously Members)
Net income (loss) attribution to holders of our Class A common stock represents our results after the provision for non- controlling interest, the effect of all taxes under the Up-C structure for the period subsequent to the Atlas Business Combination, and dividends due on redeemable preferred stock.
Net income (loss) for the historical results of Atlas Intermediate prior to the Atlas Business Combination are also reported within this line item.
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RESULTS OF OPERATIONS
Consolidated Results of Operations
The following table represents our selected results of operations for the periods indicated.
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| (in thousands, except per share data) | ||||||||||||||||
| Revenues | $ | 112,715 | $ | 123,669 | $ | 222,017 | $ | 229,280 | ||||||||
| Cost of revenues | (58,714 | ) | (68,452 | ) | (117,612 | ) | (125,624 | ) | ||||||||
| Operating expenses | (45,376 | ) | (47,236 | ) | (113,741 | ) | (92,105 | ) | ||||||||
| Operating income (loss) | 8,625 | 7,981 | (9,336 | ) | 11,551 | |||||||||||
| Interest expense | (6,398 | ) | (3,149 | ) | (12,038 | ) | (5,534 | ) | ||||||||
| Other income (expense) | 18 | (486 | ) | 50 | (782 | ) | ||||||||||
| Income (loss) before income taxes | 2,245 | 4,346 | (21,324 | ) | 5,235 | |||||||||||
| Income tax expense | - | (154 | ) | - | (159 | ) | ||||||||||
| Net income (loss) from continuing operations | 2,245 | 4,192 | (21,324 | ) | 5,076 | |||||||||||
| Loss from discontinued operations | - | (64 | ) | - | (213 | ) | ||||||||||
| Net income (loss) | 2,245 | 4,128 | (21,324 | ) | 4,863 | |||||||||||
| Provision for non-controlling interest | 1,881 | - | 5,141 | - | ||||||||||||
| Redeemable preferred stock dividends | (4,533 | ) | - | (6,777 | ) | - | ||||||||||
| Net (loss) income attributable to Class A common stock shareholders/members | $ | (407 | ) | $ | 4,128 | $ | (22,960 | ) | $ | 4,863 | ||||||
| (Loss) Per Class A Common Share | $ | (0.07 | ) | N/A | $ | (0.33 | ) | N/A | ||||||||
| Weighted average of shares outstanding: | ||||||||||||||||
| Class A common shares (basic and diluted) | 5,767,342 | N/A | 5,767,342 | N/A | ||||||||||||
Comparison of the three months and six months ended June 30, 2020 to the three and six months ended June 30, 2019, respectively:
Overview of Financial Results
This quarter, we saw an increase in our backlog to $620.7 million or 1.6% compared to June 30, 2019. Revenues were lower this quarter in comparison to the comparable prior quarter due to the effects of the COVID-19 pandemic due to shelter in place orders in select markets but operating income increased slightly due to our cost containment efforts at the pandemic’s onset.
Interest expense was higher due to the higher borrowings associated with the Atlas Business Combination and the dividends on redeemable preferred stock were a result of the Atlas Business Combination.
Revenue
Revenue for the three months ended June 30, 2020 decreased ($11.0) million, or (9%), to $112.7 million as compared to $123.7 million for the corresponding prior year period.
The decrease in revenue for the three months ended June 30, 2020 was primarily attributable to shelter in place orders in large metropolitan areas on the West Coast and Eastern seaboard in the amount of ($15.4) million. The completion of the acquisition of Long Engineering (“LONG”) in February 2020 served to add $4.4 million to our quarterly revenues along with our expansion into new markets in Texas offset the decrease in revenues associated with COVID-19.
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Cost of Revenue
Cost of revenue for the three months ended June 30, 2020 decreased ($9.8) million, or (14%), to $58.7 million as compared to $68.5 million for the corresponding prior year period. The decrease in cost of revenues was due mainly to the decrease in revenues but the percentage decrease was higher than the revenue decrease of (9%) due to the fact that a contract that did not recur in 2020 relied significantly on outside subcontractors.
We earn a lower margin on work performed by others than that performed by ourselves. This is evidenced by the fact that cost of revenue, as a percentage of revenue, decreased to 52.1% from 55.4% for the three months ended June 30, 2020 when compared to the three months ended June 30, 2019.
Operating Expense
Operating expense for the three months ended June 30, 2020 decreased ($1.9) million, or (4%), to $45.4 million as compared to $47.2 million for the corresponding prior year period. For the three months ended June 30, 2020, operating expense, as a percentage of revenue, increased to 40.3% from 38.2% for the three months ended June 30, 2019.
The Company made conscious efforts to reduce excess overhead personnel costs via various measures during the current quarter in response to the COVID-19 pandemic. The decrease in costs were not consistent with the decrease in revenues as we remained responsible for the benefits associated with employees either furloughed or covered under union contracts. We also incurred professional service-related fees associated with public company oversight and associated filings.
Interest Expense
Interest expense for the three months ended June 30, 2020 increased $3.3 million or 103%, to $6.4 million as compared to $3.1 million for the corresponding prior year period. The increase in interest expense is due to higher borrowings and interest rates in comparison to the prior year and higher amortization of deferred financing fees for the Atlas Credit Agreement in comparison to Atlas Credit Facility.
Other Income (Expense)
Other income (expense) for the three months ended June 30, 2020 and 2019 was $0.0 million and ($0.5) million, respectively. We recorded a lease termination charge associated with an acquired company in 2019, and this did not repeat in 2020.
Income Tax Expense
Income tax expense for the three months ended June 30, 2020 was $0.0 million compared to income tax expense of $0.2 million for the three months ended June 30, 2019.
Prior to the Atlas Business Combination and reorganization as an Up-C structure for income tax purposes, we were 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 for the Company or our subsidiaries has been provided for in the accompanying consolidated financial statements, except for margin taxes in the State of Texas and a few of our subsidiary C-Corp entities. The margin taxes are treated as income taxes, with an effective rate of 0.7%, based on the prior year’s
Texas-sourced gross receipts.
The effective rate of the Company for the three months ended June 30, 2020 was 0% as we did not believe that it was more likely than not that we would utilize the benefit or deferred tax asset generated by applying the statutory rate of 26% to our pre-tax loss that resulted during the three months ended June 30, 2020. As such, we fully reserved for the deferred tax asset which reduced our effective tax rate to 0%.
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Loss From Discontinued Operations
Other loss from discontinued operations for the three months ended June 30, 2020 decreased ($0.1) million, or 100%, to $0.0 million as compared to $0.1 million for the corresponding prior year period.
The decrease in loss from discontinued operations for the three months ended June 30, 2020 was attributable to the closure of the Power & Industrial (P&I) business unit in late 2018 with some closing transactions recorded in 2019.
Provision for Non-controlling Interest
The provision for non-controlling interest for the three months ended June 30, 2020 increased by $1.9 million or 100% to $1.9 million from $0.0 million for the corresponding prior year period. This increase is due to reverse recapitalization created by the Atlas Business Combination whereby the holders of our Class B common stock only share in the results of Atlas Intermediate and its subsidiaries based upon their ownership percentage in relation to total common stockholders. This treatment is effective from the Atlas Business Combination until the exchange of Class B common stock to Class A common stock.
Redeemable Preferred Stock Dividends
Redeemable preferred stock dividends for the three months ended June 30, 2020 increased by $4.5 million or 100% to $4.5 million from $0.0 million for the quarter ended June 30, 2019. This increase is due to $141.8 million of redeemable preferred stock that we issued in connection with the Atlas Business Combination.
Comparison of the six months ended June 30, 2020 to the six months ended June 30, 2019:
Overview of Financial Results
For the six months ended June 30, 2020, we have seen an increase in our backlog to a record level of $620.7 million or 1,6% compared to June 30, 2019. Revenues were slightly lower in comparison to the comparable period due to the effects of the COVID-19 pandemic. We have incurred an operating loss thus far due to the costs associated with the consummation of the Atlas Business Combination in the first quarter.
Interest expense was higher due to the higher borrowings associated with the Atlas Business Combination and the dividends on redeemable preferred stock were also a result of the Atlas Business Combination.
Revenue
Revenue for the six months ended June 30, 2020 decreased ($7.3) million, or (3%), to $222.0 million as compared to $229.3 million for the corresponding prior year period.
The decrease in revenue for the six months ended June 30, 2020 was primarily attributable to shelter in place orders in large metropolitan areas on the West Coast and Eastern seaboard in the amount of ($15.2) million. The completion of the acquisition of Long Engineering (“LONG”) in February 2020 served to add $6.4 million to our quarterly revenues along with our expansion into new markets in Texas offset the decrease in revenues associated with COVID-19.
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Cost of Revenue
Cost of revenue for the six months ended June 30, 2020 decreased ($8.0) million, or (6%), to $117.6 million as compared to $125.6 million for the corresponding prior year period. The decrease in cost of revenues was due mainly to the decrease in revenues but the percentage decrease was higher than the revenue decrease of (3%) due to the fact that a contract that did not recur in 2020 relied significantly on outside subcontractors.
We earn a lower margin on work performed by others than that performed by ourselves. This is evidenced by the fact that cost of revenue, as a percentage of revenue, decreased to 53.0% from 54.8% for the six months ended June 30, 2020 when compared to the six months ended June 30, 2019.
Operating Expense
Operating expense for the six months ended June 30, 2020 increased $21.6 million, or 23%, to $113.7 million as compared to $92.1 million for the corresponding prior year period. For the six months ended June 30, 2020, operating expense, as a percentage of revenue, increased to 51.2% from 40.2% for the six months ended June 30, 2019.
The increase in operating expense for the six months ended June 30, 2020 was primarily attributable to the consummation of the Atlas Business Combination as the Company expensed $7.0 million of acquisition related costs and $12.0 million of costs incurred with change of control provisions contained within employment agreements and our former Management Incentive Plan. These transaction-related items comprised 8.5% of the 11.0% change in operating expenses as a percentage of revenues when comparing the six months ended June 30, 2020 to June 30, 2019. The remainder of the change was primarily associated with public company costs.
Interest Expense
Interest expense for the six months ended June 30, 2020 increased $6.5 million or 118%, to $12.0 million as compared to $5.5 million for the corresponding prior year period. The increase in interest expense is due to higher borrowings and interest rates in comparison to the prior year, the write-off of $1.7 million of deferred financing fees relating to the Atlas Credit Facility, and higher amortization of deferred financing fees for the Atlas Credit Agreement in comparison to Atlas Credit Facility.
Other Income (Expense)
Other income (expense) for the six months ended June 30, 2020 and 2019 was $0.0 million and ($0.8) million, respectively. We recorded a lease termination charge and settlements with former owners associated with an acquired company in 2019, and this did not repeat in 2020.
Income Tax Expense
Income tax expense for the six months ended June 30, 2020 was $0.0 million compared to income tax expense of $0.2 million for the six months ended June 30, 2019.
Prior to the Atlas Business Combination and reorganization as an Up-C structure for income tax purposes, we were 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 for the Company or our subsidiaries has been provided for in the accompanying consolidated financial statements, except for margin taxes in the State of Texas and a few of our subsidiary C-Corp entities. The margin taxes are treated as income taxes, with an effective rate of 0.7%, based on the prior year’s
Texas-sourced gross receipts.
The effective rate of the Company for the six months ended June 30, 2020 was 0% as we did not believe that it was more likely than not that we would utilize the benefit or deferred tax asset generated by applying the statutory rate of 26% to our pre-tax loss that resulted during the period between the Atlas Business Combination through June 30, 2020. As such, we fully reserved for the deferred tax asset which reduced our effective tax rate to 0%.
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Loss From Discontinued Operations
Other loss from discontinued operations for the six months ended June 30, 2020 decreased ($0.2) million, or 100%, to $0.0 million as compared to $0.2 million for the corresponding prior year period.
The decrease in loss from discontinued operations for the six months ended June 30, 2020 was attributable to the closure of the P&I business unit in late 2018 with some closing transactions recorded in 2019.
Provision for Non-controlling Interest
The provision for non-controlling interest for the six months ended June 30, 2020 increased by $5.1 million or 100% to $5.1 million from $0.0 million for the corresponding period. This increase is due to the reverse recapitalization created by the Atlas Business Combination whereby the holders of our Class B common stock only share in the results of Atlas Intermediate and its subsidiaries based upon their ownership percentage in relation to total common stockholders. This treatment is effective from the Atlas Business Combination until the exchange of Class B common stock to Class A common stock.
Redeemable Preferred Stock Dividends
Redeemable preferred stock dividends for the six months ended June 30, 2020 increased by $6.8 million or 100% to $6.8 million from $0.0 million for the quarter ended June 30, 2020. This increase is due to $141.8 million of redeemable preferred stock that we issued in connection with the Atlas Business Combination.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of liquidity and capital resources are our cash and cash equivalents balances, cash flow from operations, borrowings capacity under our Credit Agreement (as defined below), and access to financial markets. Our principal uses of cash are operating expenses, working capital requirements, capital expenditures, repayment of debt and acquisition expenditures. We believe our sources of liquidity, including cash flow from operations, existing cash and cash equivalents and borrowing capacity under our Atlas Credit Facility and Atlas Loan Agreement will be sufficient to meet projected cash requirements for at least the next twelve months. We continue to assess our business operations and the impact that COVID-19 may have on our financial results and liquidity. Due to the effect of the COVID-19 pandemic and related project delays, we have experienced a reduction in revenues and thus expected cash flows from operations in comparison to the previous comparable period. We will continue to monitor our capital requirements thereafter to ensure our needs are in line with available capital resources and we will continue to monitor the impact of COVID-19 to our liquidity.
Other than the impact on cash flows from operations relating to the decrease in revenues relating to COVID-19, we have not experienced other liquidity decreases.
Cash Flows
The following table sets forth our cash flows for the periods indicated.
| For the six months ended June 30, | ||||||||
| 2020 | 2019 | |||||||
| ($ in thousands) | ||||||||
| Net cash (used in) provided by operating activities | $ | (6,250 | ) | $ | 6,942 | |||
| Net cash used in investing activities | (12,881 | ) | (4,091 | ) | ||||
| Net cash provided by financing activities | 15,827 | 781 | ||||||
| Net (decrease) increase in cash and cash equivalents | $ | (3,304 | ) | $ | 3,632 | |||
Comparison of the six months ended June 30, 2020 to the six months ended June 30, 2019
Cash and Cash Equivalents.
At June 30, 2020 and June 30, 2019 we had $16.9 million and $10.1 million of cash and cash equivalents, respectively. Due to the fact that our operating companies closed on June 26, 2020, the Friday closest to June 30, 2020 as disclosed in Note 1- Organization and Basis of Presentation to our unaudited financial statements as of and for the six months ended June 30, 2020, we collected $5.7 million of cash from June 26, 2020 through June 30, 2020 that was applied to outstanding receivable balances. This did not affect our working capital as of June 30, 2020 or our cash flows generated from operating activities for the six months ended June 30, 2020. However, this would increase our liquidity to $39 million as of June 30, 2020. This situation did not occur at June 30, 2019.
Operating Activities
Cash flow from operating activities is primarily generated from operating income from our professional and technical testing, inspection engineering and consulting services.
Net cash used in operating activities was ($6.3) million for the six months ended June 30, 2020, compared to net cash provided of $7.0 million for the six months ended June 30, 2019. The decrease of ($13.3) million was due to payments of accounts payable and accrued expenses mainly relating to costs associated with the Atlas Business Combination and other public company costs.
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Investing Activities
Net cash used in investing activities was ($12.9) million for the six months ended June 30, 2020, compared to ($4.1) million for the six months ended June 30, 2019. The $8.8 million increase in cash used was related to our acquisition of LONG in February 2020.
Financing Activities
Net cash provided by financing activities was $15.8 million for the six months ended June 30, 2020, compared $0.8 million for the six months ended June 30, 2019. The $15.0 million increase to net cash provided by financing activities was primarily due to the $10.2 million received from the issuance of Common Stock during the Atlas Business Combination.
The Company did raise additional money during 2020 through the Atlas Credit Agreement, described herein, and the issuance of redeemable preferred stock which was used to pay a distribution to the former owners of Atlas Intermediate, acquire LONG and pay off the Atlas Credit Facility.
Working Capital
Working capital, or current assets less current liabilities, increased $1.6 million, or 2%, to $98.1 million at June 30, 2020 from $96.5 million at June 30, 2019. This increase in working capital is due to the LONG acquisition.
Debt Arrangements
In October 2017, concurrent with the closing of the acquisition of Moreland Altobelli Associates, LLC (“Moreland”), we obtained a bridge loan from Regions Bank in the amount of $42.0 million. In November 2017, concurrent with the closing of the Consolidated Engineering Laboratories (“ETS”) acquisition, we entered into a credit agreement with a group led by Regions Bank providing a term loan of $95.0 million and a revolving credit facility of $30.0 million secured by some of our assets owned by Atlas Intermediate. Proceeds from the Atlas Loan Agreement were used to fund the acquisition of ETS, repayment of the bridge loan, and for a redemption of $15.2 million of initial equity contributions made by the initial members once overall leverage amounts were determined. The Atlas Loan Agreement provided for a scheduled maturity date in November 2022 and quarterly principal payments beginning in December 2017 with interest compounded based on the variable rate in effect.
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ATC was party to a business loan agreement (the “ATC Loan Agreement”) which provided for a scheduled maturity date of January 29, 2020. The ATC Loan Agreement included a revolving credit facility of $45.0 million. Security for the loan was provided by a first-priority interest in substantially all of ATC’s assets and a promissory note. Borrowings under the ATC Loan Agreement bore interest at the one-month London Interbank Offered Rate (“LIBOR”) plus a margin based on the total leverage ratio as defined in the ATC Loan Agreement.
In March 2019, subsequent to the merger with ATC, the outstanding balances of the Atlas Loan Agreement and the ATC Loan Agreement were paid in full and the ATC Loan Agreement was terminated. The Atlas Loan Agreement was amended to provide a term loan in the amount of $145.0 million and a revolving credit facility of $50.0 million, of which $31.8 million was funded at closing (collectively, the “Atlas Credit Facility”). Proceeds of the Atlas Credit Facility were used to repay existing debt of $123.9 million and fund a stockholder distribution of $52.8 million made in April 2019. 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 therein. 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 5.500%.
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 (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 June 30, 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 acquisition of LONG.
Under the terms of the Atlas Credit Agreement, the Term Loan and Revolver are set to expire on February 14, 2027 and February 14, 2025, respectively. Interest is payable monthly or at the end of the applicable interest period in arrears on any outstanding borrowings. The interest rates under the Atlas Credit Facility will be equal to either (i) Adjusted LIBOR (as defined in the Credit Agreement), plus 4.75%, or (ii) an Alternate Base Rate (as defined in the Credit Agreement), plus 3.75%.
The Atlas Credit Agreement is 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 Rate 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 Rate 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 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 subsequent in 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.
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The Company has been in compliance with the terms of the Atlas Credit Facility and Atlas Credit Agreement as of June 30, 2020 and December 31, 2019, respectively.
Our debt balances are summarized as follows:
| June 30, 2020 | December 31, 2019 | |||||||
| (in thousands) | ||||||||
| Atlas credit facility | $ | - | $ | 171,144 | ||||
| Atlas credit agreement | 301,488 | - | ||||||
| Subtotal | 301,488 | 171,144 | ||||||
| Less: Loan costs, net | (16,523 | ) | (1,712 | ) | ||||
| Less current maturities of long-term debt | (14,050 | ) | (10,875 | ) | ||||
| Long-term debt | $ | 270,915 | $ | 158,557 | ||||
The following table presents, in millions, scheduled maturities of the Company’s debt as of June 30, 2020:
| 2020 (six months remaining) | $ | 7.0 | ||
| 2021 | 14.0 | |||
| 2022 | 14.0 | |||
| 2023 | 14.0 | |||
| 2024 | 14.0 | |||
| Thereafter | 238.5 | |||
| $ | 301.5 |
Our average effective interest rate on our total debt, exclusive of amortization of deferred debt issuance costs, during the six months ended June 30, 2020 and 2019 was 6.8% and 6.1%, respectively.
Interest expense, inclusive of amortization of deferred debt issuance costs, in the consolidated statements for the six months ended June 30, 2020 and 2019 was $12.0 million and $5.5 million, respectively.
Other Commitments and Contingencies
In connection with our acquisition of LONG in February 2020, we may be required to pay $12.0 million in earnout bonuses upon the achievement of certain performance targets. This amount may be paid in installments over the first, second and third anniversaries of the acquisition. We have currently accrued $5.6 million as the fair value of that liability within other long-term liabilities within our Consolidated Balance Sheet at June 30, 2020.
In November 2019, we entered into a financing arrangement of our business-related insurance policies and the amount remaining is $1.6 million as of June 30, 2020.
The Company enters into operating leases relating to office space and equipment leases in the ordinary course of business. Remaining amounts due, in millions, as of June 30, 2020 are as follows:
| 2020 (six months remaining) | $ | 5.8 | ||
| 2021 | 9.0 | |||
| 2022 | 6.5 | |||
| 2023 | 6.0 | |||
| 2024 | 3.0 | |||
| Thereafter | 3.9 | |||
| $ | 34.2 |
Off-Balance Sheet Arrangements
As of June 30, 2020, we had no material off-balance sheet arrangements.
Effects of Inflation
Based on the analysis of the periods presented, we believe that inflation has not had a material effect on our operating results. There can be no assurance that future inflation will not have an adverse impact on our operating results and financial condition.
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NON-GAAP FINANCIAL MEASURES
Adjusted EBITDA
Adjusted EBITDA is not a financial measure determined in accordance with GAAP. We define adjusted EBITDA as net income before interest expense, provision for income taxes, depreciation and amortization, further adjusted to reflect non-cash equity compensation as well as certain one-time or non-recurring items.
We believe adjusted EBITDA is a useful performance measure because it allows for an effective evaluation of our operating performance when compared to our peers, without regard to our financing methods or capital structure. We exclude the items listed above from net income in arriving at adjusted EBITDA because these amounts are either non-recurring or can vary substantially within the industry depending upon accounting methods and book values of assets, capital structures and the method by which the assets were acquired. Adjusted EBITDA should not be considered as an alternative to, or more meaningful than, net income determined in accordance with GAAP. Certain items excluded from adjusted EBITDA are significant components in understanding and assessing a company’s financial performance, such as a company’s cost of capital and tax structure, as well as the historic costs of depreciable assets, none of which are reflected in adjusted EBITDA. Our presentation of adjusted EBITDA should not be construed as an indication that results will be unaffected by the items excluded from Adjusted EBITDA. Our computations of adjusted EBITDA may not be identical to other similarly titled measures of other companies. The following table presents reconciliations of adjusted EBITDA to net income, our most directly comparable financial measure calculated and presented in accordance with GAAP.
| For the three months ended June 30, | For the six-months ended June 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| (in $ millions) | (in $ millions) | |||||||||||||||
| Net (loss) income | $ | 2.2 | $ | 4.1 | $ | (21.3 | ) | $ | 4.9 | |||||||
| Interest | 6.4 | 3.1 | 12.0 | 5.5 | ||||||||||||
| Taxes | - | 0.2 | - | 0.2 | ||||||||||||
| Depreciation and amortization | 5.4 | 5.4 | 10.3 | 10.5 | ||||||||||||
| EBITDA | 14.0 | 12.8 | 1.0 | 21.1 | ||||||||||||
| EBITDA for acquired business prior to acquisition date(1) | $ | - | $ | 0.9 | $ | 0.8 | $ | 1.7 | ||||||||
| One time legal/transaction costs and other non-recurring charges(2) | 1.2 | 3.1 | 15.9 | 4.8 | ||||||||||||
| Non-cash equity compensation(3) | 0.2 | 0.5 | 10.6 | 0.6 | ||||||||||||
| Adjusted EBITDA | $ | 15.4 | $ | 17.3 | $ | 28.3 | $ | 28.2 | ||||||||
| (1) | Includes the EBITDA of LONG (which we acquired in February 2020) for the period January 1, 2020 through the date of the respective acquisition and January 1, 2019 through June 30, 2019. |
| (2) | Includes professional service-related service fees such as legal, accounting, tax, valuation and other consulting relating as well as change in control payments relating to the Atlas Business Combination. Additionally, it includes other acquisition related professional fees, previous owner expenses and costs to shut down the telecom division. |
| (3) | Includes the amortization of the unvested portion of our 2017 and 2019 Management Incentive Plan grants that vested immediately upon the change in control provisions contained within the agreements, compensation that was earned and accrued for in the three months ended March 31, 2020 that will be share settled subsequent to June 30, 2020, and the amortization of unvested restricted share units granted in May 2020 to key management personnel. |
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The information called for by this item is not required as we are a smaller reporting company.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15(b) of the Securities Exchange Act of 1934, as amended, an evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer, Chief Financial Officer and the Chief Accounting Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a- 15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this quarterly report. Based on that evaluation, the Company’s management, including the Chief Executive Officer, Chief Financial Officer and the Chief Accounting Officer, concluded that, as of June 30, 2020, the Company’s disclosure controls and procedures were effective at the reasonable assurance level.
We review and evaluate the design and effectiveness of our disclosure controls and procedures on an ongoing basis, to improve our controls and procedures over time and to correct any deficiencies that we may discover in the future. Our goal is to ensure that our senior management has timely access to all material financial and non-financial information concerning our business. While we believe the present design of our disclosure controls and procedures is effective to achieve our goal, future events affecting our business may cause us to significantly modify our disclosure controls and procedures.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the three-month period ended June 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. We have not experienced any material impact to our internal controls over financial reporting despite the fact that many of our employees are working remotely due to COVID-19. We are continually monitoring and assessing the effects of the COVID-19 pandemic on our internal controls to minimize the impact on their design and operating effectiveness.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Currently, we are not a party to any material litigation in any court, and management is not aware of any contemplated proceeding by any governmental authority against us. From time to time, we are involved in various legal matters and proceedings concerning matters arising in the ordinary course of business. We currently believe that any ultimate liability arising out of these matters and proceedings will not have a material adverse effect on our financial position, results of operations or cash flows.
ITEM 1A. RISK FACTORS
Other than the items noted below, there have been no material changes in any risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019, filed with the SEC on March 16, 2020. We may disclose changes to risk factors or disclose additional factors from time to time in our future filings with the SEC. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations.
We are an “emerging growth company” and will be able to avail ourselves of reduced disclosure requirements applicable to emerging growth companies, which could make our common stock less attractive to investors.
We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012 (“JOBS Act”), and we intend to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including not being required to comply with the auditor attestation requirements of Section 404(b) of Sarbanes-Oxley, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. In addition, pursuant to Section 107 of the JOBS Act, as an “emerging growth company” we intend to take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies.
We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile. We may take advantage of these reporting exemptions until we are no longer an “emerging growth company.” We will remain an “emerging growth company” until the earliest of (i) the last day of the fiscal year in which we have total annual gross revenues of $1.07 billion or more; (ii) the last day of our fiscal year following the fifth anniversary of the date of our initial public offering; (iii) the date on which we have issued more than $1 billion in nonconvertible debt during the previous three years; or (iv) the date on which we are deemed to be a large accelerated filer under the rules of the SEC.
The growth of our business through acquisitions may expose us to various risks and we cannot assure you that we will achieve synergies and cost savings in connection with prior or future acquisitions.
We have pursued and selected accretive acquisitions of complementary businesses and technologies in the past and we may continue to do so in the future. We may not achieve anticipated benefits and cost savings in connection with prior or future acquisitions within the anticipated time frames or at all. A variety of risks could cause us not to realize some or all of these expected benefits. These risks include, among others, higher than expected standalone overhead expenses, difficulties in integrating the operations and assets of the acquired business and personnel, delays in the anticipated timing of activities related to such initiatives, potential losses of key employees and customers of the acquired business, and the incurrence of other unexpected costs associated with operating the business. Moreover, our implementation of cost savings initiatives may disrupt our operations and performance, and our estimated cost savings from such initiatives may be based on assumptions that prove to be inaccurate. If, for any reason, the benefits we realize are less than our estimates or our improvement initiatives adversely affect our operations or cost more or take longer to implement than we project, or if our assumptions prove inaccurate, our results of operations may be materially and adversely affected.
In addition, our operating results from these acquisitions could, in the future, result in impairment charges for any of our intangible assets, including goodwill, or other long-lived assets, particularly if economic conditions worsen unexpectedly. These changes could materially adversely affect our results of operations, financial condition, stockholders’ equity, and cash flows.
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Our failure to comply with a variety of complex procurement rules and regulations could damage our reputation and result on our being liable for penalties, including termination of our government contracts, disqualification from bidding on future government contracts, suspension or debarment from government contracting.
We must comply with laws and regulations relating to government contracts, which affect how we do business with our customers and may impose added costs on our business. Some significant laws and regulations that affect us include:
| ● | federal, state, and local laws and regulations (including the FAR) regarding the formation, administration, and performance of government contracts; | |
| ● | the Civil False Claims Act, which provides for substantial civil penalties for violations, including for submission of a false or fraudulent claim to the U.S. government for payment or approval; and | |
| ● | federal, state, and local laws and regulations regarding procurement integrity including gratuity, bribery and anti-corruption requirements as well as limitations on political contributions and lobbying. |
Any failure to comply with applicable laws and regulations could result in contract termination, damage to our reputation, price or fee reductions or suspension or debarment from contracting with the government, each of which could materially adversely affect our business, results of operations and financial condition.
In addition, federal, state, and local government entities may revise existing contract rules and regulations or adopt new contract rules and regulations at any time and may also face restrictions or pressure regarding the type and amount of services that they may obtain from private contractors. Any of these changes could impair our ability to obtain new contracts or renew contracts under which we currently perform when those contracts are eligible for recompetition.
Cyber security breaches of our systems and information technology could adversely impact our ability to operate.
We need to protect our own internal trade secrets and other business confidential information from disclosure. We face a number of threats to our computer and information systems, including risks associated with unauthorized access, computer hackers, computer viruses, malicious code, organized cyber-attacks and other security problems and system disruptions, including possible unauthorized access to our and our clients’ proprietary or classified information. For example, in the past certain of our subsidiaries have been subject to external malicious ransom attacks of their data. We rely on industry-accepted security measures and technology to securely maintain all confidential and proprietary information on our information systems. We have devoted and will continue to devote significant resources to the security of our computer systems, but they are still vulnerable to these threats. A user who circumvents security measures can misappropriate confidential or proprietary information, including information regarding us, our personnel and/or our clients, or cause interruptions or malfunctions in operations. As a result, we can be required to expend significant resources to protect against the threat of these system disruptions and security breaches or to alleviate problems caused by these disruptions and breaches. Any of these events can damage our reputation and have a material adverse effect on our business, financial condition, results of operations and cash flows.
If we fail to develop or maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud. As a result, current and potential stockholders could lose confidence in our financial reporting, which would harm our business and the trading price of our Class A common stock.
Effective internal controls are necessary for us to provide reliable financial reports, prevent fraud and operate successfully as a public company. If we cannot provide reliable financial reports or prevent fraud, our reputation and operating results would be harmed. We cannot be certain that our efforts to develop and maintain our internal controls will be successful, that we will be able to maintain adequate controls over our financial processes and reporting in the future or that we will be able to comply with our obligations under Section 404 of the Sarbanes-Oxley Act of 2002. Any failure to develop or maintain effective internal controls, or difficulties encountered in implementing or improving our internal controls, could harm our operating results or cause us to fail to meet our reporting obligations. Ineffective internal controls could also cause investors to lose confidence in our reported financial information, which would likely have a negative effect on the trading price of our Class A common stock.
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Outbreaks of communicable diseases, including the on-going global pandemic related to COVID-19, have had and could continue to have, directly or indirectly, a material and adverse effect on our business, financial condition and results of operations. The duration and extent to which this will impact our future financial condition and results of operations remains uncertain.
Global or national health concerns, including the outbreak of pandemic or contagious disease, can negatively impact the global economy and, therefore, demand and pricing for our services. For example, the domestic and global crisis resulting from the outbreak of the COVID-19 pandemic and the measures being taken to address and limit the spread of the virus have already adversely affected the U.S. economy and financial markets, resulting in an economic downturn that has negatively impacted the demand for our services. Shelter in place orders in large metropolitan areas have negatively impacted our revenue, and it continued or exacerbated, could result in a material effect to our business. Furthermore, the COVID-19 pandemic also raises the possibility of an extended global economic downturn, which could ultimately result in an overall decrease in demand for our services and may impact the ability of our customers to pay for our services. For example, if a client’s financial difficulties become severe, the client may be unwilling or unable to pay our invoices in the ordinary course of business, which could adversely affect collections of both our accounts receivable and unbilled services.
As a result of the COVID-19 pandemic, we have an increased number of employees working remotely. As a result, we may have increased cyber security and data security risks, due to increased use of home Wi-Fi networks and virtual private networks, as well as increased disbursement of physical machines. While we implement IT controls to reduce the risk of a cyber-security and data security breach, there is no guarantee that these measures will be adequate to safeguard all systems with an increased number of employees working remotely.
At this time we are monitoring, and will continue to monitor, the safety of our employees during the COVID-19 pandemic and the impact of the COVID-19 pandemic on our cash flows and on the credit and financial markets. We are evaluating, and will continue to evaluate, the impact of COVID-19 pandemic on current projects, but the full effects of the COVID-19 pandemic on our operations are still unknown. The duration and extent of the impact from the COVID-19 pandemic depends on future developments that cannot be accurately predicted at this time, such as the severity and transmission rate of the virus, the extent and effectiveness of containment actions, and the impact of these and other factors on our employees and clients. The extension of mandates for many individuals to substantially restrict daily activities and for business to curtail or cease normal operations within the cities and municipalities we operate in could further negatively impact future results as well as the re-designation of infrastructure spending to non-essential services. Disruptions to capital markets due to the uncertainty surrounding the length and severity of the COVID-19 pandemic could delay the timing of our customers’ capital projects. In addition, the timing of payments from our commercial customers may be impacted.
Catastrophic events may adversely impact our business operations.
Our business operations may be adversely impacted by force majeure or extraordinary events beyond the control of the contracting parties, such as natural and man-made disasters as well as terrorist attacks. Such events could result in the closure of offices, interruption of projects, and the relocation of employees. We typically remain obligated to perform our services after a such extraordinary events unless the contract contains a force majeure clause that relieves us of our contractual obligations. If we are not able to react quickly to force majeure, our operations may be affected significantly, which would have a negative impact on our business operations.
Further, we rely on our network and third-party infrastructure and enterprise applications, internal technology systems, and our website for our development, marketing, operational, support, hosted services, and sales activities. Despite our implementation of network security measures, we are vulnerable to disruption, infiltration, or failure of these systems or third-party hosted services in the event of a major earthquake, fire, power loss, telecommunications failure, cyber-attack, war, terrorist attack, or other catastrophic event could cause system interruptions, reputational harm, loss of intellectual property, lengthy interruptions in our services, breaches of data security, and loss of critical data and could harm our future operating results.
Our largest stockholder collectively holds a substantial majority of our common stock.
Holders of our common stock vote together as a single class on all matters presented to our stockholders for their vote or approval, except as otherwise required by applicable law or our certificate of incorporation. Bernhard Capital Partners Management, LP and certain related affiliates (“Bernhard Capital Partners”) owns over a majority of the voting power of our common stock. Bernhard Capital Partners has the ability to determine the outcome of certain matters requiring stockholder approval, including mergers and other material transactions, and is able to cause or prevent certain changes in the composition of our board of directors or a change in control of our company that could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale of our company. The existence of a significant stockholder may also have the effect of deterring hostile takeovers, delaying or preventing changes in control or changes in management, or limiting the ability of our other stockholders to approve transactions that they may deem to be in the best interests of our company.
So long as Bernhard Capital Partners continues to control a significant amount of our common stock, they will continue to be able to strongly influence all matters requiring stockholder approval, regardless of whether or not other stockholders believe that a potential transaction is in their own best interests. In any of these matters, the interests of Bernhard Capital Partners may differ or conflict with the interests of our other stockholders. In addition, Bernhard Capital Partners and its affiliates may, from time to time, acquire interests in businesses that directly or indirectly compete with our business, as well as businesses that are significant existing or potential customers. Bernhard Capital Partners and its affiliates may acquire or seek to acquire assets that we seek to acquire and, as a result, those acquisition opportunities may not be available to us or may be more expensive for us to pursue. Moreover, this concentration of stock ownership may also adversely affect the trading price of our common stock to the extent investors perceive a disadvantage in owning stock of a company with a controlling stockholder.
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The market price of our common stock may be affected by low trading volume.
Although a trading market for our Class A common stock exists on the NASDAQ, the trading volume has not been significant, due in part to a substantial number of our outstanding shares of our common stock being subject to contractual lock-ups and other legal restrictions. Additionally, a large percentage of our common stock is currently made up of Class B common stock, which is not listed on a public exchange but is exchangeable (along with Holdings Units) for shares of Class A common stock. The market price for shares of our Class A common stock may be made more volatile because of the relatively low volume of trading. When trading volume is low, significant price movement can be caused by the trading in a relatively small number of shares. Low volume can also reduce liquidity, which could adversely affect the market price of our shares of common stock.
Shares of Class A common stock issued pursuant to the terms of the Holdings LLC Agreement or upon exercise of any of our Public Warrants or Private Placement Warrants, will increase the number of shares eligible for resale in the public market.
Pursuant to the terms of Holdings LLC Agreement, Atlas Holdings and its limited partners (the “Continuing Members”) may redeem any or all of the shares of Class B common stock issued to them along with a corresponding number of Holdings Units, for an equal number of shares of Class A common stock. If the underwriters exercise in full their option to purchase additional shares, the selling stockholder will redeem a portion of its Class B common stock and Holdings Units in exchange for the Class A common stock to be sold as part of the exercise of such option.
Furthermore, we have (i) 20,000,000 outstanding exercisable Public Warrants to purchase 20,000,000 shares of Class A common stock at an exercise price of $11.50 per share and (ii) 3,750,000 Private Placement Warrants outstanding exercisable for 3,750,000 shares of common stock at an exercise price of $11.50 per share.
Shares of Class A common stock issued pursuant to the terms of the Holdings LLC Agreement, or upon exercise of any of the Warrants, will increase in the number of shares of Class A common stock eligible for resale in the public market. Additionally, we may sell additional shares of our Class A common stock in subsequent offerings and cannot predict the size of future issuances of our Class A common stock or securities convertible into Class A common stock or the effect, if any, that future issuances and sales of shares of our Class A common stock will have on the market price of our Class A common stock. Sales of a substantial number of such shares in the public market, or the perception that such sales could occur, may adversely affect the market price of Class A common stock.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS FROM REGISTERED SECURITIES
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 exchange for the contingent consideration liability that arose from their acquisition in November 2018, 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.
Additionally, on February 14, 2020, in connection with the Atlas Business Combination, GSO was issued 1,200,000 shares of Class F common stock pursuant to a letter agreement, dated as of February 14, 2020 (the “Founder Shares Transfer Letter”), as consideration for the purchase of Preferred Units made pursuant to the Subscription Agreement, which converted automatically into 1,200,000 Class A common stock. The Class F common stock issued was 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.
Additionally, on February 14, 2020, in connection with the Atlas Business Combination, the Company issued the Seller 23,974,368 shares of Class B common stock along with an equal number of Holdings Units that are redeemable on a one-for-one basis for shares of Class A common stock in exchange for common units of Atlas TC Holdings LLC held by the Seller pursuant to the Purchase Agreement. The Class B common stock issued was 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.
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ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS.
| * | Filed Herewith |
| † | Management contract and compensatory arrangement in which any director or named executive officer participates |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on this 10th day of August, 2020.
| ATLAS TECHNICAL CONSULTANTS, INC. | ||
| /s/ David D. Quinn, Sr. | ||
| Name: | David D. Quinn, Sr. | |
| Title: | Chief Financial Officer | |
| (Principal Financial Officer) | ||
| /s/ Walter Powell | ||
| Name: | Walter Powell | |
| Title: | Chief Accounting Officer | |
| (Principal Accounting Officer) | ||
| /s/ L. Joe Boyer | ||
| Name: | L. Joe Boyer | |
| Title: | Chief Executive Officer | |
| (Principal Executive Officer) | ||
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