UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~July 1,~~September 30, 2022

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-38745

ATLAS TECHNICAL CONSULTANTS, INC.

(Exact name of registrant as specified in its charter)

Delaware		83-0808563
(State or other jurisdiction of incorporation)		(IRS Employer Identification No.)

13215 Bee Cave Parkway, Building B, Suite 230, Austin, TX		78738
(Address of principal executive offices)		(Zip Code)

(512) 851-1501

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Class A common stock, $0.0001 par value per share		ATCX		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. Yes ☒ No ☐

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 the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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	☐	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. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of ~~August 8,~~November 7, 2022, ~~36,772,542~~37,721,053 shares of the registrant’s Class A common stock, par value $0.0001 per share, and ~~2,245,292~~1,346,212 shares of the registrant’s Class B common stock, par value $0.0001 per share, were outstanding.

ATLAS TECHNICAL CONSULTANTS, INC.

Form 10-Q

For the ~~Quarter~~Three and ~~Year to Date~~Nine Months Ended ~~July 1,~~September 30, 2022

TABLE OF CONTENTS

		Page

PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements	1
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2425
Item 3.	Quantitative and Qualitative Disclosures About Market Risks	3738
Item 4.	Controls and Procedures	3738

PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	3839
Item 1A.	Risk Factors	3839
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds from Registered Securities	3839
Item 3.	Defaults Upon Senior Securities	3839
Item 4.	Mine Safety Disclosures	3839
Item 5.	Other Information	3839
Item 6.	Exhibits	3940

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

The statements contained in this Quarterly Report on Form 10-Q (this “Quarterly Report”) of Atlas Technical Consultants, Inc. (the “Company”) that are not purely historical are forward-looking statements. 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, are forward-looking statements. The words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “possible,” “potential,” “predict,” “project,” “should,” “would” 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 current expectations and beliefs concerning future developments and their potential effects on us. When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements described under the heading “Risk Factors” ~~included elsewhere~~ in ~~this report.~~our Annual Report on Form 10-K that the Company filed with the SEC on March 16, 2022. 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 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:

●

the effect, impact, potential duration or other implications of the COVID-19 pandemic and any expectations we may have with respect thereto;

●

the adequacy of our efforts to mitigate cybersecurity risks and threats, especially with employees working remotely due to the COVID-19 pandemic;

●

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, as a result of which they would then receive expense reimbursements;

●

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, regional and national downturns;

●

fluctuations in our revenue and operating results;

●

unfavorable conditions or further disruptions in the capital and credit markets;

●

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;

●

our failure to maintain appropriate internal controls over financial reporting and disclosure controls and procedures;

●

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 to fund acquisitions, expansions and our working capital needs and our ability to obtain debt or equity financing on satisfactory terms;

●

safety and environmental requirements and other governmental regulations that may subject us to unanticipated costs and/or liabilities;

●

our contracts with governmental agencies are subject to audit, which could result in adjustments to reimbursable contract costs or, if we are charged with wrongdoing, possible temporary or permanent suspension from participating in government programs;

●

general economic conditions and demand for our services; and

●

our ability to fulfill our public company obligations.

Should one or more of these risks or uncertainties materialize, they could cause our actual results to differ materially from the forward-looking statements. Forward-looking statements speak only as of the date they were made. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws. You should not take any statement regarding past trends or activities as a representation that the trends or activities will continue in the future. Accordingly, you should not put undue reliance on these statements.

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)

	July 1, 2022			December 31, 2021			September 30, 2022			December 31, 2021
ASSETS
Current assets:
Cash and equivalents	$	11,046		$	10,697		$	9,451		$	10,697
Accounts receivable, net		111,987			105,362			113,287			105,362
Unbilled receivables, net		53,727			45,924			57,245			45,924
Prepaid expenses		6,982			5,061			9,151			5,061
Other current assets		4,895			4,039			3,713			4,039
Total current assets		188,637			171,083			192,847			171,083

Property and equipment, net		14,918			13,757			15,492			13,757
Intangible assets, net		136,678			107,314			130,485			107,314
Goodwill		132,854			124,348			132,854			124,348
Other long-term assets		49,971			4,015			57,158			4,015
TOTAL ASSETS	$	523,058		$	420,517		$	528,836		$	420,517

LIABILITIES AND SHAREHOLDERS’ DEFICIT
Current liabilities:
Trade accounts payable	$	48,914		$	42,521		$	43,422		$	42,521
Accrued liabilities		13,782			17,124			13,142			17,124
Current maturities of long-term debt		4,930			3,606			4,930			3,606
Other current liabilities		40,795			26,489			32,609			26,489
Total current liabilities		108,421			89,740			94,103			89,740

Long-term debt, net of current maturities and loan costs		498,561			462,193			510,369			462,193
Other long-term liabilities		54,477			20,074			49,451			20,074
Total liabilities		661,459			572,007			653,923			572,007

COMMITMENTS AND CONTINGENCIES (NOTE 12)

Class A common stock, $0.0001 par value, 400,000,000 shares authorized, 36,772,542 and 33,645,212 shares issued and outstanding at July 1, 2022 and December 31, 2021, respectively		4			3
Class B common stock, $0.0001 par value, 100,000,000 shares authorized, 2,245,292 and 3,328,101 shares issued and outstanding at July 1, 2022 and December 31, 2021, respectively		-			-
Class A common stock, $0.0001 par value, 400,000,000 shares authorized, 37,708,556 and 33,645,212 shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively								4			3
Class B common stock, $0.0001 par value, 100,000,000 shares authorized, 1,356,212 and 3,328,101 shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively								-			-
Additional paid in capital		(83,774	)		(102,692	)		(81,765	)		(102,692	)
Non-controlling interest		(20,708	)		(20,210	)		(20,629	)		(20,210	)
Accumulated other comprehensive income								9,321			-
Retained deficit		(33,923	)		(28,591	)		(32,018	)		(28,591	)
Total shareholders’ deficit		(138,401	)		(151,490	)		(125,087	)		(151,490	)

TOTAL LIABILITIES AND SHAREHOLDERS’ DEFICIT	$	523,058		$	420,517		$	528,836		$	420,517

The accompanying notes are an integral part of these unaudited consolidated financial statements.

ATLAS TECHNICAL CONSULTANTS, INC. AND SUBSIDIARIES

UNAUDITED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

	Three Months Ended						Six Months Ended						Three Months Ended						Nine Months Ended
	July 1, 2022			July 2, 2021			July 1, 2022			July 2, 2021			September 30, 2022			October 1, 2021			September 30, 2022			October 1, 2021
Revenues	$	156,501		$	131,562		$	291,688		$	254,831		$	162,119		$	138,719		$	453,807		$	393,550
Subcontractor costs		(34,040	)		(25,241	)		(59,871	)		(46,917	)		(33,154	)		(26,206	)		(93,025	)		(73,123	)
Other costs of revenues		(48,498	)		(43,108	)		(94,534	)		(86,060	)		(52,180	)		(46,372	)		(146,714	)		(132,432	)

Gross Profit		73,963			63,213			137,283			121,854			76,785			66,141			214,068			187,995

Operating expenses:
Personnel costs and benefits		(38,335	)		(32,611	)		(72,805	)		(66,521	)		(37,254	)		(35,210	)		(110,059	)		(101,731	)
Selling general and administrative		(16,736	)		(16,177	)		(31,772	)		(28,053	)		(16,832	)		(16,327	)		(48,604	)		(44,379	)
Change in fair value of earnouts		-			(2,823	)		-			(2,823	)		-			-			-			(2,823	)
Depreciation and amortization		(8,328	)		(5,940	)		(15,296	)		(10,500	)		(8,821	)		(5,971	)		(24,117	)		(16,471	)

Total Operating expenses		(63,399	)		(57,551	)		(119,873	)		(107,897	)		(62,907	)		(57,508	)		(182,780	)		(165,404	)

Operating income		10,564			5,662			17,410			13,957			13,878			8,633			31,288			22,591

Interest expense		(11,771	)		(10,258	)		(22,890	)		(33,300	)		(11,502	)		(10,750	)		(34,392	)		(44,050	)

Loss before income taxes		(1,207	)		(4,596	)		(5,480	)		(19,343	)
Income (loss) before income taxes														2,376			(2,117	)		(3,104	)		(21,459	)
Income tax expense		(205	)		(187	)		(350	)		(231	)		(392	)		(409	)		(742	)		(641	)

Net (loss) income		(1,412	)		(4,783	)		(5,830	)		(19,574	)
Net income (loss)														1,984			(2,526	)		(3,846	)		(22,100	)

Provision for non-controlling interest		102			617			467			12,786			(79	)		233			419			13,019

Redeemable preferred stock dividends		-			-			-			(5,899	)		-			-			-			(5,899	)

Net (loss) attributable to Class A common stock shareholders/members	$	(1,310	)	$	(4,166	)	$	(5,363	)	$	(12,687	)
Net income (loss) attributable to Class A common stock shareholders/members													$	1,905		$	(2,293	)	$	(3,427	)	$	(14,980	)

(Loss) Per Class A Common Share	$	(0.04	)	$	(0.14	)	$	(0.15	)	$	(0.57	)
Income (Loss) Per Class A Common Share													$	0.05		$	(0.07	)	$	(0.10	)	$	(0.58	)

Weighted average of shares outstanding:
Class A common shares (basic and diluted)		35,934,215			30,633,366			34,981,819			22,400,179			37,511,678			32,826,431			35,822,028			25,862,913

The accompanying notes are an integral part of these unaudited consolidated financial statements.

ATLAS TECHNICAL CONSULTANTS, INC. AND SUBSIDIARIES

UNAUDITED STATEMENTS OF OTHER COMPREHENSIVE INCOME

(in thousands)

	Three Months Ended						Nine Months Ended
	September 30, 2022			October 1, 2021			September 30, 2022			October 1, 2021

Net income (loss)	$	1,984		$	(2,526	)	$	(3,846	)	$	(22,100	)
Other comprehensive income, net of tax effects:
Change in fair value of derivative instruments		9,321			-			9,321			-
Total other comprehensive income		9,321			-			9,321			-
Comprehensive income (loss)		11,305			(2,526	)		5,475			(22,100	)
Comprehensive (income) loss attributable to non-controlling interest		(448	)		233			50			13,019
Comprehensive income (loss) attributable to Atlas	$	10,857		$	(2,293	)	$	5,525		$	(9,081	)

The accompanying notes are an integral part of these unaudited consolidated financial statements.

ATLAS TECHNICAL CONSULTANTS, INC. AND SUBSIDIARIES

UNAUDITED STATEMENTS OF CASH FLOWS

(in thousands)

	For the six months ended						Nine Months Ended
	July 1, 2022			July 2, 2021			September 30, 2022			October 1, 2021
Cash flows from operating activities:
Net (loss)	$	(5,830	)	$	(19,574	)
Cash flows from operating activities:
Net loss							$	(3,846	)	$	(22,100	)
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation and amortization		15,296			10,499			24,117			16,471
Equity based compensation expense		2,734			1,251			4,743			2,454
Interest expense, paid in kind		-			3,153			-			5,536
Gain on sale of property and equipment		-			(1	)
Loss on sale of property and equipment								-			32
Write-off of deferred financing costs related to debt extinguishment		-			15,197			-			15,197
Amortization of deferred financing costs		558			644			837			928
Provision for bad debts		-			(511	)		-			(403	)
Changes in assets & liabilities:
(Increase) decrease in accounts receivable and unbilled receivable		(1,749	)		2,724			(6,567	)		(6,969	)
(Increase) decrease in prepaid expenses		(1,547	)		(2,416	)		(3,716	)		(1,630	)
(Increase) decrease in other current assets		(848	)		1,586			334			1,721
Increase (decrease) in trade accounts payable		(557	)		1,680			(6,049	)		2,305
(Decrease) in accrued liabilities		(8,511	)		(5,252	)		(9,151	)		(10,286	)
(Decrease) in other current and long-term liabilities		(6,075	)		(180	)		(14,669	)		(739	)
(Increase) in other long-term assets		221			(344	)		-			(263	)
Net cash provided by (used in) operating activities		(6,308	)		8,456
Net cash (used in) provided by operating activities								(13,967	)		2,254

Cash flows from investing activities:
Purchases of property and equipment		(4,080	)		(1,447	)		(7,283	)		(2,407	)
Proceeds from disposal of property and equipment		-			1			-			16
Purchase of business, net of cash acquired		(24,757	)		(30,999	)		(27,019	)		(30,999	)
Net cash (used in) investing activities		(28,837	)		(32,445	)		(34,302	)		(33,390	)

Cash flows from financing activities:
Proceeds from issuance of debt		26,000			496,754			26,000			496,754
Payment of loan acquisition costs		-			(8,543	)		-			(8,543	)
Repayments of debt		(2,400	)		(294,463	)		(2,400	)		(294,463	)
Net payments on revolving line of credit		13,534			(12,159	)
Net draw (payments) on revolving line of credit								25,063			(11,844	)
Repayment of redeemable preferred stock		-			(156,186	)		-			(156,186	)
Payments of redeemable preferred stock dividends		-			(1,185	)		-			(1,185	)
Distributions to non-controlling interests		-			(779	)		-			(1,238	)
Payment of contingent earn-out		(1,640	)		(1,706	)		(1,640	)		(1,706	)
Net cash provided by financing activities		35,494			21,733			47,023			21,589

Net change in cash and equivalents		349			(2,256	)		(1,246	)		(9,547	)
Cash and equivalents - beginning of period		10,697			14,062			10,697			14,062
Cash and equivalents - end of period	$	11,046		$	11,806		$	9,451		$	4,515

Supplemental information:
Cash paid during the period for:
Interest	$	21,203		$	13,830		$	33,281		$	21,950
Taxes		425			232			463			641
Capital assets financed		102			165			308			297
Contingent consideration share settled		-			2,000			-			2,000

The accompanying notes are an integral part of these unaudited consolidated financial statements.

ATLAS TECHNICAL CONSULTANTS, INC. AND SUBSIDIARIES

UNAUDITED STATEMENTS OF SHAREHOLDERS’ DEFICIT

(in thousands)

	Class A Common Stock				Class B Common Stock						Additional Paid in			Non- Controlling			Retained			Total Shareholders’			Class A Common Stock				Class B Common Stock						Additional Paid in			Non- Controlling			Accumulated Other Comprehensive		Retained			Total Shareholders’
	Shares		Amount		Shares			Amount			Capital			Interests			Deficit			Deficit			Shares		Amount		Shares			Amount			Capital			Interests			Income		Deficit			Deficit
Balance at December 31, 2020		12,842	$	1		22,439			2		$	(37,382	)		(90,566	)		(6,203	)	$	(134,148	)		12,842	$	1		22,439		$	2		$	(37,382	)	$	(90,566	)	$	-	$	(6,203	)	$	(134,148	)
Equity based compensation		-		-		-			-			446									446													446											446
Conversion of Shares		2,315		1		(2,315	)					(9,344	)		9,344						1			2,315		1		(2,315	)					(9,344	)		9,344								1
Net loss															(8,654	)		(6,136	)		(14,790	)															(8,654	)				(6,136	)		(14,790	)
Dividends on redeemable preferred stock															(3,515	)		(2,384	)		(5,899	)															(3,515	)				(2,384	)		(5,899	)
Balance at April 2, 2021		15,157	$	2		20,124			2			(46,280	)		(93,391	)		(14,723	)		(154,390	)		15,157	$	2		20,124		$	2		$	(46,280	)	$	(93,391	)	$	-	$	(14,723	)	$	(154,390	)
Equity based compensation												805									805													805											805
Distributions to non-controlling interests															(779	)					(779	)															(779	)							(779	)
Net loss															(617	)		(4,166	)		(4,783	)															(617	)				(4,166	)		(4,783	)
Issuance of shares		1,693										16,007									16,007			1,693										16,007											16,007
Conversion of shares		15,889		1		(15,889	)		(2	)		(73,743	)		73,743						(1	)		15,889		1		(15,889	)	$	(2	)		(73,743	)		73,743								(1	)
Balance at July 2, 2021		32,739	$	3		4,235		$	-		$	(103,211	)	$	(21,044	)	$	(18,889	)	$	(143,141	)		32,739	$	3		4,235		$	-		$	(103,211	)	$	(21,044	)	$	-	$	(18,889	)	$	(143,141	)

Distributions to non-controlling interests																																					(459	)							(459	)
Equity based compensation																																		1,203											1,203
Conversion of shares																								881				(881	)					(4,380	)		4,380								(1	)
Net loss																																					(233	)				(2,293	)		(2,526	)
Balance at October 1, 2021																								33,620	$	3		3,353		$	-		$	(106,388	)	$	(17,356	)	$	-	$	(21,182	)	$	(144,923	)

Balance at December 31, 2021		33,646	$	3		3,328					$	(102,692	)	$	(20,210	)	$	(28,591	)	$	(151,490	)		33,646	$	3		3,328		$	-		$	(102,692	)	$	(20,210	)	$	-	$	(28,591	)	$	(151,490	)
Equity based compensation		62										1,706									1,706			62										1,706											1,706
Conversion of shares		181				(181	)		-															181				(181	)																-
Net (loss)															(396	)		(4,022	)		(4,418	)
Net loss																																					(396	)				(4,022	)		(4,418	)
Shares issued		1,227		1		186						15,530									15,531	)		1,227		1		186						15,530											15,531
Balance at April 1, 2022		35,116	$	4		3,333		$	-		$	(85,456	)		(20,606	)		(32,613	)		(138,671	)		35,116	$	4		3,333		$	-		$	(85,456	)	$	(20,606	)	$	-	$	(32,613	)	$	(138,671	)

Equity based compensation												1,682									1,682													1,682											1,682
Conversion of shares		1,088				(1,088	)																	1,088				(1,088	)																-
Net (loss)															(102	)		(1,310	)		(1,412	)
Net loss																																					(102	)				(1,310	)		(1,412	)
Issuance of shares		569																						569																					-
Balance at July 1, 2022		36,773	$	4		2,245		$	-		$	(83,774	)	$	(20,708	)	$	(33,923	)	$	(138,401	)		36,773	$	4		2,245		$	-		$	(83,774	)	$	(20,708	)	$	-	$	(33,923	)	$	(138,401	)

Equity based compensation																																		2,009											2,009
Conversion of shares																								889				(889	)																-
Net income																																					79					1,905			1,984
Other comprehensive income																																								9,321					9,321
Issuance of shares																								47																					-
Balance at September 30, 2022																								37,709	$	4		1,356		$	-		$	(81,765	)	$	(20,629	)	$	9,321	$	(32,018	)	$	(125,087	)

The accompanying notes are an integral part of these unaudited consolidated financial statements.

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 August 12, 2019, as amended on January 22, 2020 (the “Purchase Agreement”), by and among the Company, Atlas TC Holdings LLC, a wholly-owned subsidiary of the Company and a Delaware limited liability company (“Holdings”), Atlas TC Buyer LLC, a wholly-owned subsidiary of Holdings and a Delaware limited liability company (the “Buyer”), Atlas Intermediate and Atlas Technical Consultants Holdings LP, a Delaware limited partnership (the “Seller”). The acquisition of Atlas Intermediate pursuant to the Purchase Agreement, together with the other transactions contemplated by the Purchase Agreement is referred to herein as the “Atlas Business Combination.”

Following the consummation of the Atlas Business Combination, the combined company is organized in an “Up-C” structure in which the business of Atlas Intermediate and its subsidiaries is held by Holdings and will continue to operate through the subsidiaries of Atlas Intermediate, and in which the Company’s only direct assets will consist of common units of Holdings (“Holdings Units”). The Company is the sole manager of Holdings in accordance with the terms of the Amended and Restated Limited Liability Company Agreement of Holdings (the “Holdings LLC Agreement”) entered into in connection with the consummation of the Atlas Business Combination.

The Company has approximately 124 offices in 41 states, employs approximately 3,600 employees and is headquartered in Austin, Texas.

The Company is an infrastructure and environmental solutions company and a provider of professional testing, inspection, engineering, environmental, program management and consulting services, offering solutions to public and private sector clients in the transportation, commercial, water, government, education, industrial, healthcare and power markets.

Services are provided throughout the United States and its territories to a broad base of clients, with no single client representing 10% or more of our revenues for either the three or ~~six~~nine months ended ~~July 1,~~September 30, 2022 or ~~July 2,~~October 1, 2021. Services are rendered primarily on a time and materials and cost-plus basis with approximately 90% of our contracts on that basis and the remainder represented by firm fixed price contracts.

Basis of Presentation

The acquisition of Atlas Intermediate has been accounted for as a reverse recapitalization. Under this method of accounting, Atlas is treated as the acquired company and Atlas Intermediate is treated as the acquirer for financial reporting purposes. Therefore, the consolidated financial results include information regarding Atlas Intermediate as the Company’s predecessor entity. Thus, the financial statements included in this report reflect (i) the historical operating results of Atlas Intermediate prior to the Atlas Business Combination; (ii) the combined results of the Company, which does not have any operating results and includes only certain costs such as the compensation for the Company’s board of directors (the “Board”), certain legal fees and taxes, and Atlas Intermediate following the Atlas Business Combination; (iii) the assets, liabilities and members’ capital of Atlas Intermediate at their historical costs; and (iv) the Company’s equity and earnings per share presented for the period from the Closing Date.

The accompanying interim statements of the Company have been prepared in accordance with generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X issued by the United States Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements.

In the opinion of management, all adjustments, consisting only of normal recurring adjustments and disclosures necessary for a fair statement of these interim statements have been included. The results reported in these interim statements are not necessarily indicative of the results that may be reported for the entire year or for any other period. These interim statements should be read in conjunction with the audited financial statements for the year ended December 31, 2021 included in our Annual Report on Form 10-K that the Company filed with the SEC on March ~~15,~~16, 2022.

Emerging Growth Company

The Company is an “emerging growth company,” as defined in Section 2(a) of the Securities Act (as defined herein), as modified by the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), and it may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in its periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.

Further, Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable. The Company has elected not to opt out of such extended transition period which means that when a standard is issued or revised and it has different application dates for public or private companies, the Company, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard. This may make comparison of the Company’s financial statements with another public company which is neither an emerging growth company nor an emerging growth company which has opted out of using the extended transition period difficult or impossible because of the potential differences in accounting standards used.

The Company ~~currently anticipates its~~will no longer be an emerging growth ~~status to expire during~~company at the ~~quarter ended December 29, 2023.~~end of fiscal year 2023 based on five years since the date of our initial public offering.

Reclassification

Certain amounts reported in prior years in the financial statements have been reclassified to conform to the current year’s presentation. This reclassification did not have any impact to our reported net income or cash flows for the three or ~~six~~nine months ended ~~July 2,~~October 1, 2021.

Fiscal Year

The Company’s fiscal year ends on the Friday closest to December 31 with fiscal quarters based on thirteen- week periods ending on the Friday closest to March 31, June 30 and September 30.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Accounts Receivable and Accrued Billings

The Company records its trade accounts receivable and unbilled receivables at their face amounts less allowances. On a periodic basis, the Company monitors the trade accounts receivable and unbilled receivables from its customers for any collectability issues. The allowance for doubtful accounts is established based on reviews of individual customer accounts, recent loss experience, current economic conditions, and other pertinent factors. The Company writes off accounts after a determination has been made by management that the amounts at issue are no longer likely to be collected, following the exercise of reasonable collection efforts, and upon management’s determination that the costs of pursuing collection outweigh the likelihood of recovery. Payments subsequently received on such receivables are credited to the allowance for doubtful accounts.

As of ~~July 1,~~September 30, 2022 and December 31, 2021, the allowance for trade accounts receivable was ~~$3.8~~$3.3 million and $3.3 million, respectively, while the allowance for unbilled receivables was $0.5 million and $0.6 million, respectively. The allowances reflect the Company’s best estimate of collectability risks on outstanding receivables and unbilled services.

Property and Equipment

Purchases of new assets and costs of improvement to extend the useful life of existing assets are capitalized. Routine maintenance and repairs are charged to expenses as incurred. When an asset is sold or retired, the costs and related accumulated depreciation are eliminated from the accounts, and the resulting gains or losses on disposal are recognized in the accompanying Consolidated Statement of Operations. The Company depreciates its assets on a straight-line basis over the assets’ useful lives, which range from three to ten years.

Impairment of Long-Lived Assets

The Company assesses long-lived assets for impairment when events or circumstances indicate that the carrying value of an asset may not be recoverable. The Company recognizes an impairment if the net book value of such assets exceeds the future undiscounted cash flows attributable to such assets. If an impairment is indicated based on a comparison of the assets’ carrying amounts and the undiscounted cash flows, the impairment loss is measured as the amount by which the carrying amounts of the assets exceed the respective fair values of the assets. There were no impairment charges during the three or ~~six~~nine months ended ~~July 1,~~September 30, 2022 and ~~July 2,~~October 1, 2021.

Goodwill

Goodwill represents the excess of the cost of net assets acquired over the fair value of the identifiable tangible and intangible assets acquired and liabilities assumed in a business combination. In accordance with the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 350, Intangibles – Goodwill and Other, we evaluate goodwill annually for impairment on October 1, or whenever events or changes in circumstances indicate the asset may be impaired, using the quantitative method. An entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. These qualitative factors include: macroeconomic and industry conditions, cost factors, overall financial performance and other relevant entity-specific events. If we determine that this threshold is met, then performing the two-step quantitative impairment test is unnecessary. We may elect to bypass the qualitative assessment and proceed directly to the quantitative test for any reporting unit. The two-step impairment test requires a comparison of the carrying value of the assets and liabilities associated with a reporting unit, including goodwill, with the fair value of the reporting unit. We determine fair value through the discounted cash flow method. We make certain subjective and complex judgments in assessing whether an event of impairment of goodwill has occurred, including assumptions and estimates used to determine the fair value of our reporting units. If the carrying value of our reporting unit exceeds the fair value of our reporting unit, we would calculate the implied fair value as compared to the carrying value to determine the appropriate impairment charge, if any. There were no impairment charges for the three or ~~six~~nine months ended ~~July 1,~~September 30, 2022 and ~~July 2,~~October 1, 2021.

Revenue Recognition

Below is a description of the basic types of contracts from which the Company may earn revenue:

Time and Materials Contracts

Under the time and materials (“T&M”) arrangements, contract fees are based upon time and materials incurred. The contracts may be structured as basic time and materials, cost plus a margin or time and materials subject to a maximum contract value (the “ceiling”). Due to the potential limitation of the contract’s ceiling, the economic factors of the contracts subject to a ceiling differ from the economic factors of basic T&M and cost-plus contracts.

The majority of the Company’s contracts are for projects where it bills the client monthly at hourly billing or unit rates. The billing rates are determined by contract terms. Under cost plus contracts, the Company charges its clients for contract related costs at cost, an agreed upon overhead rate plus a fixed fee or rate.

Under time and materials contracts with a ceiling, the Company charges the clients for time and materials based upon the work performed however there is a ceiling or a not to exceed value. There are often instances that a contract is modified to extend the contract value past the original or amended ceiling. As the consideration is variable depending on the outcome of the contract renegotiation, the Company will estimate the total contract price in accordance with the variable consideration guidelines and will only include consideration that it expects to receive from the customer. When the Company is reaching the ceiling, the contract will be renegotiated, or we cease work when the maximum contract value is reached. The Company will continue to work if it is probable that the contract will be extended. The Company is only entitled to consideration for the work it has performed, and the ceiling amount is not a guaranteed contract value. The Company earned approximately 90% of its revenues under T&M contracts during the three and ~~six~~nine months ended ~~July 1,~~September 30, 2022 and ~~July 2,~~October 1, 2021, respectively.

Fixed Price Contracts

Under fixed price contracts, the Company’s clients may pay an agreed amount negotiated in advance for a specified scope of work. The Company is guaranteed to receive the consideration to the extent that the Company delivers under the contract. The Company assesses contracts quarterly and may recognize any expected future loss before actually incurring the loss. When the Company is expecting to reach the total consideration under the contract or the scope of work changes, the Company will attempt to negotiate a change order.

Change Orders and Claims

Change orders are modifications of an original contract that effectively change the provisions of the contract. Either the Company or its client may initiate change orders. They may include changes in specifications or design, manner of performance, facilities, equipment, materials, sites, and period of completion of the work or changes in the amount of our compensation. Management evaluates when a change order is probable based upon its experience in negotiating change orders, the customer’s written approval of such changes or separate documentation of change order costs that are identifiable. Change orders may take time to be formally documented and terms of such change orders are agreed with the client before the work is performed. Sometimes circumstances require that work progresses before an agreement is reached with the client. If the Company is having difficulties in renegotiating the change order, the Company will stop work if possible, record all costs incurred to date, and determine, on a project-by-project basis, the appropriate final revenue recognition.

Claims are amounts in excess of the agreed contract price that the Company seeks to collect from its clients or others for client-caused delays, errors in specifications and designs, contract terminations, change orders that are either in dispute or are unapproved as to both scope and price, or other causes of unanticipated additional contract costs. Costs related to change orders and claims are recognized when they are incurred. The Company evaluates claims on an individual basis and recognizes revenue it believes is probable to collect.

Performance Obligations

The majority of our contracts have a single performance obligation as the promise to transfer the individual goods or services is not separately identifiable from other promises in the contracts and, therefore, is not distinct. However, in some instances, we may also promise to provide distinct goods or services within a contract, resulting in multiple performance obligations. For contracts with multiple performance obligations, we allocate the contract transaction price to each performance obligation using the best estimate of the standalone selling price of each distinct good or service in the contract. Typically, we sell a customer a specific service and use the expected cost plus a margin approach to estimate the standalone selling price of each performance obligation.

The Company’s performance obligations are satisfied as work progresses or at a point in time. Revenue on our cost-reimbursable contracts is recognized over time using direct costs incurred or direct costs incurred to date as compared to the estimated total direct costs for performance obligations because it best depicts the transfer of control to the customer. Contract costs include labor, subcontractors’ costs, and other direct costs.

Gross revenue from services transferred to customers at a point in time is recognized when the customer obtains control of the asset, which is generally upon delivery and acceptance by the customer of the reports and/or analysis performed.

As of ~~July 1,~~September 30, 2022 and December 31, 2021, we had ~~$855~~$864 million and $808 million of remaining performance obligations, or backlog, respectively, of which ~~$513~~$518 million and $485 million, respectively, or 60% is expected to be recognized over the next 12 months and the majority of the balance over the next 24 months. Project cancellations or scope adjustments may occur, from time to time, with respect to contracts reflected in backlog. Most of our government contracts are multi-year contracts for which funding is appropriated on an annual basis, therefore backlog includes only those amounts that have been funded and authorized and does not reflect the full amounts we may receive over the term of such contracts. In the case of non-government contracts, backlog includes future revenue at contract rates, excluding contract renewals or extensions that are at the discretion of the client. For contracts with a not-to-exceed maximum amount, we include revenue from such contracts in backlog to the extent of the remaining estimated amount. Our backlog for the period beyond 12 months may be subject to variation from year-to-year as existing contracts are completed, delayed, or renewed or new contracts are awarded, delayed, or cancelled. As a result, we believe that year-to-year comparisons of the portion of backlog expected to be performed more than one year in the future are difficult to assess and not necessarily indicative of future revenues or profitability.

U.S. Federal Acquisition Regulations

The Company has contracts with the U.S. federal, state and local governments that contain provisions requiring compliance with the U.S. Federal Acquisition Regulations (“FAR”). These regulations are generally applicable to all its contracts that are directly funded or partially funded by pass-through funds from the U.S. federal government. These provisions limit the recovery of certain specified indirect costs on contracts subject to the FAR. Cost-plus contracts covered by the FAR provide for upward or downward adjustments if actual recoverable costs differ from the estimate billed under forward pricing arrangements. Most of the Company’s government contracts are subject to termination at the convenience of the government. Contracts typically provide for reimbursement of costs incurred and payment of fees earned through the date of such termination.

Government contracts that are subject to the FAR are subject to audits performed by the Defense Contract Audit Agency (“DCAA”) and many other state governmental agencies. As such, the Company’s overhead rates, cost proposals, incurred government contract costs and internal control systems are subject to review. During the course of its audits, the DCAA or a state agency may question incurred costs if it believes the Company has accounted for such costs in a manner inconsistent with the requirements of the FAR or Cost Accounting Standards and recommend that the applicable contracting officer disallow such costs. Historically, the Company has not incurred significant disallowed costs because of such audits. However, the Company can provide no assurance that the rate audits will not result in material disallowances of incurred costs in the future. The Company provides for a refund liability to the extent that it expects to refund some of the consideration received from a customer. The liability at ~~July 1,~~September 30, 2022 and December 31, 2021 was $0, respectively.

Disaggregation of Revenues

As described further in Note 2 – Summary of Significant Accounting Policies, the Company has one operating segment, Engineering, Testing, Inspection and Other Consultative Services, which reflects how the Company is being managed. The Company provides public and private sector clients with comprehensive support in managing large-scale infrastructure improvement programs including engineering, design, program development/management, compliance services, acquisition and project control services, as well as construction engineering and inspection and materials testing. Approximately 50% of the Company’s revenues in each reporting period presented are derived from federal, state and local government related projects.

All services performed by the Company are rendered in the United States and its territories via two contract types, time and materials or fixed price contracts. The Company derives 90% of its revenues from T&M contracts, the remainder are earned under fixed price contracts.

Cash Flows

The Company has presented its cash flows using the indirect method and considers all highly liquid investments with original maturities of three months or less at acquisition to be cash equivalents. At times, our cash and cash equivalents may be uninsured or in deposit accounts that exceed the Federal Deposit Insurance limit.

~~Comprehensive Income~~

~~There are no other components of comprehensive income other than net income and the provision for non-controlling interest associated with Holdings Units.~~

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

Concentration of Credit Risk

Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of trade accounts receivable. These risks primarily relate to the concentration of customers who are large, governmental customers and regional governmental customers. The Company performs ongoing credit evaluations of its customers’ financial condition and generally requires no collateral.

Fair Value of Financial Instruments

ASC Topic 820, Fair Value Measurements (“ASC 820”), establishes a framework for measuring fair value. That framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements).

The three levels of the fair value hierarchy under ASC 820 are described as follows:

Level 1 — Inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that management has the ability to access.

Level 2 — Inputs utilize data points that are observable such as quoted prices, interest rates and yield curves.

Level 3 — Inputs are unobservable data points for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability.

The asset or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.

The Company has various financial instruments, including cash and cash equivalents, accounts receivable and payable, accrued liabilities, and long-term debt. The carrying value of the Company’s cash and cash equivalents, accounts receivable, and payable and accrued liabilities approximate their fair value due to their short-term nature. The Company believes that the aggregate fair values of its long-term debt approximates their carrying amounts as the interest rates on the debt are either reset on a frequent basis or reflect current market rates. See Note 6 for a discussion of interest rate cap fair value.

The Company applies the provisions of ASC 805, Business Combinations, in the accounting for its acquisitions, which requires recognition of the assets acquired and the liabilities assumed at their acquisition date fair values, separately from goodwill. Goodwill as of the acquisition date is measured as the excess of consideration transferred and the net of the acquisition date fair values of the tangible and identifiable intangible assets acquired and liabilities assumed. The allocation of the purchase price to identifiable intangible assets is based on valuations performed to determine the fair values of such assets as of the acquisition dates. Depending on the size and complexity of the acquisition, the Company may engage a third-party independent valuation specialist to assist in management’s determination of fair values of tangible and intangible assets acquired and liabilities assumed. The fair values of earn-out arrangements are included as part of the purchase price of the acquired companies on their respective acquisition dates. The Company estimates the fair value of contingent earn-out payments as part of the initial purchase price and records the estimated fair value of contingent consideration as a liability on the Consolidated Balance Sheet. Changes in the estimated fair value of contingent earnout payments are included in operating expenses in the accompanying Consolidated Statements of Operations.

Several factors are considered when determining contingent consideration liabilities as part of the purchase price, including whether (i) the valuation of the acquisitions is not supported solely by the initial consideration paid, and the contingent earn-out formula is a critical and material component of the valuation approach to determining the purchase price; and (ii) the former owners of the acquired companies that remain as key employees receive compensation other than contingent earn-out payments at a reasonable level compared with the compensation of other key employees. The contingent earn-out payments are not affected by employment termination.

The Company reviews and re-assesses the estimated fair value of contingent consideration liabilities on a quarterly basis, and the updated fair value could differ materially from the initial estimates. The Company measures contingent consideration recognized in connection with business combinations at fair value on a recurring basis using significant unobservable inputs classified as Level 3 inputs. The Company uses a probability-weighted discounted cash flow approach as a valuation technique to determine the fair value of the contingent consideration liabilities on the acquisition date and at each reporting period. The significant unobservable inputs used in the fair value measurements are projections over the earn-out period, and the probability outcome percentages that are assigned to each scenario. Significant increases or decreases to either of these inputs in isolation could result in a significantly higher or lower liability with a higher liability capped by the contractual maximum of the contingent consideration liabilities. Ultimately, the liability will be equivalent to the amount paid, and the difference between the fair value estimate on the acquisition date and amount paid will be recorded in earnings. The Company records the current portion of contingent consideration liability within other current liabilities and the noncurrent portion of contingent consideration liability within other long-term liabilities within its Consolidated Balance Sheet.

The following table summarizes the changes in the fair value of estimated contingent consideration:

Contingent consideration, as of December 31, 2021	$	31,461		$	31,461
Additions for acquisitions		9,500			9,500
Adjustment to liability for changes in fair value		-
Reduction of liability for payment made		(3,270	)
Total contingent consideration, as of July 1, 2022		37,691
Reduction of liability for payments made					(3,270	)
Total contingent consideration, as of September 30, 2022					37,691
Current portion of contingent consideration		(16,577	)		(16,577	)
Contingent consideration, less current portion	$	21,114		$	21,114

The Company may at its discretion settle the contingent consideration with cash, common shares or a combination of cash and common shares. During the three months ended April 1, 2022, we settled a portion of the $3.3 million payment with shares of Class A common stock. No additional payments were made during the three months ended July 1, 2022 or September 30, 2022.

Equity Based Compensation

The Company recognizes the cost of services received in an equity-based payment transaction with an employee as services are received and records either a corresponding increase in equity or a liability, depending on whether the instruments granted satisfy the equity or liability classification criteria.

The measurement objective for these equity awards is the estimated fair value at the grant date of the equity instruments that the Company is obligated to issue when employees have rendered the requisite service and satisfied any other conditions necessary to earn the right to benefit from the instruments. The compensation cost for an award classified as an equity instrument is recognized ratably over the requisite service period, including an estimate of forfeitures. The requisite service period is the period during which an employee is required to provide service in exchange for an award.

Equity compensation was ~~$1.7~~$2.0 million and ~~$805 thousand~~$1.2 million for the three months ended ~~July 1,~~September 30, 2022 and ~~July 2,~~October 1, 2021, respectively, and ~~$3.4~~$5.4 million and ~~$1.3~~$2.5 million for the ~~six~~nine months ended ~~July 1,~~September 30, 2022 and ~~July 2,~~October 1, 2021, respectively.

Income Taxes

The Company accounts for income taxes in accordance with the FASB ASC Topic 740, Income Taxes, which requires an asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed for differences between the financial statement and tax bases of assets and liabilities that will result in future taxable or deductible amounts based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. In determining the need for a valuation allowance, management reviews both positive and negative evidence, including current and historical results of operations, future income projections, scheduled reversals of deferred tax amounts, availability of carrybacks, and potential tax planning strategies. Based on our assessment, we have concluded that a portion of the deferred tax assets will not be realized.

According to the authoritative guidance on accounting for uncertainty in income taxes, we may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. This guidance also addresses de-recognition, classification, interest and penalties on income taxes, accounting in interim periods and disclosure requirements for uncertain tax positions.

Redeemable Preferred Stock

On February 14, 2020, in connection with the consummation of the Atlas Business Combination, Holdings and GSO COF III AIV-2 LP (“GSO AIV-2”) entered into a subscription agreement, dated February 14, 2020 (the “Subscription Agreement”) pursuant to which, GSO AIV-2 purchased 145,000 units of a new class of Series A Senior Preferred Units of Holdings (the “Preferred Units”) at a price per Preferred Unit of $978.21 for an aggregate cash purchase price of $141,840,450, which represented a 2.179% original issue discount on the Preferred Units (such purchase, the “GSO Placement”).

The GSO Placement was made pursuant to the exemption from registration contained in Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”), and/or Regulation D promulgated thereunder.

The Preferred Units ranked senior in priority to all other existing and future equity securities of Holdings with respect to liquidation preference and distribution rights.

The Preferred Units had a liquidation preference of $1,000 per Preferred Unit (the “Liquidation Preference”).

Subject to any limitations set forth in the Atlas Credit Agreement (as defined in Note 6 – Long-Term Debt), the Preferred Units were paid a dividend of 5% per annum, plus either an additional 6.25% per annum in cash or 7.25% per annum in additional Preferred Units, at Holdings’ option, payable quarterly in arrears.

If a cash dividend was not able to be made because of a limitation under the Atlas Credit Agreement, then the Liquidation Preference with respect to any Preferred Unit would have increased to 3.5625% in any quarter until a cash dividend could be made.

The Preferred Units did not possess voting rights and were not convertible into any other security of Holdings.

Holdings was permitted to redeem the Preferred Units beginning on the second anniversary of the Closing Date at a price of 103% of the Liquidation Preference (the “Redemption Premium”), and on the third anniversary of their issuance at the Liquidation Preference, in each case plus accrued and unpaid dividends. The Preferred Units could only be redeemed by Holdings within the first two years of the Closing Date upon a change of control as described below, in which case such Preferred Units would have been redeemed at a customary make-whole amount as if the Preferred Units were redeemed on the second anniversary.

Subject to the terms of Holdings’ and its subsidiaries’ senior credit agreements, Holdings was required to redeem the Preferred Units at the Redemption Premium, plus accrued and unpaid dividends, in the event of (i) a change of control, (ii) sales or other dispositions of all or substantially all of Holdings’ assets and (iii) the insolvency or bankruptcy of Holdings or any of its material subsidiaries.

Finally, holders of the Preferred Units were permitted to require Holdings to redeem their Preferred Units at the Liquidation Preference, plus accrued and unpaid dividends, beginning on the eighth anniversary of the Closing Date, subject to certain customary limitations.

The Preferred Units were redeemed in full at par without a premium on February 25, 2021. The Company incurred redeemable preferred stock dividends of $5.9 million during the quarter ended April 2, 2021.

Segment

The Company has one operating and reporting segment, Engineering, Testing, Inspection and Other Consultative Services. This financial information is reviewed regularly by our chief operating decision maker to assess performance and make decisions regarding the allocation of resources and is equivalent to our consolidated information. Our chief operating decision maker does not review below the consolidated level. Our chief operating decision maker is our Chief Executive Officer.

Recent Accounting Pronouncements

In February 2016, the FASB established Topic 842, Leases, by issuing Accounting Standards Update (ASU) No. 2016-02, which requires lessees to recognize leases on-balance sheet and disclose key information about leasing arrangements. Topic 842 was subsequently amended by ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842, Leases; and ASU No. 2018-11, Targeted Improvements. The new standard establishes a right-of-use model (ROU) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement. The new standard was effective and we adopted and implemented the standard on January 1, 2022 with a modified retrospective transition approach, as permitted, applying the new standard to all leases existing at the date of initial application. Consequently, financial information will not be updated and the disclosures required under the new standard will not be provided for dates and periods before January 1, 2022. The new standard provides a number of optional practical expedients in transition. We elected the ‘package of practical expedients’, which permits us not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs. The adoption of this standard had a material effect on our balance sheet, the most significant effects relating to (1) the recognition of new ROU assets and lease liabilities on our balance sheet for our office, vehicles and equipment operating leases and; (2) providing significant new disclosures about our leasing activities. See Note 15 for further information.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments (Topic 326) - Credit Losses: Measurement of Credit Losses on Financial Instruments, which provides guidance regarding the measurement of credit losses on financial instruments. The new guidance replaces the incurred loss impairment methodology in the current guidance with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to determine credit loss estimates. This ASU will be effective for the Company commencing after December 15, 2022. The Company is in the process of assessing the impact of this ASU on our consolidated financial statements and disclosures.

NOTE 3 – ATLAS BUSINESS COMBINATION

On the Closing Date, the Company completed the acquisition of Atlas Intermediate and its subsidiaries and in return the Atlas Intermediate members received 24.0 million shares of Class B common stock in the Company amongst other consideration such as repayment of $171.5 million of debt in effect as of the closing date.

The shares of non-economic Class B common stock of the Company entitle each holder to one vote per share, and each Class B share, along with its corresponding Holdings Unit, is redeemable on a one-for-one basis for one share of Class A common stock at the option of the Unit Holders (formerly members) as their lock-up periods expire. Upon the redemption by any Class B common stock, along with the corresponding Holdings Units, for Class A common stock, a corresponding number of shares of Class B common stock will be cancelled.

Because the holders of our Class B common stock have effective control of the combined company after the Closing Date through their majority voting interests in both the Company and, accordingly, Atlas Intermediate, the Atlas Business Combination was accounted for as a reverse recapitalization. Although the Company was the legal acquirer, Atlas Intermediate was the accounting acquirer. As a result, the reports filed by the Company subsequent to the Atlas Business Combination are prepared “as if” Atlas Intermediate is the predecessor and legal successor to the Company. The historical operations of Atlas Intermediate are deemed to be those of the Company. Thus, the financial statements included in this report reflect (i) the historical operating results of Atlas Intermediate prior to the Atlas Business Combination; (ii) the combined results of the Company, which does not have any operating results and includes only certain costs such as the compensation for the Company’s Board, certain legal fees and taxes, and Atlas Intermediate following the Atlas Business Combination; (iii) the assets, liabilities and members’ capital of Atlas Intermediate at their historical cost; and (iv) the Company’s equity and earnings per share for the period from the Closing Date.

NOTE 4 – BUSINESS ACQUISITIONS

In April 2021, the Company acquired Atlantic Engineering Laboratories, Inc. and Atlantic Engineering Laboratories of New York, Inc. (collectively, “AEL”) for cash and an amount of equity consideration totaling $24.5 million, plus an earnout of up to $13.5 million. The Company issued 738,566 shares of Class A common stock to the former owner of AEL, which represented $7.5 million of the total consideration paid. AEL is a materials testing and inspection firm based in Avenel, New Jersey, and provides steel, concrete, soil and other testing and inspection services to a diverse mix of public and private clients primarily in New York and New Jersey. AEL added approximately 290 professionals to the Company’s workforce and is expected to strengthen the Company’s materials testing and inspection services in the Northeast. Total consideration may also be increased or decreased based on results in future years. Final value will be subject to the resolution of certain contingencies.

In July 2021, the Company acquired O’Neill Services Group (“O’Neill), a quality assurance and environmental services firm that services clients throughout the Pacific Northwest. O’Neill, headquartered in Redmond, Washington, employs 90 people and received $24.4 million in the form of cash and stock consideration, plus an earnout of up to $16.0 million. The Company issued 653,728 shares of Class A common stock which represented $6.5 million of the total consideration received. Total consideration may also be increased or decreased based on results in future years. Final value will be subject to the resolution of certain contingencies.

In March 2022, the Company acquired TranSmart Technologies, Inc. (“TranSmart”) for an initial purchase price of $29.8 million which was paid in a combination of cash and shares of our Class A common stock, plus an earnout of up to $7.0 million. TranSmart specializes in Intelligent Transportation Systems (ITS) and engineering for transportation agencies and customers throughout the Midwest. TranSmart was founded in 1986 and is headquartered in Chicago, Illinois employs approximately 100 employees specializing in ITS, engineering, design and construction/program management services. The Company issued 872,752 of Class A common stock which represented $9.9 million of the total consideration received. Total consideration may also be increased or decreased based on results in future years. Final value will be subject to the resolution of certain contingencies.

In March 2022, the Company acquired 1 Alliance Geomatics, LLC (“1 Alliance”) for an initial purchase price of $22.0 million which was paid in a combination of cash and shares of our Class A common stock, plus an earnout of up to $8.3 million. 1 Alliance is a provider of geospatial services to transportation and water resources clients from its four offices within the Pacific Northwest. 1 Alliance, based in Bellevue, Washington, was founded in 2012 and employs approximately 70 people. The Company issued 355,649 of Class A common stock which represented $4.3 million of the total consideration received. Total consideration may also be increased or decreased based on results in future years. Final value will be subject to the resolution of certain contingencies.

Acquisition costs of approximately $0.0 million and ~~$0.7~~$0.5 million have been expensed in the ~~quarters~~three months ended ~~July 1,~~September 30, 2022 and ~~July 2,~~October 1, 2021, respectively, and $0.5 million and ~~$1.4~~$1.9 million for the ~~six-months~~nine months ended ~~July 1,~~September 30, 2022 and ~~July 2,~~October 1, 2021, respectively, in the Consolidated Statement of Operations within operating expenses.

The following table summarizes the fair values of the assets acquired and liabilities assumed as of the acquisition (in thousands):

	AEL			O’Neill			TranSmart*			1 Alliance*			AEL			O’Neill			TranSmart*			1 Alliance*
Cash	$	684		$	1,608			-			-		$	684		$	1,608			-			-
Accounts receivable		6,026			4,201			6,244			2,489			6,026			4,201			6,244			2,489
Unbilled receivable		858			-			1,832			2,115			858			-			1,832			2,115
Property and equipment		52			1,049			139			1,733			52			1,049			139			1,733
Other current and long-term assets		130			-			298			174			130			-			298			174
Intangible assets		13,816			22,735			23,555			16,314			13,816			22,735			23,555			16,314
Liabilities		(3,065	)		(1,546	)		(5,062	)		(3,557	)		(3,065	)		(1,546	)		(5,062	)		(3,557	)

Net assets acquired	$	18,501			28,047			27,006			19,268		$	18,501			28,047			27,006			19,268

Consideration paid (cash and equity consideration)	$	24,502		$	24,369			25,763			16,517		$	24,502		$	24,369			25,763			16,517
Contingent earnout liability at fair value (cash)		7,045			7,106			4,000			5,500			7,045			7,106			4,000			5,500
Total Consideration		31,547			31,475			29,763			22,017			31,547			31,475			29,763			22,017
Excess consideration over the amounts assigned to the net assets acquired (goodwill)	$	13,046			3,428			2,757			2,749		$	13,046			3,428			2,757			2,749

The above purchase price allocation is tentative and preliminary and subject to further updates as we complete the purchase price allocation.

NOTE 5 – GOODWILL AND INTANGIBLES

The carrying amount, including changes therein, of goodwill was as follows:

Balance as of December 31, 2021	$	124,348	$	124,348
Acquisitions		5,506		5,506
Disposals		-
Measurement period adjustments		3,000		3,000
Balance as of July 1, 2022	$	132,854
Balance as of September 30, 2022			$	132,854

The Company did not recognize any impairments of goodwill in the ~~six~~nine months ended ~~July 1,~~September 30, 2022 or ~~July 2,~~October 1, 2021.

Intangible assets as of ~~July 1,~~September 30, 2022 and December 31, 2021 consist of the following:

	July 1, 2022							December 31, 2021							Remaining		September 30, 2022							December 31, 2021							Remaining
	Gross		Accumulated			Net book		Gross		Accumulated			Net book		useful life		Gross		Accumulated			Net book		Gross		Accumulated			Net book		useful life
	amount		amortization			value		amount		amortization			value		(in years)		amount		amortization			value		amount		amortization			value		(in years)
Definite life intangible assets:
Customer relationships	$	187,126	$	(56,288	)	$	130,838	$	149,917	$	(47,310	)	$	102,607		11.0	$	187,126	$	(61,644	)	$	125,482	$	149,917	$	(47,310	)	$	102,607		6.2
Tradenames		28,240		(22,400	)		5,840		25,580		(20,890	)		4,690		2.5		28,240		(23,237	)		5,003		25,580		(20,890	)		4,690		1.6
Non-competes		600		(600	)		-		600		(583	)		17		0.4		600		(600	)		-		600		(583	)		17		0.0
Total intangibles	$	215,966	$	(79,288	)	$	136,678	$	176,097	$	(68,783	)	$	107,314			$	215,966	$	(85,481	)	$	130,485	$	176,097	$	(68,783	)	$	107,314

Amortization expense was ~~$5.9~~$6.2 million and ~~$3.6~~$4.2 million for the three months ended ~~July 1,~~September 30, 2022 and ~~July 2,~~October 1, 2021 respectively, and ~~$10.5~~$16.7 million and ~~$6.7~~$10.9 million for the ~~six~~nine months ended ~~July 1,~~September 30, 2022 and ~~July 2,~~October 1, 2021, respectively.

Amortization of intangible assets for the next five years and thereafter is expected to be as follows:

2022 (six months remaining)	$	10,694
2022 (three months remaining)			$	6,196
2023		22,005		24,280
2024		20,654		22,751
2025		20,190		21,433
2026		20,190		21,433
Thereafter		42,945		34,392
	$	136,678	$	130,485

NOTE 6 – LONG-TERM DEBT

On February 25, 2021, Atlas Intermediate, as the borrower, entered into two new credit facilities consisting of (i) a $432.0 million senior secured term loan at closing and, subject to the satisfaction of certain terms and conditions, a committed delayed draw term loan facility to be used for future acquisitions, within 18 month of February 25, 2021 and subject to certain conditions, in an aggregate principal amount of up to $75.0 million, of which $61 million has been used ($26.0 million in connection with the acquisitions during the first quarter of 2022) and $14 million remains available as of ~~July 1,~~September 30, 2022, and an uncommitted incremental term loan facility that may be incurred after closing (the “Term Loan”) pursuant to a Credit Agreement dated February 25, 2021, by and among Holdings, Atlas Intermediate, Wilmington Trust, National Association, as administrative agent and collateral agent, and certain lenders thereto, including certain Blackstone entities, which may include, Blackstone Alternative Credit Advisors LP, and its managed funds and accounts, and its affiliates, Blackstone Holdings Finance Co. L.L.C. and its affiliates, and/or certain other of their respective funds, accounts, clients managed, advised or sub-advised, or any of their respective affiliates (the “Term Loan Agreement”) and (ii) a $40.0 million senior secured revolver which aggregate principal amount may be increased, subject to the satisfaction of certain terms and conditions, including obtaining commitments therefor, by up to $20.0 million (the “Revolver”) pursuant to the Credit Agreement dated February 25, 2021, by and among Holdings, Intermediate, JPMorgan Chase Bank, N.A., as administrative agent, swingline lender, issuing bank, lender, sole bookrunner and sole lead arranger (the “ABL Revolver Agreement,” and together with the Term Loan Agreement, collectively the “Credit Agreements”). The Term Loan Agreement refinances the Atlas Credit Agreement dated as of February 14, 2020, with Macquarie Capital Funding LLC, as administrative agent and certain lenders, which repayment was effectuated partially in cash and partially by way of a cashless exchange of existing term loans and preferred equity for Term Loans.

The Term Loan Agreement and ABL Revolver Agreement are collectively referred to as the “Atlas 2021 Credit Agreements” by the Company.

The initial Term Loan will mature on February 25, 2028 and the Revolver will mature on February 25, 2026.

~~Refer~~

On August 4, 2022, Holdings, Intermediate, certain subsidiaries of Holdings (collectively with Holdings and Intermediate, the “Loan Parties”) and the Administrative Agent (as defined below) entered into the First Amendment to ~~Note 15 – Subsequent Events for a discussion~~Credit Agreement (the “Credit Agreement Amendment”), which amends that certain Credit Agreement, dated as of ~~an amendment~~February 25, 2021 by and among the Loan Parties and JPMorgan Chase Bank, N.A., as administrative agent, swingline lender, issuing bank, lender, sole bookrunner and sole lead arranger (the “Administrative Agent”). The Credit Agreement Amendment amended the Credit Agreement to, ~~the ABL Revolver Agreement in August 2022 to~~among other matters, increase the ~~capacity~~revolving credit facility thereunder by $20.0 million to ~~$60,000,000.~~an aggregate principal amount of $60.0 million.

Interest on any outstanding borrowings is payable monthly under the ABL Revolver Agreement, quarterly under the Term Loan Agreement or, in each case, at the end of the applicable interest period in arrears. The cash interest rates under the Term Loan Agreement will be equal to either (i) the Adjusted LIBO Rate (as defined in the Term Loan Agreement), plus 5.50%, or (ii) an Alternate Base Rate (as defined in the Term Loan Agreement), plus 4.50%. In addition, the term loan requires an additional 2.0% interest that can be made at the option of the Company in cash or payment-in-kind (PIK). The interest rates under the ABL Revolver Agreement will be equal to either (i) the Adjusted LIBO Rate (as defined in the ABL Revolver Agreement), plus 2.50%, or (ii) the ABR (as defined in the ABL Revolver Agreement), plus 1.50%.

~~Interest Rate Cap~~

The Company is exposed to fluctuations in interest rates on its senior secured credit facilities. Changes in interest rates will not affect the market value of such debt but will affect the Company’s interest payments over the term of the loans. Likewise, an increase in interest rates could have a material impact on the Company’s cash flow. The Company hedges the interest rate fluctuations on debt obligations through an interest rate cap agreement. The Company records this agreement at fair value as an asset in its consolidated balance sheet. Based on the inherent nature of an interest rate cap, the instrument can never result in a liability to the Company. As the derivative is designated and qualifies as a cash flow hedge, the gains or losses on the interest rate cap agreement are recorded in stockholders’ equity as a component of OCI, net of tax. Reclassifications of the gains and losses on the interest rate cap agreement into earnings are recorded as part of interest expense in the consolidated statements of operations as the Company makes its interest payments on the hedged portion of its senior secured credit facilities. Fair value is determined based on estimated amounts that would be received or paid to terminate the contracts at the reporting date based on quoted market prices.

In June 2022, the Company entered into a deferred premium interest rate cap which limits the Adjusted LIBOR rate noted above to 3%. The interest rate cap hedges $500,000,000 of debt and has a three-year term and will be paid for monthly at an annual rate of 0.69% or approximately $10.5 million over the three-year period. This interest rate cap limits the overall interest rate on the Term Loan from exceeding 11.2% (Adjusted Libor of 3% maximum plus 5.50% plus the additional 2.0% cash or payment-in-kind plus the 0.69% cost of the interest rate cap). The Company uses interest rate related derivative instruments to manage its exposure to changes in interest rates on its variable-rate debt instruments. The Company does not speculate using derivative instruments.

By using derivative financial instruments to hedge exposures to changes in interest rates, the Company exposes itself to credit risk and market risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is an asset, the counterparty owes the Company, which creates credit risk for the Company. When the fair value of a derivative contract is a liability, the Company owes the counterparty and therefore, the Company is not exposed to the counterparty’s credit risk in those circumstances. The Company minimizes counterparty credit risk in derivative instruments by entering into transactions with high quality counterparties. The derivative instruments entered into by the Company do not contain credit-risk-related contingent features.

Market risk is the adverse effect on the value of a derivative instrument that results from a change in interest rates. The market risk associated with the Company’s derivative instruments is managed by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken.

As a result, the Company has recorded an asset and a corresponding liability for $10.5 million representing the fair value of the interest rate cap and the remaining payments of the deferred premium. The asset is included in other long-term assets and the liability is recorded as an other current liability of $3.5 million and an other long-term liability of $7 million. One monthly payment was made as of July 1, 2022. The fair value of the interest rate cap as of July 1, 2022 approximated the initial value of $10.5 million and therefore there was no amount recorded in OCI as of July 1, 2022.

The Credit Agreements are guaranteed by Holdings and secured by (i) inIn the case of the ABL Revolver Agreement, a first priority security interest in the current assets, including accounts receivable, of Holdings, Intermediate and its subsidiaries and (ii) in the case of the Term Loan Agreement, a pledge of the equity interests of the subsidiaries of Holdings and Intermediate, and subject to the first lien security interest on current assets under the Revolver, a first priority lien on substantially all other assets of Holdings, Intermediate and all of their direct and indirect subsidiaries.

The Term Loan Agreement contains a financial covenant which requires Holdings, Atlas Intermediate and all of their direct and indirect subsidiaries on a consolidated basis to maintain a Total Net Leverage Ratio (as defined in each Credit Agreement) tested on a quarterly basis that does not exceed (i) 8.25 to 1.00 with respect to the fiscal quarters ending on April 2, 2021 and July 2, 2021, (ii) 8.00 to 1.00 for the fiscal quarters ending October 1, 2021 and December 31, 2021, (iii) 7.50 to 1.00 for the fiscal quarters ending April 1, 2022 and July 1, 2022, (iv) 7.25 to 1.00 for the fiscal quarters ending September 30, 2022 and December 30, 2022, (v) 7.00 to 1.00 for the fiscal quarters ending March 31, 2023 and June 30, 2023, (vi) 6.75 to 1.00 for the fiscal quarters ending September 29, 2023 and December 29, 2023, and (vii) 6.50 to 1.00 for March 29, 2024 and each fiscal quarter ending thereafter.

The ABL Revolver Agreement contains a “springing” financial covenant which requires Holdings, Intermediate and all their direct and indirect subsidiaries on a consolidated basis to maintain a Fixed Charge Coverage Ratio (as defined in the ABL Revolver Agreement) of no less than 1.10 to 1.00 when the outstanding principal amount of loans under the Revolver exceeds $0 or the aggregate exposure for letters of credit under the Revolver exceeds $5$5.0 million.

The Company has been in compliance with the terms of the Atlas Credit Facility and Atlas Credit Agreement as of ~~July 1,~~September 30, 2022 and December 31, 2021, respectively.

Long-term debt consisted of the following:

	July 1, 2022			December 31, 2021			September 30, 2022			December 31, 2021
Atlas 2021 credit agreement - term loan	$	498,971		$	473,392
Atlas 2021 credit agreement – term loan							$	498,971		$	473,392

Atlas 2021 credit agreement – revolving		12,058			-			23,588			-

Subtotal		511,029			473,392			522,559			473,392

Less: Loan costs, net		(7,538	)		(7,593	)		(7,260	)		(7,593	)

Less current maturities of long-term debt		(4,930	)		(3,606	)		(4,930	)		(3,606	)

Long-term debt	$	498,561		$	462,193		$	510,369		$	462,193

Aggregate ~~long-term~~ principal payments on debt subsequent to ~~July 1,~~September 30, 2022, are as follows (amounts in thousands):

2022 (six months remaining)	$	2,465
2022 (three months remaining)			$	2,465
2023		4,930		4,930
2024		4,930		4,930
2025		4,930		4,930
2026		4,930		4,930
Thereafter		488,844		500,374
	$	511,029	$	522,559

The 2021 Atlas Credit agreement requires annual amortization of principal and interest amounts of 1% or 2.5% depending on certain ratios. The Company is currently within the ratio that requires 1% annual amortization and expects to remain at the 1% level. Principal repayments commenced during the Company’s second quarter 2022.

Interest Rate Cap

In June 2022, the Company entered into a deferred premium interest rate cap which limits the Adjusted LIBOR rate noted above to 3%. The interest rate cap hedges $500.0 million of debt and has a three-year term and will be paid for monthly at an annual rate of 0.69% or approximately $10.5 million over the three-year period. This interest rate cap limits the overall interest rate on the Term Loan from exceeding 11.2% (Adjusted LIBOR of 3% maximum plus 5.50% plus the additional 2.0% cash or payment-in-kind plus the 0.69% cost of the interest rate cap). The Company uses interest rate related derivative instruments to manage its exposure to changes in interest rates on its variable-rate debt instruments. The Company does not speculate using derivative instruments.

As a result, the Company initially recorded an asset and a corresponding liability of $10.5 million representing the fair value of the interest rate cap and the remaining payments of the deferred premium. Four monthly payments have been made as of September 30, 2022. The fair value of the interest rate cap as of September 30, 2022 increased by $9.3 million and therefore there was a gain of $9.3 million recorded in OCI for the three and nine months ended September 30, 2022. The asset is included in other long-term assets and the liability is recorded as an other current liability of $3.4 million and an other long-term liability of $5.5 million as of September 30, 2022.

NOTE 7- SHAREHOLDERS’ DEFICIT

Shares Outstanding

Prior to the Atlas Business Combination, the Company was a special purpose acquisition company with no operations, formed as a vehicle to affect a business combination with one or more operating businesses. After the consummation of the Atlas Business Combination, the Company became a holding company whose sole material operating asset consists of its interest in Atlas Intermediate.

The following table summarizes the changes in the outstanding stock ~~and warrants~~ from ~~the~~ December 31, 2021 through ~~July 1,~~September 30, 2022 (amounts in thousands):

	Class A Common Stock		Class B Common Stock			Class A Common Stock		Class B Common Stock
Beginning Balance, as of December 31, 2021		33,646		3,328			33,646		3,328
Issuances		1,857		186			1,905		186
Transfers to Class A from Class B		1,270		(1,269	)		2,158		(2,158	)
Shares Outstanding at July 1, 2022		36,773		2,245
Shares Outstanding at September 30, 2022							37,709		1,356

Class A Common Stock –At ~~July 1,~~September 30, 2022 and December 31, 2021, there were ~~36,772,542~~37,708,556 and 33,645,212 shares of Class A common stock issued and outstanding, respectively. Holders of the Company’s Class A common stock are entitled to one vote for each share. The Company is authorized to issue 400,000,000 shares of Class A common stock with a par value of $0.0001 per share.

Class B Common Stock – At ~~July 1,~~September 30, 2022 and December 31, 2021, there were ~~2,245,292~~1,356,212 and 3,328,101 shares of Class B common stock issued and outstanding, respectively.

Class B common stock was initially issued to the holders of Holdings Units in Atlas Intermediate in connection with the Atlas Business Combination and are non-economic but entitle the holder to one vote per share and may be converted to Class A shares at any time by the holder. Conversion to Class A shares may result in a taxable event for the holder at the time of conversion. Subsequent to the Atlas Business Combination, the Company has issued Class B common stock to certain acquisitions. The Company is authorized to issue up to 100,000,000 shares of Class B common stock with a par value of $0.0001 per share but it is not allowed to issue any Class B common stock to the public.

Non-controlling Interest

As of ~~July 1,~~September 30, 2022 and December 31, 2021, the Company ownership and voting structure was comprised of holders of our Class A common stock that participate 100% in the results of Atlas Technical Consultants, Inc. and ~~94%~~97% and 91%, respectively, in Atlas Intermediate and its subsidiaries and holders of our Class B common stock that participate in the results of Atlas Intermediate and its subsidiaries until their Class B common stock is converted to Class A common stock. In connection with the Atlas Business Combination, it was determined that the results of Atlas Intermediate and its subsidiaries would be fully consolidated within the results of the Company.

Due to the participation of the holders of our Class B common stock in the results of Atlas Intermediate and subsidiaries, a non-controlling interest was deemed to exist. Non-controlling ownership interests in Atlas Intermediate and its subsidiaries are presented in the Consolidated Balance Sheet within shareholders’ equity as a separate component. In addition, consolidated net income includes earnings attributable to both the shareholders and the non-controlling interests.

We did not have any distributions during the ~~quarters~~three or ~~six~~nine months ended ~~July 1,~~September 30, 2022 and ~~July 2,~~October 1, 2021.

NOTE 8 – ~~LOSS~~INCOME (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)~~Income (loss) per share was calculated as follows:

	Three Months Ended						Six Months Ended			Closing Date Through			Three Months Ended						Nine Months Ended
	July 1, 2022			July 2 2021			July 1, 2022			July 2, 2021			September 30, 2022			October 1 2021			September 30, 2022			October 1, 2021
Numerator:
Net loss	$	(1,412	)	$	(4,783	)	$	(5,830	)	$	(19,574	)
Net income (loss)													$	1,984		$	(2,526	)	$	(3,846	)	$	(22,100	)
Provision for non-controlling interest		102			617			467			12,786			(79	)		233			419			13,019
Redeemable preferred stock dividends		-			-			-			(5,899	)		-			-			-			(5,899	)
Net (loss) attributable to Class A common shares - basic and diluted	$	(1,310	)	$	(4,166	)	$	(5,363	)	$	(12,687	)
Net income (loss) attributable to Class A common shares - basic and diluted													$	1,905		$	(2,293	)	$	(3,427	)	$	(14,980	)

Denominator:
Weighted average shares outstanding - basic and diluted		35,934,215			30,633,366			34,981,819			22,400,179			37,511,678			32,826,431			35,822,028			25,862,913

Net (loss) per Class A common share, basic and diluted	$	(0.04	)	$	(0.14	)	$	(0.15	)	$	(0.57	)
Net income (loss) per Class A common share, basic and diluted													$	0.05		$	(0.07	)	$	(0.10	)	$	(0.58	)

The Class B common shares are excluded as these shareholders do not share in the income of Atlas Technical Consultants, Inc. and represent a non-controlling interest in the results of Atlas Intermediate and its subsidiaries. ~~The warrants and private placement warrants were exchanged for shares of Class A common stock in late 2020.~~ Please refer to Note 7 “Shareholders’ ~~Equity”~~Deficit” for further information.

NOTE 9 – EQUITY BASED COMPENSATION

Equity compensation was ~~$1.7~~$2.0 million and ~~$0.8~~$1.2 million for the three months ended ~~July 1,~~September 30, 2022 and ~~July 2,~~October 1, 2021, respectively, and ~~$3.4~~$5.4 million and ~~$1.3~~$2.5 million for the ~~six~~nine months ended ~~July 1,~~September 30, 2022 and ~~July 2,~~October 1, 2021, respectively.

The Company granted restricted stock units (“RSUs”) and performance stock units (“PSUs”) during 2022 and 2021 to reward, motivate and retain selected management personnel.

An additional grant of RSUs was made to a member of the Company’s leadership team on December 31, 2020 to reflect an increase in responsibility.

The Company granted its Board of Directors RSUs during 2022 and 2021 as part of their annual board compensation packages.

The Company estimates forfeitures of its stock awards. Actual forfeitures may differ from those estimates. The Company currently estimates its forfeitures as 3% of the RSUs awards granted each year but will continue to reassess its estimate on a quarterly basis.

Price-Vested Stock Options

During the third quarter of 2021, the Company awarded 547,943 of price-vested stock options (the “~~options~~”“options” or “~~stock options~~”“stock options”) in aggregate to its Chief Executive, Chief Financial, and Chief Strategy Officers collectively the “~~option awardees~~”“option awardees”). These options vested equally in four tranches on the second, third, fourth and fifth anniversary of the option grant date and is dependent upon the option awardees remaining employed by the Company and the stock price on the applicable tranche anniversary to be equal to or exceed a prescribed share price within the stock option agreement. The strike price of each option for each tranche is $10.50, which was the ~~Company~~’sCompany’s closing stock price on the option grant date. The Company has valued the options at fair market value based upon a Monte Carlo with Geometric Brown Motion simulation and will recognize the compensation cost for each tranche over a range of 5.17 to 5.93 years with values per option ranging from $2.29 to $3.55. The fair market value of the options as of the grant date was $1.6 million.

NOTE 10 – RELATED-PARTY TRANSACTIONS

During the ~~quarters~~three and ~~six month~~nine months ended ~~July 1,~~September 30, 2022 and ~~July 2,~~October 1, 2021, the Company leased office space at fair value from former owners of acquired companies that became shareholders and/or officers of the Company. The Company recognized lease expenses under these leases within the Statement of Operations in the amount of $0.2 million for each of the ~~quarters~~three months ended ~~July 1,~~September 30, 2022 and ~~July 2,~~October 1, 2021 and ~~$0.4~~$0.6 million for each of the ~~six~~nine months ended ~~July 1,~~September 30, 2022 and ~~July 2,~~October 1, 2021.

During the ~~six~~nine months ended ~~July 1,~~September 30, 2022 and ~~July 2,~~October 1, 2021, the Company performed certain environmental consulting work for an affiliate of one of its principal shareholders or members and collected fees related to these services in the amount of $0$0.0 and $0.1 million, respectively.

NOTE 11 — EMPLOYEE BENEFIT PLANS

The Company maintains employee savings plans which allow for voluntary contributions into designated investment funds by eligible employees. The Company may, at the discretion of its Board, make additional contributions to these plans. The Company has made total contributions of ~~$1.8~~$0.4 million and ~~$1.6~~$1.8 million for the three months ended ~~July 1,~~September 30, 2022 and ~~July 2,~~October 1, 2021, respectively, and ~~$3.9~~$4.3 million and ~~$3.4~~$5.2 million for the ~~six~~nine months ended ~~July 1,~~September 30, 2022 and ~~July 2,~~October 1, 2021, respectively.

NOTE 12 – COMMITMENTS AND CONTINGENCIES

The Company is subject to certain claims and lawsuits typically filed against engineering companies, alleging primarily professional errors or omissions. The Company carries professional liability insurance, subject to certain deductibles and policy limits, against such claims. While management does not believe that the resolution of these claims will have a material adverse effect, individually or in aggregate, on its financial position, results of operations or cash flows, management acknowledges the uncertainty surrounding the ultimate resolution of these matters.

NOTE 13 – INCOME TAXES

Following the consummation of the Atlas Business Combination, we are organized as an umbrella partnership C-Corporation structure also known as an “Up-C” structure in which the business of Atlas Intermediate and its subsidiaries is held by Holdings and will continue to operate through the subsidiaries of Atlas Intermediate, and in which our only direct assets consist of common units of Holdings. We are the sole manager of Holdings in accordance with the terms of the Holdings LLC Agreement entered into in connection with the consummation of the Atlas Business Combination.

Previously, Atlas Intermediate was treated as a partnership for federal and state income tax purposes with all income tax liabilities and/or benefits of the Company being passed through to the partners and members. As such, no recognition of federal or state income taxes have been provided for in the accompanying consolidated financial statements except for income taxes relating to the C-Corp subsidiaries directly owned by Atlas Intermediate and the State of Texas Margin tax.

Subsequent to the Atlas Business Combination, income taxes relating to Atlas Technical Consulting, Inc, the C-Corps owned directly by Atlas Intermediate and the State of Texas Margin tax are considered within the provision of non-controlling interest as it is generated through the results of Atlas Intermediate and its subsidiaries.

Our effective tax rate from continuing operations was ~~(17.0%)~~16.5% and ~~(3.8%~~(19.3%) for the ~~quarters ending July 1,~~three months ended September 30, 2022 and ~~July 2,~~October 1, 2021, respectively, and ~~(6.4%~~(23.9%) and ~~(1.2%~~(3.0%) for the ~~six-months~~nine months ended ~~July 1,~~September 30, 2022 and ~~July 2,~~October 1, 2021, respectively. Reconciliation between the amount determined by applying the U.S. federal income tax rate of 21% to pretax income from continuing operations and income tax expense is attributable to changes in our mix of pre-tax losses/earnings, valuation allowance and the effect of non-controlling interest in income of consolidated subsidiaries.

The Company provides a valuation allowance when it is more likely than not that some portion of the deferred tax assets will not be realized. Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to utilize the existing deferred tax assets. Based on this evaluation, a valuation allowance has been recorded to reduce net deferred tax assets to an amount that management believes is more than likely not to be realized.

The Company had no unrecognized tax benefits as of ~~July 1,~~September 30, 2022 or December 31, 2021. Interest and, if applicable, penalties are recognized related to unrecognized tax benefits in income tax expense. There are no accruals for interest and penalties as of ~~July 1,~~September 30, 2022 or December 31, 2021.

NOTE 14 – LEASES

The Company determines whether contractual arrangements contain a lease by evaluating whether those arrangements either implicitly or explicitly identify an asset, whether the Company has the right to obtain substantially all of the economic benefits from use of the asset throughout the term of the arrangement, and whether the Company has the right to direct the use of the asset.

The Company has entered into various operating leases primarily for office space, vehicles and office equipment. The office space leases generally have fixed payments with expiration dates ranging from 2022 to 2026, some of which have options to extend the leases from 5 to 10 years and some have options to terminate at the Company’s discretion. The Company’s vehicle and office equipment leases generally have fixed payments with expiration dates ranging from 2022 to 2026. Renewal options are included in the lease term if it is reasonably certain that the Company will exercise those options. Periods for which the Company is reasonably certain not to exercise termination options are also included in the lease term. For leases with a term of 12 months or less, the Company has made an accounting policy election to not recognize right-of-use (ROU) assets or lease liabilities for qualifying leases. For these leases, the Company recognizes lease expense on a straight-line basis over the lease term.

The Company has certain agreements with lease and non-lease components, such as office space leases, which are combined as a single lease component based on the Company’s practical expedient election. The Company’s real estate leases require that it pay maintenance in addition to rent. Additionally, the real estate leases generally require payment of real estate taxes and insurance. Maintenance, real estate taxes, and insurance payments are generally variable and based on actual costs incurred by the lessor. Therefore, these amounts are not included in the consideration of the contract when determining the ROU asset and lease liability.

Discount Rate

The discount rate for a lease is the rate implicit in the lease unless that rate cannot be readily determined. In that case, the Company is required to use its incremental borrowing rate, which is the rate the Registrants would have to pay to borrow, on a collateralized basis over a similar term, an amount equal to the lease payments in a similar economic environment. The Company determines its incremental borrowing rate by obtaining interest rates from various external financing sources and makes certain adjustments to reflect the terms of the lease and type of the asset leased. The Company uses the secured rate which corresponds with the term of the applicable lease.

The following table provides the components of lease cost for the Company’s operating leases for the ~~quarter~~three months ended ~~July 1~~September 30 (in thousands):

	2022
			2022
Lease cost:
Operating lease cost	$	3,712	$	3,598
Short-term lease cost		221		195
Total lease cost	$	3,933	$	3,793

The following table provides other key information related to the Company’s operating leases at ~~July 1~~September 30 (in thousands):

	2022		2022

Cash paid for amounts included in the measurement of lease liabilities:	$	-
Cash paid for amounts included in the measurement of lease liabilities			$	-
Operating cash flows from operating leases		3,620		3,589
Right-of-use asset obtained in exchange for new operating lease liabilities	$	3,620	$	3,589

The following table provides the total future minimum rental payments for operating leases, as well as a reconciliation of these undiscounted cash flows to the lease liabilities recognized on the Balance Sheets as of ~~July 1,~~September 30, 2022 (in thousands).

Operating Leases
2022 $ 7,161
2023 12,291
2024 8,101
2025 4,128
2026 2,695
Thereafter 3,819
Total $ 38,195

Weighted-average discount rate 5.41 %
Weighted-average remaining lease term (in years) 3.74
Current lease liabilities (included in other current liabilities) $ 12,111
Non-current lease liabilities (included in other long-term liabilities) 22,224
Right-of-use assets (included in other long-term assets) 32,786

~~NOTE 15 – SUBSEQUENT EVENTS~~

On August 4, 2022, Holdings, Intermediate, certain subsidiaries of Holdings (collectively with Holdings and Intermediate, the “Loan Parties”) and the Administrative Agent (as defined below) entered into the First Amendment to Credit Agreement (the “Credit Agreement Amendment”), which amends that certain Credit Agreement, dated as of February 25, 2021 by and among the Loan Parties and JPMorgan Chase Bank, N.A., as administrative agent, swingline lender, issuing bank, lender, sole bookrunner and sole lead arranger (the “Administrative Agent”).

~~The Credit Agreement Amendment amended the Credit Agreement to, among other matters:~~

●

~~Increase the revolving credit facility thereunder by $20,000,000 to an aggregate principal amount of $60,000,000.~~

	Operating Leases
2022 (three months remaining)	$	3,489
2023		12,244
2024		8,085
2025		4,128
2026		2,695
Thereafter		3,818
Total	$	34,459
Less: Present value discount		(3,426	)
Lease liability	$	31,033

Weighted-average discount rate		5.44	%
Weighted-average remaining lease term (in years)		3.65
Current lease liabilities (included in other current liabilities)	$	11,578
Non-current lease liabilities (included in other long-term liabilities)	$	19,455
Right-of-use assets (included in other long-term assets)	$	29,480

ITEM 22. 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 that the Company filed with the SEC on March 16, 2022 for the year ended December 31, ~~2020,~~2021, 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 an infrastructure and environmental solutions company and a provider of professional testing, inspection, engineering, environmental, program management and consulting services, offering solutions to public and private sector clients in the transportation, commercial, water, government, education, industrial, healthcare and power markets. For the year ended December 31, 2021, we:

●

performed approximately 40,000 projects; and

●

delivered approximately 90% of our projects under “time & materials” and “cost-plus” contracts.

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 any direct construction risk.

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 and Georgia Departments of Transportation, U.S. Postal Service, Gwinnett County Georgia, New York City Housing Authority, Stanford University, Port of Oakland, United Rentals, Inc., Speedway (7-Eleven), Walmart, Inc., Caltrans, Sound Transit, Phillips 66 and Google.

Our broad base of customers spans a diverse set of end markets including the transportation, commercial, water, government, education, industrial, healthcare and power 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 ~~July 1,~~September 30, 2022, our technical staff represented approximately 80% of our approximately 3,600 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 ~~July 1,~~September 30, 2022 our contracted backlog was estimated to be approximately ~~$855~~$864 million. See “—Backlog” below for additional information relating to our backlog.

Recent Accounting Pronouncements

See “Note ~~2. “Summary~~2 — Summary of Significant Accounting Policies” to the ~~Consolidated Financial Statements~~consolidated financial statements for a description of the recent accounting pronouncements.

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 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 hourly rates or a fixed fee. 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.

Backlog

We define backlog to include the total estimated future revenue streams associated with fully executed contracts as well as an estimate of highly probable revenues from recurring, task order-based contracts.

We use backlog to evaluate Company revenue growth as it typically follows growth in backlog. As backlog is not a defined accounting term, our computation of backlog may not be comparable with that of our peers.

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 & 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.

Subcontractor Costs and Other Costs of Revenues

Total costs of revenues reflects subcontractor costs, the cost of personnel and specifically identifiable costs associated with revenue, and other direct costs.

Operating Expense

Total operating expense includes corporate expenses, including personnel, occupancy, and administrative expenses, including depreciation and amortization and changes in fair value of contingent consideration.

Interest Expense

Interest expense consists of contractual interest expense on outstanding debt obligations including amortization of deferred financing costs and other related financing expenses.

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 our only direct assets consist of common units of Holdings. We are the sole manager of Holdings in accordance with the terms of the Holdings LLC Agreement entered into in connection with the consummation of the Atlas Business Combination.

Previously, Atlas Intermediate was treated as a partnership for federal and state income tax purposes with all income tax liabilities and/or benefits of the Company being passed through to the partners and members. As such, no recognition of federal or state income taxes have been provided for in the accompanying consolidated financial statements with the exception of income taxes relating to the C-Corp subsidiaries directly owned by Atlas Intermediate and the State of Texas Margin tax.

Subsequent to the Atlas Business Combination, income taxes relating to the C-Corps owned directly by Atlas Intermediate and the State of Texas Margin tax are considered within the provision of non-controlling interest as it is generated through the results of Atlas Intermediate and its subsidiaries.

Net Income (loss)

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.

Provision for Non-controlling Interest

Our ownership and voting structure are comprised of holders of our Class A common stock that participate 100% in the results of Atlas Technical Consultants, Inc. and ~~94%~~97% in Atlas Intermediate and its subsidiaries and holders of our Class B common stock that participate in the results of Atlas Intermediate and its subsidiaries until their Class B common stock is converted to Class A common stock. In connection with the Atlas Business Combination, it was determined that the results of Atlas Intermediate and its subsidiaries would be fully consolidated within the results of the Company.

Due to the participation of the holders of our Class B common stock in the results of Atlas Intermediate and subsidiaries, a non-controlling interest was deemed to exist. Consolidated net income (loss) 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 includes a pro-rata share of taxes as federal and state income taxes relating to the C-Corps directly owned by Atlas Intermediate and the State of Texas Margin tax as it is generated through the results of Atlas Intermediate and its subsidiaries.

Upon the close of the Atlas Business Combination, the holders of our Class B common stock participated in 80.6% of the results of Atlas Intermediate and its subsidiaries. This percentage has declined since the Atlas Business Combination due to the exchange of Atlas Intermediate units, together with Class B common shares, for Class A common shares as contractual lock-ups have expired and the exchange of our public and private placement warrants for Class A common shares during November and December 2020 because of our tender offer and warrant exchange.

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 represented a 2.179% original issue discount on the Preferred Units (such purchase, the “GSO Placement”).

On February 25, 2021, the Company, in its capacity as the managing member of Holdings, entered into Amendment No. 1 to the Holdings LLC Agreement to allow Holdings, at the direction of the Board, to redeem all of the Preferred Units at any time using the proceeds from the refinancing of the Atlas Credit Agreement and entry into the Atlas 2021 Credit Agreements.

On February 25, 2021, following the execution of Amendment No. 1 to the Holdings LLC Agreement, Holdings elected to redeem all of the 145,000 Preferred Units then outstanding and held by GSO AIV-2 for $1,084.96 per Preferred Unit for a total redemption price of $157.4 million which included dividends accrued for as of December 31, 2020 (the “Redemption”). Following the Redemption, (i) the Preferred Units are no longer deemed outstanding, (ii) all dividends on the Preferred Units ceased to accrue, and (iii) all rights of the holders thereof as holders of Preferred Units ceased and terminated, except for the right to receive payment under the Redemption.

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.

Financial Overview

During the ~~quarter~~three months ended ~~July 1,~~September 30, 2022, we continued to execute on our growth strategy increasing revenues by ~~19%~~17% compared to the ~~second quarter of 2021, including 8% organic~~three months ended October 1, 2021. Organic growth was 10% as we capitalize on strong market demand for infrastructure and environmental professional services, continue to win larger projects ~~and programs~~ and benefit from our expanded service capabilities with two new acquisitions in 2022. ~~Our~~We maintained our gross margins ~~improved over~~rates compared to the ~~first~~second quarter of ~~2022 as we benefited from increased billing rates and improved operational execution.~~2022. As the Company grows, we continue to see economies of scale with our efficient overhead structure which has resulted in significantly higher operating income compared to both the prior year quarter and ~~first~~second quarter of this year. In the face of rising interest rates and increased amortization of intangibles related to acquisitions, we have been able to reduce our net loss to $1.4 million for the quarter and generated cash flow from operations of $9.8 million. We also entered into an interest rate cap hedge agreement to limit the cash flow impact of rising interest rates.

~~Our focus~~We are focusing on providing infrastructure and environmental professional services without undertaking direct construction ~~risk or having the carbon footprint of a manufacturing entity provides a growing platform for~~risk. Our environmental technical expertise continues to position us to assist our clients in addressing their ongoing Environmental, Social and Governance (“ESG”) objectives and maintaining compliance with local laws and regulations.

Backlog has grown to a record ~~$855~~$864 million ~~with additional~~driven by key ~~wins on larger marquee environmental~~transportation, government and ~~transportation jobs.~~power contracts.

RESULTS OF OPERATIONS

Consolidated Results of Operations

The following table represents our selected results of operations for the periods indicated.

	Three Months Ended						Six Months Ended						Three Months Ended						Nine Months Ended
	July 1, 2022			July 2, 2021			July 1, 2022			July 2, 2021			September 30, 2022			October 1, 2021			September 30, 2022			October 1, 2021
	(in thousands, except per share data)												(in thousands, except per share data)
Revenues	$	156,501		$	131,562		$	291,688		$	254,831		$	162,119		$	138,719		$	453,807		$	393,550
Subcontractor costs		(34,040	)		(25,241	)		(59,871	)		(46,917	)		(33,154	)		(26,206	)		(93,025	)		(73,123	)
Other costs of revenues		(48,498	)		(43,108	)		(94,534	)		(86,060	)		(52,180	)		(46,372	)		(146,714	)		(132,432	)

Gross Profit		73,963			63,213			137,283			121,854			76,785			66,141			214,068			187,995

Operating expenses:
Personnel costs and benefits		(38,335	)		(32,611	)		(72,805	)		(66,521	)		(37,254	)		(35,210	)		(110,059	)		(101,731	)
Selling general and administrative		(16,736	)		(16,177	)		(31,772	)		(28,053	)		(16,832	)		(16,327	)		(48,604	)		(44,379	)
Change in fair value of earnouts		-			(2,823	)		-			(2,823	)		-			-			-			(2,823	)
Depreciation and amortization		(8,328	)		(5,940	)		(15,296	)		(10,500	)		(8,821	)		(5,971	)		(24,117	)		(16,471	)

Total Operating expenses		(63,399	)		(57,551	)		(119,873	)		(107,897	)		(62,907	)		(57,508	)		(182,780	)		(165,404	)

Operating income		10,564			5,662			17,410			13,957			13,878			8,633			31,288			22,591

Interest expense		(11,771	)		(10,258	)		(22,890	)		(33,300	)		(11,502	)		(10,750	)		(34,392	)		(44,050	)

(Loss) income before income taxes		(1,207	)		(4,596	)		(5,480	)		(19,343	)
Income (loss) income before income taxes														2,376			(2,117	)		(3,104	)		(21,459	)
Income tax expense		(205	)		(187	)		(350	)		(231	)		(392	)		(409	)		(742	)		(641	)

Net (loss) income		(1,412	)		(4,783	)		(5,830	)		(19,574	)
Net income (loss)														1,984			(2,526	)		(3,846	)		(22,100	)

Provision for non-controlling interest		102			617			467			12,786			(79	)		233			419			13,019

Redeemable preferred stock dividends		-			-			-			(5,899	)		-			-			-			(5,899	)

Net (loss) attributable to Class A common stock shareholders/members	$	(1,310	)	$	(4,166	)	$	(5,363	)	$	(12,687	)
Net income (loss) attributable to Class A common stock shareholders/members													$	1,905		$	(2,293	)	$	(3,427	)	$	(14,980	)

(Loss) Per Class A Common Share	$	(0.04	)	$	(0.14	)	$	(0.15	)	$	(0.57	)
Income (Loss) Per Class A Common Share													$	0.05		$	(0.07	)	$	(0.10	)	$	(0.58	)

Weighted average of shares outstanding:
Class A common shares (basic and diluted)		35,934,215			30,633,366			34,981,819			22,400,179			37,511,678			32,826,431			35,822,028			25,862,913

Comparison of the ~~three months ended July 1,~~Three Months Ended September 30, 2022 to the ~~three months ended July 2, 2021:~~Three Months Ended October 1, 2021

Revenue

Revenue for the three months ended ~~July 1,~~September 30, 2022 increased ~~$24.9~~$23.4 million, or ~~19.0%~~16.9%, to ~~$156.5~~$162.1 million as compared to ~~$131.6~~$138.7 million for the corresponding prior year period.

The increase in revenue for the three months ended ~~July 1,~~September 30, 2022 was attributable, in part, to the acquisitions of ~~O’Neill,~~ TranSmart and 1 Alliance. These acquisitions accounted for ~~$16.2~~$11.1 million of the increase for the quarter. Additionally, we have experienced growth in revenues in transportation projects as we expand our services across new geographies and expand our range of services to existing customers and have been successful in updating and increasing our pricing with customers to mitigate greater U.S. labor issues.

Subcontractor Costs

Subcontractor costs increased ~~$8.8~~$6.9 million, or ~~34.9%~~26.5%, to ~~$34.0~~$33.2 million. The increase is due to the increase in revenues and the timing of work where subcontractor costs are required. During the ~~quarter~~three months ended ~~July 1,~~September 30, 2022, there was in increase in the percentage of subcontractor costs compared to revenues from ~~19.2%~~18.9% in the ~~quarter~~three months ended ~~July 2,~~October 1, 2021 to ~~21.8%~~20.5% in the current quarter. This percentage varies from period to period based on the timing of large projects that require higher percentage subcontractor use but has historically been 20% over a number of periods.

Other Costs of Revenues and Gross Profit

Other costs of revenue for the ~~quarter~~three months ended ~~July 1,~~September 30, 2022 increased ~~$5.4~~$5.8 million, or ~~12.5%~~22.0%. The increase in other cost of revenues was due to the increase in revenues and ~~total costs of revenues~~ was consistent as a percentage of revenues for each quarter. The company has been able to achieve consistent gross margins with a significant amount of work done on a cost reimbursable basis along with other projects where pricing increases have been achieved.

Operating Expense

Total operating expenses for the ~~quarter~~three months ended ~~July 1,~~September 30, 2022 increased by ~~$5.8~~$5.4 million, or ~~10.2%~~9.4%. For the ~~quarter~~three months ended ~~July 1,~~September 30, 2022, operating expense, as a percentage of revenue, decreased to ~~40.5%~~38.8% from ~~43.7% in~~41.5% for the ~~prior year~~three months ended October 1, 2021 as the Company has been able to scale the business and manage costs. ~~Personnel costs, depreciation~~Depreciation and amortization expense ~~and selling general and administrative costs~~ increased due to the additional intangible assets recorded in connection with the acquisitions completed since ~~the quarter ended July~~October 1, 2021.

Interest Expense

Interest expense for the ~~quarter~~three months ended ~~July 1,~~September 30, 2022 increased by ~~$1.5~~$0.8 million due to additional debt related to the costs of the acquisitions completed since ~~the quarter ended July 2,~~October 1, 2021 as well as an approximate ~~0.80%~~2% increase in the average borrowing rate as the Company’s debt is partly based on ~~Libor~~LIBOR rates which have increased over the prior period.

Income Tax Expense

Income tax expense for the three months ended ~~July 1,~~September 30, 2022 and ~~July 2,~~October 1, 2021 was ~~$0.2~~$0.4 million and $0.4 million, respectively, as the Company’s overall effective tax rate is low as the Company is in a loss position and does not have prior year income taxes to apply the losses to and recover prior taxes.

Provision for ~~Non-controlling~~Non-Controlling Interest

The provision for non-controlling interest for the ~~quarter~~three months ended ~~July 1,~~September 30, 2022 is a function of the level of participation of the non-controlling interests which was 6%4.0% in the current period compared to 9%11.2% in the prior period.

Redeemable Preferred Stock Dividends

We redeemed the Preferred Units in February 2021 and therefore had no redeemable preferred stock dividends for the three months ended ~~July 1,~~September 30, 2022 or ~~July 2,~~October 1, 2021.

Comparison of the ~~six months ended July 1,~~Nine Months Ended September 30, 2022 to the ~~six months ended July 2,~~Nine Months Ended October 1, 2021

Revenue

Revenue for the ~~six~~nine months ended ~~July 1,~~September 30, 2022 increased ~~$36.9~~$60.3 million, or ~~14.5%~~15.3%, to ~~$291.7~~$453.8 million as compared to ~~$254.8~~$393.6 million for the corresponding prior year period.

The increase in revenue for the ~~six~~nine months ended ~~July 1,~~September 30, 2022 was attributable, in part, to the acquisitions of AEL, O’Neill, TranSmart and 1 Alliance. These acquisitions accounted for ~~$21.8~~$33.9 million of the increase for the period. Additionally, we have experienced growth in revenues in transportation projects as we expand our services across new geographies and expand our range of services to existing customers and have been successful in updating and increasing our pricing with customers to mitigate greater U.S. labor issues.

Subcontractor Costs

Subcontractor costs increased ~~$13.0~~$19.9 million, or ~~27.6%~~27.2%, to ~~$59.9~~$93.0 million. The increase is due to the increase in revenues and the timing of work where subcontractor costs are required. During the ~~six~~nine months ended ~~July 1,~~September 30, 2022, there was in increase in the percentage of subcontractor costs compared to revenues from ~~18.4%~~18.6% in the ~~six~~nine months ended ~~July 2,~~October 1, 2021 to ~~20.5%~~20.4% in the current period. This percentage varies from period to period based on the timing of large projects that require higher percentage subcontractor use but has historically been 20% over a number of periods.

Other Costs of Revenues and Gross Profit

Other costs of revenue for the ~~six~~nine months ended ~~July 1,~~September 30, 2022 increased ~~$8.5~~$14.3 million, or ~~9.8%~~10.8%. The increase in other cost of revenues was due to the increase in revenues and ~~total costs of revenues~~ was consistent as a percentage of revenues for each quarter. The company has been able to achieve consistent gross margins with a significant amount of work done on a cost reimbursable basis along with other projects where pricing increases have been achieved.

Operating Expense

Total operating expenses for the ~~six~~nine months ended ~~July 1,~~September 30, 2022 increased by ~~$12.0~~$17.4 million, or ~~11.1%~~10.5%. For the ~~six~~nine months ended ~~July 1,~~September 30, 2022, operating expense, as a percentage of revenue, decreased to ~~41.1%~~40.3% from ~~42.3% in~~42.0% for the ~~prior period~~nine months ended October 1, 2021 as the Company has been able to scale the business and manage costs. ~~Personnel costs, depreciation~~Depreciation and amortization expense ~~and selling general and administrative costs~~ increased due to the additional intangible assets recorded in connection with the acquisitions completed since October 1, 2021. In the ~~six~~nine months ended ~~July~~October 1, ~~2021.~~2021, the Company recorded a non-cash charge of $2.8 million for the change in fair value of earnouts.

Interest Expense

Interest expense for the ~~six~~nine months ended ~~July 1,~~September 30, 2022 decreased by ~~$10.4~~$9.7 million. The prior year period included a write-off of deferred financing costs of $15.2 million when the 2021 debt transaction was completed. Excluding this from the prior period results in interest expense increasing ~~$4.9~~$5.5 million from the additional debt related to the costs of the acquisitions completed since ~~the six months ended July 2,~~October 1, 2021 as well as an approximate ~~0.80%~~2% increase in the average borrowing rate as the Company’s debt is partly based on ~~Libor~~LIBOR rates which have increased over the prior period.

Income Tax Expense

Income tax expense for the ~~six~~nine months ended ~~July~~September 30, 2022 and ~~July 2,~~October 1, 2021 was ~~$0.4~~$0.7 million and ~~$0.2~~$0.6 million, respectively, as the Company’s overall effective tax rate is low as the Company is in a loss position and does not have prior year income taxes to apply the losses to and recover prior taxes.

Provision for ~~Non-controlling~~Non-Controlling Interest

The provision for non-controlling interest for the ~~six~~nine months ended ~~July 1,~~September 30, 2022 is a function of the level of participation of the non-controlling interests which was 6%6.7% in the current period compared to 9%28.8% in the prior period.

Redeemable Preferred Stock Dividends

We redeemed the Preferred Units in February 2021 and therefore had no redeemable preferred stock dividends for the ~~three~~nine months ended ~~July~~September 30, 2022. Redeemable preferred stock dividends for the nine months ended October 1, ~~2022 or July 2, 2021.~~2021 were $5.9 million.

NON-GAAP FINANCIAL MEASURES

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, 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						For the six-months ended						Three Months Ended					Nine Months Ended
	July 1, 2022			July 2, 2021			July 1, 2022			July 2, 2021			September 30, 2022		October 1, 2021			September 30, 2022			October 1, 2021
	(in $ millions)						(in $ millions)						(in millions)					(in millions)
Net loss	$	(1.4	)	$	(4.8	)	$	(5.8	)	$	(19.6	)
Net income (loss)													$	2.0	$	(2.6	)	$	(3.8	)	$	(22.1	)
Interest ⁽¹⁾		11.8			10.2			22.9			33.3			11.5		10.8			34.4			44.1
Taxes		0.2			0.2			0.4			0.2			0.4		0.4			0.7			0.6
Depreciation and amortization		8.3			5.9			15.3			10.5			8.8		6.0			24.1			16.5
EBITDA		18.9			11.5			32.8			24.4			22.7		14.6			55.4			39.1

One time legal/transaction costs and other non-recurring charges⁽²⁾	$	-			2.6		$	0.8			3.9		$	0.8		3.4		$	1.6			7.3
Non-cash change in fair market value of contingent consideration		-			2.8						2.8			-		-			-			2.8
Non-cash equity compensation⁽³⁾		2.3			1.3			4.2			1.7			2.3		1.8			6.5			3.5

Adjusted EBITDA	$	21.2		$	18.2		$	37.8		$	32.8		$	25.8	$	19.8		$	63.5		$	52.7

(1)	Includes $15.2 million of financing fees incurred as part of the Atlas Business Combination in 2020 that were written off as part of our refinancing that occurred in the first quarter of 2021.

(2)	Includes acquisition related professional fees and other non-recurring legal and professional fees.

(3)	Includes the amortization of unvested restricted share units, performance share units and stock options granted in 2020, 2021 and 2022 to key management personnel and Board of Directors compensation.

LIQUIDITY AND CAPITAL RESOURCES

Our primary sources of liquidity and capital resources are our cash and cash equivalents balances, cash flow from operations, borrowings under the Atlas 2021 Credit Agreements (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 the Atlas 2021 Credit Agreements will be sufficient to meet projected cash requirements for at least the next twelve months.

As of ~~July 1,~~September 30, 2022, we had total liquidity of ~~$39.0~~$45.9 million. Based on the nature of our seasonality cycle, we typically see a liquidity decrease in our first quarter of the fiscal year and remaining constant during the second and third quarters of the year with the fourth quarter typically resulting in significant improvements in liquidity as working capital requirements decrease.

~~Other than the impact on cash flows from operations~~

The Company has experienced increased working capital outflows relating to the increase in interest ~~expense, we have not experienced other liquidity decreases.~~charges and from overall growth in operations.

On June 6, 2022, we entered into an interest rate cap as described in “Note 6 — Long-Term Debt” to the consolidated financial statements to hedge against the risk of Adjusted ~~Libor~~LIBOR exceeding 3%.

~~Refer~~On August 4, 2022, we entered into an agreement to amend the ABL Revolver Agreement to increase the revolving credit facility to $60.0 million as described in “Note ~~15 – Subsequent Events~~6 — Long-Term Debt” to the consolidated financial ~~statements for a discussion of an amendment to the ABL Revolver Agreement in August 2022 to increase the capacity to $60,000,000.~~statements.

Cash Flows

The following table sets forth our cash flows for the periods indicated.

	For the six months ended						Nine Months Ended
	July 1, 2022			July 2, 2021			September 30, 2022			October 1, 2021
	($ in thousands)						(in thousands)
Net cash (used in) provided by operating activities	$	(6,308	)	$	8,456		$	(13,967	)	$	2,254
Net cash used in investing activities		(28,837	)		(32,445	)		(34,302	)		(33,390	)
Net cash provided by financing activities		35,494			21,733			47,023			21,589
Net (decrease) increase in cash and cash equivalents	$	349		$	(2,256	)
Net decrease in cash and cash equivalents							$	(1,246	)	$	(9,547	)

Comparison of the ~~six months ended July 1,~~Nine Months Ended September 30, 2022 to the ~~six months ended July 2,~~Nine Months Ended October 1, 2021

Cash and Cash ~~Equivalents.~~Equivalents

At ~~July 1,~~September 30, 2022 and ~~July 2,~~October 1, 2021, we had ~~$11.0~~$9.5 million and ~~$11.8~~$4.5 million of cash and cash equivalents, respectively.

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 ~~provided by~~used in operating activities was ~~a usage of $6.3~~$14.0 million for the ~~six~~nine months ended ~~July 1,~~September 30, 2022, compared to net cash provided of ~~$8.5~~$2.3 million for the ~~six~~nine months ended ~~July 2,~~October 1, 2021. The decrease was primarily due to the increase in cash paid for interest of ~~$4.9~~$11.3 million and ~~timing~~increase in other working capital needs from growth of the ~~payment of the Cares-Act deferral of employer taxes of $3 million.~~business.

Investing Activities

Net cash used in investing activities was ~~($28.8)~~$34.3 million for the ~~six~~nine months ended ~~July 1,~~September 30, 2022, compared to ~~($32.4)~~$33.4 million for the ~~six~~nine months ended ~~July 2,~~October 1, 2021. The usage of cash was related to our acquisitions of TranSmart and Alliance in March ~~2022.~~2022 and other capital expenditures. The prior year period included the cash cost of the AEL and O’Neill acquisitions which were slightly higher cash outflows compared to the current period acquisitions.

Financing Activities

Net cash provided by financing activities was ~~$35.5~~$47.0 million for the ~~six~~nine months ended ~~July 1,~~September 30, 2022, compared ~~$21.7~~$21.6 million for the ~~six~~nine months ended ~~July 2,~~October 1, 2021. The ~~$13.8~~$25.4 million increase to net cash provided by financing activities was due to borrowings on the Term Loan and Line of Credit to fund the acquisitions described above and to fund operations.

Working Capital

Working capital, or current assets less current liabilities, of ~~$80.2~~$98.7 million at ~~July 1,~~September 30, 2022 ~~was comparable to~~increased from working capital as of December 31, 2021 of $81.3 ~~million.~~million due to the acquisitions in 2022.

Debt Arrangements

On February 25, 2021, Atlas Intermediate, as the borrower, entered into two new credit facilities consisting of (i) a $432.0 million senior secured term loan at closing and, subject to the satisfaction of certain terms and conditions, a committed delayed draw term loan facility to be used for future acquisitions, within 18 month of February 25, 2021 and subject to certain conditions, in an aggregate principal amount of up to $75.0 million, of which $61 million has been used and $14 million remains available as of ~~July 1,~~September 30, 2022, and an uncommitted incremental term loan facility that may be incurred after closing (the “Term Loan”) pursuant to a Credit Agreement dated February 25, 2021, by and among Holdings, Atlas Intermediate, Wilmington Trust, National Association, as administrative agent and collateral agent, and certain lenders thereto, including certain Blackstone entities, which may include, Blackstone Alternative Credit Advisors LP, and its managed funds and accounts, and its affiliates, Blackstone Holdings Finance Co. L.L.C. and its affiliates, and/or certain other of their respective funds, accounts, clients managed, advised or sub-advised, or any of their respective affiliates (the “Term Loan Agreement”) and (ii) a $40.0 million senior secured revolver which aggregate principal amount may be increased, subject to the satisfaction of certain terms and conditions, including obtaining commitments therefor, by up to $20.0 million (the “Revolver”) pursuant to the Credit Agreement dated February 25, 2021, by and among Holdings, Intermediate, JPMorgan Chase Bank, N.A., as administrative agent, swingline lender, issuing bank, lender, sole bookrunner and sole lead arranger (the “ABL Revolver Agreement,” and together with the Term Loan Agreement, collectively the “Credit Agreements”). The Term Loan Agreement refinances the Atlas Credit Agreement dated as of February 14, 2020, with Macquarie Capital Funding LLC, as administrative agent and certain lenders, which repayment was effectuated partially in cash and partially by way of a cashless exchange of existing term loans and preferred equity for Term Loans.

The Term Loan Agreement and ABL Revolver Agreement are collectively referred to as the “Atlas 2021 Credit Agreements” by the Company.

The initial Term Loan will mature on February 25, 2028 and the Revolver will mature on February 25, 2026.

On August 4, 2022, Holdings, Atlas Intermediate, certain subsidiaries of Holdings (collectively with Holdings and Atlas Intermediate, the “Loan Parties”) and the Administrative Agent (as defined below) entered into the First Amendment to Credit Agreement (the “Credit Agreement Amendment”), which amends that certain Credit Agreement, dated as of February 25, 2021 by and among the Loan Parties and JPMorgan Chase Bank, N.A., as administrative agent, swingline lender, issuing bank, lender, sole bookrunner and sole lead arranger (the “Administrative Agent”). The Credit Agreement Amendment amended the Credit Agreement to, among other matters, increase the revolving credit facility thereunder by $20.0 million to an aggregate principal amount of $60.0 million.

Interest Rate Cap

In June 2022, the Company entered into a deferred premium interest rate cap which limits the Adjusted LIBOR rate noted above to 3%. The interest rate cap hedges ~~$500,000,000~~$500.0 million of debt and has a three-year term and will be paid for monthly at an annual rate of 0.69% or approximately $10.5 million over the three-year period. As a result, the Company ~~has~~initially recorded an asset and a corresponding liability for $10.5 million. Four monthly payments have been made as of September 30, 2022. The Company applies hedge accounting and records any change in fair value as a component of shareholders’ equity. The fair value of the interest rate cap as of September 30, 2022 increased $9.3 million and therefore there was a gain of $9.3 million recorded in OCI for the nine months ended September 30, 2022. The asset is included in other long-term assets and the liability is recorded as an other current liability of ~~$3.5~~$3.4 million and an other long-term liability of ~~$7 million. One monthly payment was made~~$5.5 million as of ~~July 1,~~September 30, 2022. The interest rate cap has already provided benefit to the Company ~~will apply hedge accounting and record any change in fair value as a component~~with LIBOR rates exceeding 3% at the end of ~~shareholders’ equity.~~September 2022.

The Credit Agreements are guaranteed by Holdings and secured by (i) in the case of the ABL Revolver Agreement, a first priority security interest in the current assets, including accounts receivable, of Holdings, Atlas Intermediate and its subsidiaries and (ii) in the case of the Term Loan Agreement, a pledge of the equity interests of the subsidiaries of Holdings and Atlas Intermediate, and subject to the first lien security interest on current assets under the Revolver, a first priority lien on substantially all other assets of Holdings, Intermediate and all of their direct and indirect subsidiaries.

The ABL Revolver Agreement contains a “springing” financial covenant which requires Holdings, Atlas Intermediate and all their direct and indirect subsidiaries on a consolidated basis to maintain a Fixed Charge Coverage Ratio (as defined in the ABL Revolver Agreement) of no less than 1.10 to 1.00 when the outstanding principal amount of loans under the Revolver exceeds $0 or the aggregate exposure for letters of credit under the Revolver exceeds $5$5.0 million.

The Company has been in compliance with the terms of the Atlas Credit Facility and Atlas Credit Agreement as of ~~July 1,~~September 30, 2022 and December 31, 2021, respectively.

Our debt balances are summarized as follows (in thousands):

	July 1, 2022			December 31, 2021			September 30, 2022			December 31, 2021
	(in thousands)						(in thousands)
Atlas 2021 credit agreement	$	511,029		$	473,392		$	522,559		$	473,392

Less: Loan costs, net		(7,538	)		(7,593	)		(7,260	)		(7,593	)
Less current maturities of long-term debt		(4,930	)		(3,606	)		(4,930	)		(3,606	)
Long-term debt	$	498,561		$	462,193		$	510,369		$	462,193

The following table presents, in ~~millions,~~thousands, scheduled maturities of the Company’s debt as of ~~July 1,~~September 30, 2022:

2022 (six months remaining)	$	2.5
2022 (three months remaining)			$	2,465
2023		4.9		4,930
2024		4.9		4,930
2025		4.9		4,930
2026		4.9		4,930
Thereafter		488.9		500,374
	$	511.0	$	522,559

The 2021 Atlas Credit agreement requires annual amortization of principal amounts of 1% or 2.5% depending on certain ratios. The Company is currently within the ratio that requires 1% annual amortization. Principal repayments commenced during the Company’s second quarter 2022.

Effective Interest Rate

Our average effective interest rate on our total debt during the ~~six~~nine months ended ~~July 1,~~September 30, 2022 and ~~July 2,~~October 1, 2021 was ~~9.3%~~9.2% and ~~8.5%~~8.1%, respectively.

Interest expense, inclusive of amortization of deferred debt issuance costs, in the consolidated financial statements for the ~~six~~nine months ended ~~July 1,~~September 30, 2022 and ~~July 2,~~October 1, 2021 was ~~$22.9~~$34.4 million and ~~$33.3~~$44.1 million (which included $15.2 million non-cash write-off of deferred financing costs), respectively.

Other Commitments and Contingencies

In connection with our acquisitions, , we may be required to pay 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 acquisitions and may be paid in cash or stock. We have currently accrued $37.7 million as the fair value of that liability within our Consolidated Balance Sheet at ~~July 1,~~September 30, 2022. Actual payouts may vary based on achievement of future results.

As part of our self-insurance policies, we are required to furnish standby letters of credit to our reinsurers. We had $3.7 million of standby letters of credit in effect as of ~~July 1,~~September 30, 2022.

The Company enters into operating leases relating to office space and equipment leases in the ordinary course of business. Remaining amounts due, in ~~millions,~~thousands, as of ~~July 1,~~September 30, 2022 are as follows:

2022 (six months remaining)	$	7.2
2022 (three months remaining)			$	3,489
2023		12.3		12,244
2024		8.1		8,085
2025		4.1		4,128
2026		2.7		2,695
Thereafter		3.8		3,818
	$	38.2	$	34,459

During 2020, the Company entered into an agreement with its fleet management company pursuant to which it would receive rebates of $1.3 million to be repaid over three years at an interest rate of 2.85% per annum. The rebates were secured by title to selected vehicles within the Company’s owned fleet of vehicles in Georgia and California.

During the fourth quarter of the year ended December 31, 2021, the Company entered into a similar agreement with its fleet management company in which it would receive $1.6 million secured by vehicles owned by O’Neill. Financial terms for the O’Neill transaction were similar to agreement entered into during 2020.

Remaining payments are as follows (in millions):

2022 (six months remaining)	$	0.5
2022 (three months remaining)			$	0.3
2023		0.7		0.7
2024		0.5		0.5
	$	1.7	$	1.5

Off-Balance Sheet Arrangements

As of ~~July 1,~~September 30, 2022, 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 through the ~~six~~nine months ended ~~July 1,~~September 30, 2022. However, interest rates have continued to rise and the additional interest expense expected to be paid over the next twelve months will be higher than the previous twelve months. For every 1% increase in LIBOR, we would experience $5 million in additional interest (see disclosures related to the interest rate cap entered into during the ~~quarter~~three months ended July 1, 2022). In addition, the Company has experienced higher costs to replace comparable employees as certain labor markets have tightened and for employees opting to return to work post COVID-19.

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 and the Chief Financial 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 and the Chief Financial Officer, concluded that, as of ~~July 1,~~September 30, 2022, 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 quarter ended ~~July 1,~~September 30, 2022 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 situation on our internal controls to minimize the impact on their design and operating effectiveness.

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

During the quarter ended ~~July 1,~~September 30, 2022, 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, 2021, filed with the Securities and Exchange Commission (the “SEC”) on March ~~15,~~16, 2022. 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.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS FROM REGISTERED SECURITIES

None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS.

Exhibit Number		Description
2.1		Unit Purchase Agreement, dated August 12, 2019, by and among the Company, Atlas TC Holdings LLC, Atlas TC Buyer LLC, Atlas Intermediate Holdings LLC and Atlas Technical Consultants Holdings LP (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the SEC on August 13, 2019).
2.2		Amendment No. 1 to Unit Purchase Agreement, dated as of January 23, 2020, by and among Boxwood Merger Corp., Atlas TC Holdings LLC, Atlas TC Buyer LLC, Atlas Intermediate Holdings LLC and Atlas Technical Consultants LP (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the SEC on January 23, 2020).
3.1		Third Amended and Restated Certificate of Incorporation of Atlas Technical Consultants, Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on June 22, 2022).
3.2		Amended and Restated Bylaws of Atlas Technical Consultants, Inc. (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed with the SEC on June 22, 2022).
4.1		Specimen Class A common stock Certificate (incorporated by reference to Exhibit 4.2 to the Company’s Registration Statement on Form S-1 (File No. 333-228018), filed with the SEC on November 15, 2018).
4.2		Specimen Warrant Certificate (incorporated by reference to Exhibit 4.3 to the Company’s Registration Statement on Form S-1 (File No. 333-228018), filed with the SEC on November 15, 2018).
4.3		Warrant Agreement, dated November 15, 2018, between the Company and Continental Stock Transfer & Trust Company (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the SEC on November 21, 2018).
4.4		Amendment No. 1 to Warrant Agreement, dated as of November 17, 2020, by and among the Company and Continental Stock Transfer & Trust Company (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on November 17, 2020).
31.1*		Certification of Principal Executive Officer Pursuant to Securities Exchange Act Rules 13a-14(a) and 15(d)-14(a), as adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*		Certification of Principal Financial Officer Pursuant to Securities Exchange Act Rules 13a-14(a) and 15(d)-14(a), as adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*		Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*		Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*		Inline XBRL Instance Document.
101.SCH*		Inline XBRL Taxonomy Extension Schema Document.
101.CAL*		Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF*		Inline XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB*		Inline XBRL Taxonomy Extension Label Linkbase Document.
101.PRE*		Inline XBRL Taxonomy Extension Presentation Linkbase Document.
104*		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

Filed Herewith

†

Management contract and compensatory arrangement in which any director or named executive officer participates

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 9th day of ~~August,~~November, 2022.

	ATLAS TECHNICAL CONSULTANTS, INC.

	/s/ David D. Quinn, Sr.
	Name:	David D. Quinn, Sr.
	Title:	Chief Financial Officer
		(Principal Financial Officer)

	/s/ L. Joe Boyer
	Name:	L. Joe Boyer
	Title:	Chief Executive Officer
		(Principal Executive Officer)

4041

iso4217:USD xbrli:shares

	Operating Leases
2022	$	7,161
2023		12,291
2024		8,101
2025		4,128
2026		2,695
Thereafter		3,819
Total	$	38,195

Weighted-average discount rate		5.41	%
Weighted-average remaining lease term (in years)		3.74
Current lease liabilities (included in other current liabilities)	$	12,111
Non-current lease liabilities (included in other long-term liabilities)		22,224
Right-of-use assets (included in other long-term assets)		32,786