Notes to Condensed Consolidated Financial Statements
(unaudited)
1. Nature of Operations and Basis of Presentation
Atlas Financial Holdings, Inc. (“Atlas”, “We”, “us”, “our” or the “Company”) commenced operations on December 31, 2010. The primary business of Atlas focuses on a managing general agency (“MGA”) strategy, primarily through our wholly owned subsidiary, Anchor Group Management, Inc. (“AGMI”). AGMI focuses on a niche market orientation for the “light” commercial automobile sector. This sector includes taxi cabs, limousine, livery, full-time transportation network companies (“TNC”) drivers/operators, and other specialty commercial auto operators. Automobile insurance products provide insurance coverage in three major areas: liability, accident benefits and physical damage.
Atlas’ business is carried out through its subsidiaries: AGMI, UBI Holdings Inc. (“UBI Holdings”) and UBI Holdings’ wholly-owned subsidiaries, optOn Digital IP Inc. (“OOIP”) and optOn Insurance Agency Inc. (“optOn” and together with OOIP and UBI Holdings, “UBI”).
Prior to a strategic transition, our core business was the underwriting and risk bearing of commercial automobile insurance policies, focusing on the “light” commercial automobile sector, through American Country Insurance Company (“American Country”), American Service Insurance Company, Inc. (“American Service”) and Gateway Insurance Company (“Gateway” and together with American Country and American Service, the “ASI Pool Companies”) and Global Liberty Insurance Company of New York (“Global Liberty” and together with the ASI Pool Companies, the “Insurance Subsidiaries”), along with our wholly owned MGA, AGMI. The ASI Pool Companies were placed into rehabilitation under the statutory control of the Illinois Department of Insurance during the second half of 2019 and were subsequently placed into liquidation and have been deconsolidated from our consolidated financial statements as of October 1, 2019 as a result of these actions. Other regulatory actions were taken in certain states, including restriction, suspension, or revocation of certain state licenses and certificates of authority held by the ASI Pool Companies preceding and following the initiation of rehabilitation.
During the fourth quarter of 2019, the Company began actively pursuing the potential sale of Global Liberty, and as a result, Global Liberty was held for sale and thus classified as a discontinued operation from October 1, 2019 through September 30, 2021. Global Liberty was placed into liquidation by the New York Department of Financial Services in October 2021 and, as a result, it has been deconsolidated from our consolidated financial statements beginning October 2021.
Atlas’ ordinary common shares are listed on the OTC Markets system under the symbol “AFHIF”.
Basis of Presentation
These statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The consolidated financial statements include the accounts of Atlas and the entities it controls. Equity investments in entities that we do not consolidate, including corporate entities in which we have significant influence and partnership and partnership-like entities in which we have more than minor influence over operating and financial policies, are accounted for under the equity method unless we have elected the fair value option. All significant intercompany accounts and transactions have been eliminated.
The results for the three and nine months ended September 30, 2022 are not necessarily indicative of the results expected for the full calendar year.
The accompanying unaudited condensed consolidated financial statements, in accordance with Securities and Exchange Commission (“SEC”) rules for interim periods, do not include all of the information and notes required by GAAP for complete financial statements and should be read in conjunction with Atlas’ Annual Report on Form 10-K for the year ended December 31, 2021, which provides a more complete understanding of the Company’s accounting policies, financial position, operating results, business properties, and other matters. Atlas has consistently applied the same accounting policies throughout all periods presented.
Estimates and Assumptions
The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates and changes in estimates are recorded in the accounting period in which they are determined. Significant estimates in the accompanying financial statements include revenue recognition, evaluation of assets for impairment, valuation of financing instruments, and deferred tax asset valuation.
Revenue Recognition
Revenues from contracts with customers include both commission and fee income. The recognition and measurement of revenue is based on the assessments of individual contract terms. As an MGA, AGMI has contracts with various insurance carrier partners to write premiums for specific programs which determines AGMI’s commission income revenue. Each contract specifies what our performance obligations are as an MGA and what determines our commission income revenue, generally gross written premiums, net of cancellations and refunds, multiplied by an MGA commission percentage. Under these contracts there are a number of performance obligations; however, it is the bundle of these services and not a single obligation that results in the performance of the MGA under the contracts. The Company considers these performance obligations as a non-bifurcated bundle of services where the performance obligations are satisfied simultaneous to the point in time where AGMI issues a policy, or cancels a policy to an insured. The commission rate stated in the individual contract is the standalone selling price of these non-bifurcated services, which is allocated to the service bundle and not to any individual obligation under the various contracts.
Seasonality
Our insurance business is seasonal in nature. Our ability to generate commission income is also impacted by the timing of policy effective periods in the states in which we operate and products provided by our business partners. For example, January 1st, March 1st and July 1st are common taxi cab renewal dates in jurisdictions in which our companies have written business historically.
Operating Segments
The Company operates in one business segment, the Managing General Agency segment.
2. New Accounting Standards
There have been no recent pronouncements or changes in pronouncements during the nine months ended September 30, 2022, as compared to those described in our Annual Report on Form 10-K for the twelve months ended December 31, 2021, that are of significance or potential significance to Atlas. Pertinent Accounting Standard Updates (“ASUs”) are issued from time to time by the Financial Accounting Standards Board (“FASB”) and are adopted by the Company as they become effective. All recently issued accounting pronouncements with effective dates prior to October 1, 2022 have been adopted by the Company.
3. Intangible Assets
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| Intangible Assets by Major Asset Class |
| ($ in ‘000s) | Economic Useful Life | Gross Carrying Amount | Accumulated Amortization | Accumulated Impairment | Net |
| As of September 30, 2022 | | | | | |
| Trade name and trademark | 15 years | $ | 1,800 | | $ | 907 | | $ | — | | $ | 893 | |
| | | | | |
| As of December 31, 2021 | | | | | |
| Trade name and trademark | 15 years | $ | 1,800 | | $ | 817 | | $ | — | | $ | 983 | |
| Customer relationship | 10 years | 2,700 | | 1,770 | | 930 | | — | |
| | $ | 4,500 | | $ | 2,587 | | $ | 930 | | $ | 983 | |
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4. Loss From Continuing Operations per Share
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| Computations of Basic and Diluted Loss per Common Share from Continuing Operations |
| ($ in ‘000s, except share and per share amounts) | Three months ended September 30, | Nine months ended September 30, |
| 2022 | 2021 | 2022 | 2021 |
| Basic | | | | |
| Loss from continuing operations before income taxes | $ | (3,746) | | $ | (4,070) | | $ | (12,927) | | $ | (6,112) | |
| Income tax expense | — | | — | | — | | — | |
| Net loss attributable to common shareholders from continuing operations | $ | (3,746) | | $ | (4,070) | | $ | (12,927) | | $ | (6,112) | |
| | | | |
| | | | |
| | | | |
| Basic weighted average common shares outstanding | 17,652,839 | | 12,973,964 | | 16,781,195 | | 13,665,609 | |
| Loss per common share basic from continuing operations | $ | (0.21) | | $ | (0.31) | | $ | (0.77) | | $ | (0.45) | |
| | | | |
| Diluted | | | | |
| Basic weighted average common shares outstanding | 17,652,839 | | 12,973,964 | | 16,781,195 | | 13,665,609 | |
| Dilutive potential ordinary shares: | | | | |
| Dilutive stock options outstanding | — | | — | | — | | — | |
| | | | |
| Diluted weighted average common shares outstanding | 17,652,839 | | 12,973,964 | | 16,781,195 | | 13,665,609 | |
| Loss per common share diluted from continuing operations | $ | (0.21) | | $ | (0.31) | | $ | (0.77) | | $ | (0.45) | |
Common shares are defined as ordinary voting common shares, restricted voting common shares and participative restricted stock units (“RSUs”). Earnings per common share diluted is computed by dividing net loss by the weighted average number of common shares outstanding for each period plus the incremental number of shares added as a result of converting dilutive potential ordinary voting common shares, calculated using the treasury stock method. Atlas’ potential dilutive ordinary voting common shares consists of outstanding stock options to purchase ordinary voting common shares and warrants to purchase 2,387,368 ordinary voting common shares of Atlas for $0.69 per share (as indicated in the Schedule 13G filing by American Financial Group, Inc. dated January 20, 2022).
The outstanding principal balance of the Term Loans (as defined herein) under the Credit Agreement (as defined herein) can be converted at any time into ordinary voting common shares, at the applicable Lender’s (as defined herein) discretion, at a rate of $0.35 per share, except that paid-in-kind interest included in the amount presented by a Lender for conversion may, at the Borrowers’ (as defined herein) discretion be paid in cash or converted into ordinary voting common shares at the same rate. As of November 8, 2022, no such conversion has taken place.
Atlas’ dilutive potential ordinary voting common shares consist of outstanding stock options to purchase ordinary voting common shares. The effects of these convertible instruments are excluded from the computation of earnings per common share diluted from continuing operations in periods in which the effect would be anti-dilutive. For the three and nine months ended September 30, 2022 and 2021, all exercisable stock options, warrants and conversion rights under the Credit Agreement were deemed to be anti-dilutive.
5. Contracts with Customers
The revenue included as commission income was $760,000 and $2.0 million for the three months ended September 30, 2022 and 2021, respectively, and $2.2 million and $5.5 million for the nine months ended September 30, 2022 and 2021, respectively.
The balance of receivables related to contracts with customers, which is recorded as part of premiums receivable on the condensed consolidated statements of financial position, as of September 30, 2022 and December 31, 2021:
| | | | | | | | | | | |
| Components of Commission Receivables |
| ($ in ‘000s) | September 30, 2022 | December 31, 2021 |
| Commission receivable, beginning of period | $ | 2,551 | | $ | 2,577 | |
| Commission revenue | 2,232 | | 5,923 | |
| Net change in cash received | (2,864) | | (5,949) | |
| Commission receivable, end of period | $ | 1,919 | | $ | 2,551 | |
| | | |
6. Income Taxes
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| Reconciliation of U.S. Statutory Marginal Income Tax Rate to the Effective Tax Rate - Continuing Operations |
| ($ in ‘000s) | Three months ended September 30, | Nine months ended September 30, |
| 2022 | 2021 | 2022 | 2021 |
| Amount | % | Amount | % | Amount | % | Amount | % |
| Provision for taxes at U.S. statutory marginal income tax rate | $ | (787) | | 21.0 | % | $ | (855) | | 21.0 | % | $ | (2,715) | | 21.0 | % | $ | (1,284) | | 21.0 | |
| Provision for deferred tax assets deemed unrealizable (valuation allowance) | 784 | | (20.9) | | 855 | | (21.0) | | 2,425 | | (18.8) | | 2,241 | | (36.7) | |
| Nondeductible expenses | — | | — | | — | | — | | — | | — | | 2 | | — | |
| Stock compensation | 3 | | (0.1) | | — | | — | | 290 | | (2.2) | | 7 | | (0.1) | |
| Gain from debt extinguishment | — | | — | | — | | — | | — | | — | | (966) | | 15.8 | |
| | | | | | | | |
| Provision for income taxes for continuing operations | $ | — | | — | % | $ | — | | — | % | $ | — | | — | % | $ | — | | — | % |
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| Reconciliation of U.S. Statutory Marginal Income Tax Rate to the Effective Tax Rate - Discontinued Operations |
| ($ in ‘000s) | Three months ended September 30, | Nine months ended September 30, |
| 2022 | 2021 | 2022 | 2021 |
| Amount | % | Amount | % | Amount | % | Amount | % |
| Provision for taxes at U.S. statutory marginal income tax rate | $ | — | | — | % | $ | 3 | | 21.0 | % | $ | — | | — | % | $ | 35 | | 21.0 | % |
| Provision for deferred tax assets deemed unrealizable (valuation allowance) | — | | — | | (3) | | (21.0) | | — | | — | | (35) | | (21.0) | |
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| | | | | | | | |
| | | | | | | | |
| Provision for income taxes for discontinued operations | $ | — | | — | % | $ | — | | — | % | $ | — | | — | % | $ | — | | — | % |
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| Components of Income Tax Benefit - Continuing Operations |
| ($ in ‘000s) | Three months ended September 30, | Nine months ended September 30, |
| 2022 | 2021 | 2022 | 2021 |
| Current tax expense | $ | — | | $ | — | | $ | — | | $ | — | |
| | | | |
| | | | | | | | | | | | | | |
| Components of Income Tax Benefit - Discontinued Operations |
| ($ in ‘000s) | Three months ended September 30, | Nine months ended September 30, |
| 2022 | 2021 | 2022 | 2021 |
| Current tax expense | $ | — | | $ | — | | $ | — | | $ | — | |
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During 2013 and 2019, due to shareholder activity, “triggering events” as determined under Internal Revenue Code (“IRC”) Section 382 may have occurred. As a result, under IRC Section 382, the use of the Company’s net operating loss (“NOL”) and other carryforwards generated prior to the “triggering events” may be subject to a yearly limitation as a result of this “ownership change” for tax purposes, which is defined as a cumulative change of more than 50% during any three-year period by shareholders owning 5% or greater portions of the Company’s shares. Due to the mechanics of the Section 382 calculation when there are multiple triggering events, the Company’s losses will generally be limited based on the thresholds of the 2019 triggering event. The Company has established a valuation allowance against the NOLs that will expire unused as a result of the yearly limitation.
| | | | | | | | |
| Components of Deferred Income Tax Assets and Liabilities |
| ($ in ‘000s) | September 30, 2022 | December 31, 2021 |
| Gross deferred tax assets: | | |
| Losses carried forward | $ | 8,814 | | $ | 6,657 | |
| Investment in affiliates | 28,250 | | 28,250 | |
| Bad debts | 47 | | 47 | |
| Fixed assets | 608 | | 437 | |
| Stock compensation | 50 | | 320 | |
| Other | 1,126 | | 670 | |
| Valuation allowance | (38,319) | | (35,894) | |
| Total gross deferred tax assets | 576 | | 487 | |
| | |
| Gross deferred tax liabilities: | | |
| Intangible assets | 188 | | 206 | |
| Other | 388 | | 281 | |
| Total gross deferred tax liabilities | 576 | | 487 | |
| Net deferred tax assets | $ | — | | $ | — | |
| | |
| | | | | | | | |
| Net Operating Loss Carryforward as of September 30, 2022 by Expiry |
| ($ in ‘000s) | | |
| Year of Occurrence | Year of Expiration | Amount |
| 2011 | 2031 | $ | 1 | |
| 2012 | 2032 | 70 | |
| 2015 | 2035 | 1 | |
| 2017 | 2037 | 12,085 | |
| | |
| 2018 | Indefinite | 8,245 | |
| | |
| 2019 | Indefinite | 5,241 | |
| | |
| 2020 | Indefinite | 4,687 | |
| 2021 | Indefinite | 1,372 | |
| 2022 | Indefinite | 10,270 | |
| Total | | $ | 41,972 | |
| | |
Deferred tax assets are recognized to the extent that it is probable that future taxable income will be available against which they can be utilized. When considering the extent of the valuation allowance on Atlas’ deferred tax assets, weight is given by management to both positive and negative evidence. GAAP states that a cumulative loss in recent years is a significant piece of negative evidence that is difficult to overcome in determining that a valuation allowance is not needed against deferred tax assets. Based on Atlas’ cumulative loss in recent years and certain deferred tax assets subject to a yearly limitation under Section 382 which will likely result in expiration before utilization, Atlas has recorded a valuation allowance of $38.3 million and $35.9 million for its gross future deferred tax assets as of September 30, 2022 and December 31, 2021, respectively.
Atlas accounts for uncertain tax positions in accordance with the income taxes accounting guidance. Atlas has analyzed filing positions in the federal and state jurisdictions where it is required to file tax returns, as well as the open tax years in these jurisdictions. Atlas believes that its federal and state income tax filing positions and deductions will be sustained on audit and does not anticipate any adjustments that will result in a material change to its financial position. Therefore, no reserves for uncertain federal and state income tax positions have been recorded. Atlas would recognize interest expense and penalties related to unrecognized tax benefits as a component of the provision for federal income taxes. Atlas did not incur any federal income tax related interest income, interest expense or penalties for the three and nine months ended September 30, 2022 and 2021. Tax year 2018 and years thereafter are subject to examination by the Internal Revenue Service (“IRS”).
7. Commitments and Contingencies
In the ordinary course of its business, Atlas is involved in legal proceedings, including lawsuits, regulatory examinations and inquiries.
Atlas is exposed to credit risk on balances receivable from insureds and agents. Credit exposure to any one individual insured is not material. The policies placed with risk-taking partners are distributed by agents who may manage cash collection on its behalf pursuant to the terms of their agency agreement. Atlas has procedures to monitor and minimize its exposure to delinquent agent balances, including, but not limited to, reviewing agent account statements, processing policy cancellations for non-payment and other collection efforts deemed appropriate. As a managing agent, our ability to generate commission revenue is pursuant to contractual agreements with risk-taking partners. Our objective is to maintain long-term relationships with these risk-taking partners. Such relationships are dependent upon market conditions, business results, and other factors which may be outside of our control.
8. Property and Equipment
| | | | | | | | |
| Property and Equipment Held |
| ($ in ‘000s) | September 30, 2022 | December 31, 2021 |
Buildings1 | $ | — | | $ | — | |
Land1 | — | | — | |
Building improvements1 | — | | — | |
| Leasehold improvements | 5 | | 39 | |
| Internal use software | 12,795 | | 12,795 | |
| Computer equipment | 1,630 | | 1,842 | |
| Furniture and other office equipment | 1,059 | | 1,086 | |
| Total | $ | 15,489 | | $ | 15,762 | |
| Accumulated depreciation and amortization | (14,034) | | (13,259) | |
| Total property and equipment, net | $ | 1,455 | | $ | 2,503 | |
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1 Held for sale
Depreciation expense and amortization from continuing operations was $347,000 and $378,000 for the three months ended September 30, 2022 and 2021, respectively, and $1.0 million and $1.5 million for the nine months ended September 30, 2022 and 2021, respectively. For the year ended December 31, 2021, depreciation expense and amortization from continuing operations was $1.8 million.
During 2016, Atlas purchased a building and land to serve as its new corporate headquarters to replace its former leased office space. Atlas’ Chicago area staff moved into this space in late October 2017 and occupies approximately 70,000 square feet in the building. An unrelated tenant occupies the remaining office space in the building, pursuant to a lease agreement with American Insurance Acquisition, Inc. (“American Acquisition”), a subsidiary of Atlas. Rental income related to this lease agreement was $123,000 and $119,000 for the three months ended September 30, 2022 and 2021, respectively, and $369,000 and $357,000 for the nine months ended September 30, 2022 and 2021, respectively. Depreciation expense related to the building and its improvements was $0 for each of the three months ended September 30, 2022 and 2021, and $0 and $284,000 for the nine months ended September 30, 2022 and 2021, respectively. The decrease in depreciation expense for the corporate headquarters is a result of the held for sale status of the corporate headquarters.
On April 1, 2021, the Company transitioned the assets related to its corporate headquarters from long-lived asset held and used to long-lived assets held for sale. The Company engaged an independent third party that is actively marketing the sale of the corporate headquarters including the land, building, building improvements and contents including furniture and fixtures. The Company engaged an independent third party that performed a valuation of the corporate headquarters and determined the fair market value as $7.5 million as of March 4, 2022. The valuation of the corporate headquarters resulted in a net realized loss totaling $7.0 million for the year ended December 31, 2021. On August 2, 2022, the Company and the regulators of Illinois and New York, in their capacity as liquidators of the estates of the Company’s former insurance company subsidiaries as mortgagees (the “Insurance Regulators”), had agreed in principal to an auction sale process for the Company’s HQ, furnishing and fixtures and land. Details related to this agreement were disclosed via Form 8-K on August 4, 2022. The Company ran an auction for the building, contents and property during the week of October 3, 2022 with a confidential reserve price agreed with the Insurance Regulators. There was significant interest leading up to the auction, however, the bids did not reach the reserve and the property did not sell. The Company is continuing to work towards a sale of the property. For more information regarding the sale of the Company’s corporate headquarters, see Part I, Item 2, “Management’s Discussion and Analysis of Results of Operations.”
Amortization expense recorded to internal-use projects in the post-implementation/operation stage was $302,000 for each of the three months ended September 30, 2022 and 2021, and $906,000 for each of the nine months ended September 30, 2022 and 2021. For the three and nine months ended September 30, 2022 and 2021, the Company did not capitalize any projects in the application development stage.
Realized gains on disposals of fixed assets totaled $1,000 and $12,000 for the nine months ended September 30, 2022 and 2021, respectively. There were no gains or losses on disposals of fixed assets for each of the three months ended September 30, 2022 and 2021.
9. Share-Based Compensation
On January 6, 2011, Atlas adopted a stock option plan (“Stock Option Plan”) in order to advance the interests of Atlas by providing incentives to certain eligible employees and service providers, as approved by the Compensation Committee. In the second quarter of 2013, a new equity incentive plan (“2013 Equity Incentive Plan”) was approved by the Company’s common shareholders at the Annual General Meeting, and Atlas ceased to grant new stock options under the Stock Option Plan. The 2013 Equity Incentive Plan provided for the grant of the restricted stock, restricted stock units, stock options and other forms of equity incentives to eligible persons as part of their compensation. The 2013 Equity Incentive Plan was considered a continuation, and an amendment and restatement of the Stock Option Plan, although outstanding stock options issued pursuant to the Stock Option Plan continued to be governed by the terms of the Stock Option Plan. As of September 30, 2022, all outstanding stock options were issued under the 2013 Equity Incentive Plan.
In the second quarter of 2022, a new equity incentive plan (“2022 Equity Incentive Plan”) was approved by the Company’s common shareholders at the Annual General Meeting, and Atlas ceased to grant new stock options under the 2013 Equity Incentive Plan. The 2022 Equity Incentive Plan is an equity-based compensation plan, pursuant to which Atlas may issue restricted stock, restricted stock units, stock options, stock appreciation rights, performance stock, performance units, and other forms of equity and equity-based incentives to eligible persons as part of their compensation. Outstanding stock options issued pursuant to the 2013 Equity Incentive Plan will continue to be governed by the terms of the 2013 Equity Incentive Plan.
Stock Options
| | | | | | | | | | | | | | |
| Stock Option Activity | | | | |
| Nine months ended September 30, |
| 2022 | 2021 |
| Number of Options | Weighted Average Exercise Price | Number of Options | Weighted Average Exercise Price |
| Outstanding, beginning of period | 1,197,500 | | $ | 2.63 | | 181,500 | | $ | 13.51 | |
| Granted | — | | — | | 1,016,000 | | 0.49 | |
| Exercised | — | | — | | — | | — | |
| Canceled | (520,500) | | 5.42 | | — | | — | |
| Outstanding, end of period | 677,000 | | $ | 0.49 | | 1,197,500 | | $ | 2.63 | |
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There are no stock options that are exercisable as of September 30, 2022. The stock option grants outstanding have a weighted average remaining life of 5.56 years and have a fair value of $0 as of September 30, 2022.
On March 12, 2015, the Board of Directors of Atlas granted equity awards of (i) 200,000 restricted stock grants for ordinary voting common shares of the Company and (ii) 200,000 options to acquire ordinary voting common shares to the executive officers of the Company as part of the Company’s annual compensation process. The awards were made under the Company’s 2013 Equity Incentive Plan. The awards vest in five equal annual installments of 20%, provided that an installment shall not vest unless an annual performance target based on specific book value growth rates linked to return on equity goals is met. In the event the performance target is not met in any year, the 20% installment for such year shall not vest, but such non-vested installment shall carry forward and can become vested in future years (up to the fifth year from the date of grant), subject to achievement in a future year of the applicable performance target for such year. For the three and nine months ended September 30, 2022 and 2021, no shares of either of the restricted stock grants for ordinary voting common shares or the options to acquire ordinary voting common shares vested due to not meeting annual performance targets. During 2020, 140,000 of the option awards were canceled as a result of not meeting the annual performance targets and an additional 53,500 options were canceled due to the departure of a former officer. During the first quarter of 2022, the remaining, 181,500 option awards were canceled as a result of not meeting the annual performance targets. The Monte-Carlo simulation model was used, for both the options and restricted stock grants for ordinary voting common shares, to estimate the fair value of compensation expense as a result of the performance based component of these grants. Utilizing the Monte-Carlo simulation model, the fair values were $1.5 million and $1.9 million for the options and restricted stock grants for ordinary voting common shares, respectively. This expense was amortized over the anticipated vesting period.
On April 22, 2021, the Company granted an aggregate of 1,016,000 options (“Options”) with an exercise price of $0.49 per common share of the Company to directors, managers, and executives pursuant to the Company’s 2013 Equity Incentive Plan. This exercise price is the average of the high bid and low asked prices on the date of the grant quoted on the OTC Bulletin
Board Service. The Options granted to management vest in three equal installments, with each installment vesting on the 1st, 2nd and 3rd anniversary of the date of the grant. The Options granted to independent directors vested immediately upon the date of the grant. The Options will expire on the seventh anniversary of the date of the grant. In the event of a change of control of the Company, or should a director’s or employee’s service with the Company be terminated other than for cause or voluntary resignation, any unvested Options will immediately vest. During the first nine months of 2022, 339,000 Options were canceled because the Options were not exercised after voluntary terminations. The estimated fair values of the Options are amortized to expense over the Options’ vesting period. The Company estimated the fair value of the Options at the date of the grant using the Black-Scholes option pricing model with the following weighted average assumptions:
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| Expected risk-free interest rate | 1.6 | % |
| Volatility | 180.8 | % |
| Expected life (in years) | 7.0 |
| |
On December 31, 2018, the Company awarded restricted stock unit grants for ordinary voting common shares of the Company to its external directors pursuant to a director equity award agreement dated December 31, 2018. The awards, which were approved by the Company’s Board of Directors in March 2018, were valued at $40,000 per external director (“Aggregate Award”) and were made under the Company’s 2013 Equity Incentive Plan. The number of restricted stock units awarded was determined by dividing (A) the Aggregate Award by (B) the closing price of a Company ordinary voting common share at the close of market on April 4, 2018, which was $10.50 per share. For new directors, the Aggregate Award is proportionate to the director’s start date and priced as of that same day. During 2018, the Company awarded 17,524 RSU grants having an aggregate grant date fair value of $179,000.
On September 12, 2022, the Company awarded 100,000 restricted stock unit grants for ordinary voting common shares of the Company to each of its external directors as part of their compensation. The awards were valued at $11,000 per external director and vest over a two-year period.
Restricted Shares
| | | | | | | | | | | | | | |
| Restricted Stock Grants for Ordinary Voting Common Shares and Restricted Share Unit Activity |
| Nine months ended September 30, |
| 2022 | 2021 |
| Number of Shares | Weighted Average Fair Value at Grant Date | Number of Shares | Weighted Average Fair Value at Grant Date |
| Non-vested, beginning of period | $ | — | | $ | — | | $ | 3,301 | | $ | 10.22 | |
| Granted | 200,000 | | 0.11 | | — | | — | |
| Vested | — | | — | | (3,301) | | 0.12 | |
| Canceled | — | | — | | — | | — | |
| Non-vested, end of period | $ | 200,000 | | $ | 0.11 | | $ | — | | $ | — | |
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In accordance with Accounting Standards Codification (“ASC”) 718 (Stock-Based Compensation), Atlas has recognized share-based compensation expense on a straight-line basis over the requisite service period of the last separately vesting portion of the award. Share-based compensation expense is a component of other underwriting expenses on the condensed consolidated statements of operations. Atlas recognized $35,000 and $31,000 in share-based compensation expense, including income tax expense, for the three months ended September 30, 2022 and 2021, respectively, and $189,000 and $197,000 for the nine months ended September 30, 2022 and 2021, respectively. As of September 30, 2022, there was $21,000 of unrecognized total compensation expense related to restricted stock and restricted stock units for ordinary voting common shares.
10. Other Employee Benefit Plans
Defined Contribution Plan
Atlas has a defined contribution 401(k) plan covering all qualified employees of Atlas and its subsidiaries. Contributions to this plan are limited based on IRS guidelines. Atlas may match up to 100% of the employee contribution up to 2.5% of annual earnings, plus 50% of additional contributions up to 2.5% of annual earnings, for a total maximum expense of 3.75% of annual earnings per participant. Atlas’ matching contributions are discretionary. Employees are 100% vested in their own contributions
and vest in Atlas contributions based on years of service equally over 5 years with 100% vested after 5 years. There were no Company contributions for either of the three and nine months ended September 30, 2022 and 2021. The matching portion of this plan was suspended until further notice during the third quarter of 2020.
Employee Stock Purchase Plan
The Atlas Employee Stock Purchase Plan (“ESPP”) encourages employee interest in the operation, growth and development of Atlas and provides an additional investment opportunity to employees. Full time and permanent part time employees working more than 30 hours per week are allowed to invest up to 7.5% of adjusted salary in Atlas ordinary voting common shares. Atlas may match up to 100% of the employee contribution up to 2.5% of annual earnings, plus 50% of additional contributions up to 5% of annual earnings, for a total maximum expense of 5% of annual earnings per participant. Atlas’ matching contributions are discretionary. Atlas also pays all administrative costs related to this plan. Atlas incurred no costs related to the matching portion of the ESPP for either of the three and nine months ended September 30, 2022 and 2021. The matching portion of this plan was suspended until further notice during the third quarter of 2020.
11. Share Capital and Mezzanine Equity
Share Capital
| | | | | | | | | | | | | | | | | | | | | | | |
| Share Capital Activity |
| | September 30, 2022 | December 31, 2021 |
| Shares Authorized1 | Shares Issued | Shares Outstanding | Amount
($ in ‘000s) | Shares Issued | Shares Outstanding | Amount
($ in ‘000s) |
| | | | | | | |
| | | | | | | |
| Ordinary voting common shares | 800,000,001 | | 17,652,839 | | 17,652,839 | | $ | 54 | | 15,052,839 | | 14,797,334 | | $ | 45 | |
| Restricted voting common shares | 33,333,334 | | — | | — | | — | | — | | — | | — | |
| Total common shares | 833,333,335 | | 17,652,839 | | 17,652,839 | | $ | 54 | | 15,052,839 | | 14,797,334 | | $ | 45 | |
| | | | | | | |
During the nine months ended September 30, 2022, the Company issued (i) 2,600,000 ordinary voting common shares in connection with the Delayed Draws (as defined herein) pursuant to the Credit Agreement and (ii) 255,005 treasury shares to the officers as equity compensation. During the year ended December 31, 2021, the Company issued 2,804,041 ordinary voting common shares of which 2,750,000 ordinary voting common shares were issued upon execution of the Credit Agreement, as a set-up fee for the Term Loan facility, 50,740 ordinary voting common shares were issued under the near term incentive program, and 3,301 ordinary voting common shares were issued as a result of the vesting of RSUs.
Warrants
The Schedule 13G/A filed by American Financial Group, Inc. a parent holding company, on January 20, 2022 states that as of December 31, 2021, it has sole power to vote and sole power to dispose of 2,387,368 ordinary voting common shares. These shares are represented by warrants to purchase 2,387,368 ordinary voting common shares until June 10, 2024, under a Warrant Agreement dated June 10, 2019 (the “Warrant Agreement”), at an initial exercise price of $0.69 per share, with both the number of ordinary voting common shares subject to the Warrant Agreement and the exercise price subject to adjustment as set forth in the Warrant Agreement.
Convertible Senior Secured Delayed-Draw Credit Agreement
The outstanding principal balance of the Term Loans can be converted at any time into ordinary voting common shares, at the applicable Lender’s discretion, at a rate of $0.35 per share, except that paid-in-kind interest included in the amount presented by a Lender for conversion may, at the Borrowers’ discretion, be paid in cash or converted into ordinary voting common shares at the same rate. As of November 8, 2022, no such conversion has taken place.
Mezzanine Equity
There were no preferred shares outstanding as of September 30, 2022 and December 31, 2021.
12. Leases
We currently lease certain equipment under non-cancelable operating lease agreements. Leases with an initial term of 12 months or less, which are immaterial to the Company, are not recorded in the condensed consolidated statement of financial position. The Company has elected the practical expedient to account for each separate lease component of a contract and its associated non-lease components as a single lease component, thus causing all fixed payments to be capitalized. The Company also elected the package of practical expedients permitted within the new standard, which among other things, allows the Company to carry forward historical lease classification. Variable lease payment amounts that cannot be determined at the commencement of the lease, such as increases to lease payments based on changes in index rates or usage, are not recorded in the condensed consolidated statements of financial position.
Certain agreements include an option to extend or renew the lease term at our option. The operating lease liability includes lease payments related to options to extend or renew the lease term if the Company is reasonably certain of exercising those options. Lease payments are discounted using the implicit discount rate in the lease. If the implicit discount rate for the lease cannot be readily determined, the Company uses an estimate of its incremental borrowing rate. The Company did not have any contracts accounted for as finance leases as of September 30, 2022 or 2021.
| | | | | | | | | | | | | | |
| Lease Expense |
| ($ in ‘000s) | Three months ended September 30, | Nine months ended September 30, |
| 2022 | 2021 | 2022 | 2021 |
| Operating leases | $ | 6 | | $ | 169 | | $ | 179 | | $ | 507 | |
| Variable lease cost | — | | 12 | | 9 | | 195 | |
| Total | $ | 6 | | $ | 181 | | $ | 188 | | $ | 702 | |
| | | | |
| | | | | | | | | | | | | | |
| Other Operating Lease Information |
| ($ in ‘000s) | Three months ended September 30, | Nine months ended September 30, |
| 2022 | 2021 | 2022 | 2021 |
| Cash paid for amounts included in the measurement of lease liabilities reported in operating cash flows | $ | 6 | | $ | 181 | | $ | 195 | | $ | 702 | |
| Right-of-use assets obtained in exchange for new lease liabilities | — | | — | | — | | — | |
| Total | $ | 6 | | $ | 181 | | $ | 195 | | $ | 702 | |
| | | | |
The following table presents the undiscounted contractual maturities of the Company’s operating lease liability:
| | | | | | |
| Contractual Operating Lease Liabilities |
| ($ in ‘000s) | | As of September 30, 2022 |
| Remainder of 2022 | | $ | 4 | |
| 2023 | | 15 | |
| | |
| | |
| | |
| Total lease payments | | $ | 19 | |
| Impact of discounting | | (1) | |
| Operating lease liability | | $ | 18 | |
| | |
| | | | | | | | |
| Supplemental Balance Sheet Disclosures |
| ($ in ‘000s) | | |
| Lease Component | Balance Sheet Classification | As of September 30, 2022 |
| Lease right-of-use asset | Right-of-use asset | $ | 18 | |
| | |
| Weighted-average remaining lease term | | 1.0 year |
| Weighted-average discount rate | | 6.6 | % |
13. Related Party Transactions
As of April 1, 2022, a member of the administrative agent for the Credit Agreement was a member of the Company’s Board of Directors. However, as of April 22, 2022, such director resigned from the Board. For more information on the Credit Agreement, see Note 14.
14. Notes Payable
Senior Unsecured Notes
On April 26, 2017, Atlas issued $25 million of five-year 6.625% senior unsecured notes (the “Notes”) and received net proceeds of approximately $23.9 million after deducting underwriting discounts and commissions and other estimated offering expenses. The Notes were issued under an indenture and supplemental indenture that contained covenants that, among other things, limited: (i) the ability of Atlas to merge or consolidate, or lease, sell, assign or transfer all or substantially all of its assets; (ii) the ability of Atlas to sell or otherwise dispose of the equity securities of certain of its subsidiaries; (iii) the ability of certain of Atlas’ subsidiaries to issue equity securities; (iv) the ability of Atlas to permit certain of its subsidiaries to merge or consolidate, or lease, sell, assign or transfer all or substantially all of their respective assets; and (v) the ability of Atlas and its subsidiaries to incur debt secured by equity securities of certain of its subsidiaries.
Interest on the Notes was payable quarterly on each January 26, April 26, July 26 and October 26. Pursuant to the supplemental indenture, Atlas could have, at its option, beginning with the interest payment date of April 26, 2020, and on any scheduled interest payment date thereafter, redeem the Notes, in whole or in part, at a redemption price equal to 100% of the principal amount plus accrued and unpaid interest to, but excluding, the date of redemption. The Notes ranked senior in right of payment to any of Atlas’ existing and future indebtedness that is by its terms expressly subordinated or junior in right of payment to the senior unsecured notes. The Notes ranked equally in right of payment to all of Atlas’ existing and future senior indebtedness, but were effectively subordinated to any secured indebtedness to the extent of the value of the collateral securing such secured indebtedness. In addition, the Notes were structurally subordinated to the indebtedness and other obligations of Atlas’ subsidiaries.
On August 31, 2021, the Company entered into a Restructuring Support Agreement (the “RSA”) with holders of approximately 48% of the aggregate principal amount of the Notes, and subsequently holders of approximately an additional 9.0% of the aggregate principal amount of the Notes acceded to the RSA for a total of approximately 57% (collectively, the “Supporting Noteholders”). Effective as of February 22, 2022, the Company entered into an amendment of the RSA with the requisite majority of Supporting Noteholders to extend the date by which the Note Restructuring must be completed to April 15, 2022. The RSA memorialized the agreed-upon terms for a restructuring of the Notes (the “Note Restructuring”). The RSA contemplated that the Note Restructuring would be effectuated through (i) the Scheme and (ii) a recognition proceeding with respect to the Scheme pursuant to chapter 15 of title 11 of the United States Code (the Recognition Proceeding”).
On January 4, 2022, the Company filed a petition and summons for direction (the “Cayman Proceeding”) in the Grand Court of the Cayman Islands (the “Cayman Court”) regarding a scheme of arrangement pursuant to section 86 of Part IV of the Companies Act (2021 Revision) of the Cayman Islands (the “Scheme”) proposed by the Company related to the restructuring of the Company’s indebtedness under the Notes (the “Note Restructuring”). Pursuant to the summons for directions, the Company sought an order (the “Convening Order”) for the convening of a single meeting of a class of creditors affected by the Scheme (the “Scheme Meeting”). At the Scheme Meeting, the resolution was put forward that “...the Scheme of Arrangement, a copy of which has been tabled at this Scheme Meeting, be approved subject to any modification, addition or condition which the Grand Court of the Cayman Islands may this to fit or impose which would not directly or indirectly have a material adverse effect on the rights of the Scheme Creditors.” The aforementioned resolution was passed with an overwhelming majority: holders of 91.83% of the Notes in number and 99.34% par amount of those voting voted in favor of the Scheme and, on February 25, 2022, the Cayman Court sanctioned and approved the Scheme by entry of a sanction order (the “Sanction Order”). The Sanction Order was filed with and accepted by the Registrar of Companies, as required by the Cayman Court.
On March 4, 2022, the Company filed a petition under chapter 15 of the United States Bankruptcy Code (the “Recognition Petition”), seeking that the United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”) enter an order recognizing the Cayman Proceeding as the foreign main or foreign nonmain proceeding and enforcing the Scheme within the territorial jurisdiction of the United States (the “Recognition and Enforcement Order”). On March 4, 2022, the Bankruptcy Court entered an order, which, among other things, scheduled a hearing before the Bankruptcy Court for March 30, 2022 (the “Recognition Hearing”), and, on the same day, the Bankruptcy Court entered the final and non-appealable Recognition and Enforcement Order, recognizing the Cayman Proceeding as the foreign main proceeding and enforcing the Scheme within the territorial jurisdiction of the United States, among other relief. Among other things, the Recognition and Enforcement Order provides that, pursuant to section 1145 of the Bankruptcy Code, once issued, the New Notes will be exempt from registration under Section 5 of the Securities Act of 1933, as amended (the “Securities Act”), and any applicable state and local securities laws and freely transferable, subject to certain limitations under section 1145(b) of the Bankruptcy Code with respect to any New Notes issued to “underwriters” as defined in section 2(a)(11) of the Securities Act. The procurement of the Recognition and Enforcement Order was the last in-court step in the Note Restructuring. The Recognition and Enforcement Order was effective immediately and enforceable upon entry, authorizing the Company to take any action to implement and effectuate the Note Restructuring, including finalization of ancillary documents, among other things, in an effort to proceed toward closing the Note Restructuring in accordance with the Scheme and the RSA. The notice of presentment to close the Recognition Proceeding was filed on June 13, 2022. On June 22, 2022, the Bankruptcy Court entered the order closing the Recognition Proceeding.
Pursuant to the terms of the Note Restructuring, on April 14, 2022, the Restructuring Effective Date (as defined in the RSA) occurred, and the Company canceled the Notes and exchanged the Notes for the Company’s 6.625%/7.25% Senior Unsecured PIK Toggle Notes due 2027 (the “New Notes”). The New Notes have an interest rate of 6.625% per annum, if paid in cash, and 7.25% per annum, if paid in kind (“PIK”). As a result of the PIK feature, the New Notes were issued in denominations of $1, and each holder of a Note received, for each Note exchanged, New Notes in an aggregate principal amount equal to $25 plus the accrued but unpaid interest related to the exchanged Note. The terms of the New Notes are governed by an indenture, dated as of April 26, 2017 (the “Base Indenture”), between the Company and Wilmington Trust, National Association, as trustee, as supplemented by a First Supplemental Indenture thereto, dated as of April 26, 2017 (the “First Supplemental Indenture”), and a Second Supplemental Indenture thereto, dated as of April 14, 2022 (the “Second Supplemental Indenture”), between the Company and the Trustee. The Company intends to utilize the extended maturity of the New Notes to execute on its technology and analytics driven MGA strategy, with the objective of creating value for all stakeholders. The New Notes were issued in reliance on the exemption to registration provided by section 1145 of the Bankruptcy Code, except with respect to those New Notes issued to an “underwriter” as defined in section 2(a)(11) of the Securities Act under section 1145(b) of the Bankruptcy Code that will be subject to certain restrictions upon resale, and the authorization of the Bankruptcy Court pursuant to the Recognition and Enforcement Order; however, the Company intends to use its best efforts to seek registration of the New Notes following the Note Restructuring subject to any applicable rules or restrictions that may apply.
Interest on the New Notes is payable quarterly on each January 27, April 27, July 27 and October 27. Pursuant to the Base Indenture, the First Supplemental Indenture and the Second Supplemental Indenture, Atlas may, beginning on April 14, 2025, or at any time thereafter, redeem the New Notes, in whole or in part, at a redemption price equal to 100% of the principal amount to be redeemed plus accrued and unpaid interest thereon to, but excluding, the date of redemption. Additionally, pursuant to the Base Indenture, the First Supplemental Indenture and the Second Supplemental Indenture, Atlas may, on any interest payment date, redeem the New Notes, in whole or in part, at a redemption price equal to 100% of the principal amount to be redeemed in an amount not to exceed the excess of the outstanding principal amount of the New Notes as of such interest payment date (including, if applicable, any PIK interest accrued as of such interest payment date) over the original par amount of the New Notes outstanding on such interest payment date. For the avoidance of doubt, the amount which may be redeemed pursuant to the foregoing sentence shall not exceed the amount attributable to PIK Interest added to the principal amount of the then-outstanding New Notes. The New Notes will rank senior in right of payment to any of Atlas’ existing and future
indebtedness that is by its terms expressly subordinated or junior in right of payment to the senior unsecured notes. The New Notes rank equally in right of payment to all of Atlas’ existing and future senior indebtedness, but are effectively subordinated to any secured indebtedness to the extent of the value of the collateral securing such secured indebtedness. In addition, the New Notes are structurally subordinated to the indebtedness and other obligations of Atlas’ subsidiaries.
The Company assessed the modifications to the New Notes under ASC 470 (Debt) and determined that the guidance under troubled debt restructuring should apply. Per ASC 470-60-35-5, a debtor in a troubled debt restructuring involving only modification of terms of a payable that is not involving a transfer of assets or grant of an equity interest shall account for the effects of the restructuring prospectively from the time of restructuring, and shall not change the carrying amount of the payable at the time of the restructuring unless the carrying amount exceeds the total future cash payments specified by the new terms. As the future undiscounted cash flows were greater than or equal to the net carrying value of the original debt, the carrying amount of the New Notes at the time of the restructuring was not changed (that is, no gain recognized). Interest expense on the New Notes will be computed using a new effective rate that equates the present value of the future cash payments specified by the new terms with the carrying value of the debt.
Mortgage
On November 10, 2016, American Acquisition entered into a ten-year 5.0% fixed rate mortgage agreement with the Insurance Subsidiaries totaling $10.7 million with principal and interest payments due monthly. The mortgage is secured by the Company’s headquarters and was previously eliminated in consolidation. The mortgage balances payable at each of September 30, 2022 and December 31, 2021 were $8.0 million. The Company is evaluating alternatives to expedite the sale of the Company’s headquarters, which as disclosed in Note 8, as of the date of this report is currently held at the Company’s best estimate of fair value of $7.5 million, which may include a disposition without any financial benefit or incremental liability to the Company other than the elimination of ongoing building related operational expenses and real estate taxes, some of which have been deferred. For more information regarding this mortgage, See Part I, Item 2, “Management’s Discussion and Analysis of Results of Operations.”
Paycheck Protection Program Loans
On May 1, 2020, American Acquisition entered into a Paycheck Protection Program Promissory Note (a "PPP Note") with respect to a loan of $4,600,500 (the "First PPP Loan") from Fifth Third Bank, National Association (“Fifth Third”). The First PPP Loan was obtained pursuant to the Paycheck Protection Program of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) administered by the U.S. Small Business Administration (“SBA”). The First PPP Loan had a maturity date of May 1, 2022 and interest at a rate of 1.0% per annum. On June 14, 2021, American Acquisition received notification from the SBA that the First PPP Loan principal and related interest has been forgiven.
On February 7, 2021, American Acquisition entered into a PPP Note with respect to a loan of $2,000,000 (the “Second PPP Loan”) from Fifth Third. The Second PPP Loan was obtained pursuant to the SBA’s Paycheck Protection Program Second Draw Loans under the Small Business Act (“SB Act”) and is subject to the terms and conditions of the SB Act, the CARES Act and related legislation and regulations (collectively, the “PPP Rules”). The Company was eligible for the Second PPP Loan because our equity securities are not a National Markets System stock traded on a national securities exchange as defined by Section 6 of the Securities Exchange Act. The Second PPP Loan had a maturity date of February 7, 2026 and interest at a rate of 1.0% per annum. On December 10, 2021, American Acquisition received notification from the SBA that the Second PPP Loan Principal and related interest has been forgiven.
Credit Agreement
On September 1, 2021, the Company and certain of its subsidiaries, as borrowers (collectively, the “Borrowers”), entered into a Convertible Senior Secured Delayed-Draw Credit Agreement (as amended February 2, 2022, March 25, 2022 and from time to time as discussed below, the “Credit Agreement”), agented by Sheridan Road Partners, LLC (in such capacity, the “Agent”), with certain Supporting Noteholders named therein as lenders (the “Lenders”), pursuant to which the Lenders made available to the Borrowers an aggregate principal amount up to $3,000,000 (the “Term Loans”). The Credit Agreement provides for an initial advance of $2 million in Term Loans and up to $1 million of additional delayed draws (the “Delayed Draws”) within 18 months of closing, in each case, subject to the satisfaction or waiver of certain funding conditions and the other terms and conditions set forth in the Credit Agreement. The Borrowers may use the proceeds of the Term Loans for payments of certain agreed upon permitted expenditures, which include expenses expected to be incurred in connection with the Note Restructuring. Interest will accrue on the funded Term Loans at 12.0% per annum and may be paid, at the Borrowers’ option, in cash or in kind; provided, that upon the occurrence and during the continuance of an event of default, the interest rate will be increased to 14.0% per annum and will be payable only in cash. The term of the Term Loan facility is 24 months. In October 2021 and January 2022, the Lenders advanced an aggregate of $2 million of the Term Loans and, in March 2022, the Lenders advanced $1 million of Delayed Draws under the Term Loans, in each case despite the fact that not all of the funding conditions had been met.
As a set-up fee for the Term Loan facility, 2,750,000 ordinary voting common shares of the Company were issued to the Lenders upon execution of the agreement, and an additional 2,500,000 ordinary voting common shares were issued to the Lenders in March 2022, in connection with the Delayed Draws. The outstanding principal balance of the Term Loans can be converted at any time into ordinary voting common shares, at the applicable Lender’s discretion, at a rate of $0.35 per share, except that paid-in-kind interest included in the amount presented by a Lender for conversion may, at the Borrowers’ discretion, be paid in cash or converted into ordinary shares at the same rate.
On June 9, 2022, the Company entered into a third amendment of the Credit Agreement that increased the Term Loans to $6,200,000 and extended the maturity date to June 30, 2024.
On June 29, 2022, the Company and Borrowers, entered into a Term Loan Commitment (the “Commitment Letter”) with certain lenders party thereto (the “Commitment Lenders”), whereby the Commitment Lenders agreed to make an additional $1 million in principal amount of additional Term Loans (the “Committed Loans”) to the Borrowers related to the Credit Agreement. In connection with this Commitment Letter, the Company issued 100,000 ordinary voting common shares to the Commitment Lenders. Pursuant to the Commitment Letter, the Committed Loans would be loaned within ten days after the Effective Date (as defined below), and such Committed Loans would be made pursuant to the terms of the Credit Agreement. The Committed Loans are subject to certain conditions, including (i) the delivery of the closing documents required pursuant to the Credit Agreement, and (ii) that no material adverse changes with respect to the Borrowers shall have occurred following the date of the Commitment Letter, (iii) that the Settlement Agreement (as defined below) be fully executed within 21 days from the date of the Commitment Letter (the “Execution Condition”), and (iv) that the Effective Date occur within 45 days from the date of the Commitment Letter (the “Effective Date Condition” and, with the Execution Condition, the “Settlement Agreement Conditions”). On July 19, 2022, the Commitment Lenders agreed to extend the Settlement Agreement Conditions by fifteen (15) days, and the Settlement Agreement was fully executed on August 2, 2022.
On September 6, 2022, the Company entered into a fourth amendment of the Credit Agreement that increased the Term Loans to $7,200,000, as contemplated by the Commitment Letter.
On October 31, 2022, the Company entered into a fifth amendment of the Credit Agreement that increased the Term Loans to $7,950,000.
The Credit Agreement requires the satisfaction or waiver of certain funding conditions and that the Borrower comply with customary affirmative and negative covenants, including covenants governing and restricting indebtedness, liens, investments, sales of assets, distributions, and fundamental changes in the Borrowers’ organizational structure and line of business and maintaining certain levels of liquidity. The obligation of the Lenders to make any of the Term Loans is conditioned upon the grant to the Agent, on behalf of the Lenders, of a first priority perfected security interest in collateral consisting of substantially all of the assets of the Borrowers to secure the payment in full of the Term Loans and all other obligations under the Credit Agreement and related loan documentation. The collateral will include pledges of the equity of the Company’s direct and indirect subsidiaries American Acquisition, AGMI, Anchor Holdings Group, Inc., and UBI. Upon payment in full of the Term Loans, the Company will have no further obligations to the Agent and the Lenders under the Credit Agreement and other related loan documentation other than the obligation to register the ordinary shares issued pursuant to the Credit Agreement, and the security interests granted by the Borrowers in favor of the Agent, on behalf of the Lenders, will terminate.
After the Delayed Draws in March 2022, Management engaged an independent third-party valuation firm which determined the fair value of the Credit Agreement conversion option using Black-Scholes modeling. The fair value of the liability portion
following the Delayed Draws in September 2022 was determined to be $1.2 million and was deducted from the $7.2 million draw amount. The equity component of the Credit Agreement will not be remeasured as long as it continues to meet the conditions for equity classification.
The Company recorded a fee related to the Credit Agreement which totaled $2.0 million, which was the fair value of the shares issued portion in connection with the Credit Agreement. This non-cash fee had been recorded as an asset in the Company’s condensed consolidated statements of financial position until the full amount of the draws were received by the Company. The unamortized potion of the fee was transferred to a liability and is the unamortized debt discount. The amortization is being expensed on a straight-line basis over the contractual term of the Credit Agreement. During the three and nine months ended September 30, 2022, the Company recorded amortization totaling $145,000 and $530,000, respectively.
| | | | | |
| Liability and Equity Components of Credit Agreement |
| ($ in ‘000s) | September 30, 2022 |
| Liability component: | |
| Principal amount | $ | 1,168 | |
| Unamortized debt discount | (212) | |
| Net carrying amount | $ | 956 | |
| |
| Carrying amount of equity component | $ | 4,939 | |
| |
The Company assessed the modifications to the Credit Agreement under ASC 470 and determined that the guidance under troubled debt restructuring should apply. Per ASC 470-60-35-5, a debtor in a troubled debt restructuring involving only modification of terms of a payable that is not involving a transfer of assets or grant of an equity interest shall account for the effects of the restructuring prospectively from the time of restructuring, and shall not change the carrying amount of the payable at the time of the restructuring unless the carrying amount exceeds the total future cash payments specified by the new terms. As the future undiscounted cash flows were greater than or equal to the net carrying value of the original debt, the carrying amount of the Credit Agreement at the time of the restructuring was not changed (that is, no gain recognized). Interest expense on the Credit Agreement will be computed using a new effective rate that equates the present value of the future cash payments specified by the new terms with the carrying value of the debt.
Interest expense on notes payable was $801,000 and $556,000 for the three months ended September 30, 2022 and 2021, respectively, and $2.2 million and $1.6 million for the nine months ended September 30, 2022 and 2021, respectively.
| | | | | | | | |
| Notes Payable Outstanding |
| ($ in ‘000s) | September 30, 2022 | December 31, 2021 |
6.625%/7.25% Senior Unsecured PIK Toggle Notes due April 27, 2027 | $ | 27,192 | | $ | 25,000 | |
12.0% Credit Agreement, net of discount, due June 30, 2024 | 956 | | 224 | |
5.0% Mortgage due November 10, 2026 | 7,950 | | 7,950 | |
| Total outstanding borrowings | 36,098 | | 33,174 | |
| Unamortized issuance costs | — | | (72) | |
| Total notes payable | $ | 36,098 | | $ | 33,102 | |
| | |
15. Deconsolidation and Discontinued Operations
Deconsolidation
On May 1, 2015, American Acquisition entered into subordinated surplus debentures (“Surplus Notes”) with the ASI Pool Companies that had a maturity date of April 30, 2020 carrying a variable interest equal to the corporate base rate as reported by the largest bank (measured in assets) with its head office located in Chicago, Illinois, in effect on the first business day of each month for the term of the Surplus Notes plus two percent per annum on the unpaid principal balance with a maximum variable interest rate for any month not to exceed the initial rate for the Surplus Notes by more than ten percent per annum. These Surplus Notes are subject to various terms and conditions as set forth by the Illinois Department of Insurance and require prior written approval for the payment of interest and/or the reduction in principal. These Surplus Notes could be used at some point to offset future amounts payable related to income tax settlements and various other intercompany settlements to the estates of the ASI Pool Companies.
Effective October 1, 2021, Atlas no longer has statutory responsibility or authority over the financial activities of Global Liberty while still maintaining their indirect ownership of Global Liberty. The financial results of Global Liberty are included in the condensed consolidated statements of operations as a discontinued operation through September 30, 2021. There was no re-measurement of any retained interest since no future value was assigned to Global Liberty as a result of the liquidation.
On August 2, 2022, American Acquisition entered into the Settlement Agreement with the Insurance Liquidators, with the Insurance Regulators serving as liquidators in connection with the previously announced liquidation of the Insurance Subsidiaries. For more information on the Settlement Agreement, see Part I, Item 2, “Management’s Discussion and Analysis of Results of Operations.”
Discontinued Operations
During the fourth quarter of 2019, the Company began actively pursuing the potential sale of Global Liberty, and as a result, Global Liberty was held for sale and thus classified as a discontinued operation through September 30, 2021 and the results of Global Liberty’s operations are reported separately for all periods presented. Global Liberty was not sold within the one year guidance as set forth by ASC 205-20-45-1E(d) to continue classifying Global Liberty as a discontinued operation. However, due to the confluence of events and circumstances beyond the Company’s control, ASC 205-20-45-1G(c) provides for an exception to the one year guidance which the Company believes fits its situation. As a result of the Company applying the exception guidance, Global Liberty remained as a discontinued operation through September 30, 2021. Global Liberty was placed into liquidation by the New York Department of Financial Services in October 2021 and, as a result, it has been deconsolidated from this reporting beginning October 1, 2021.
Summary financial information for Global Liberty included in income from discontinued operations, net of tax in the condensed consolidated statements of operations for the three and nine months ended September 30, 2021 is presented below:
| | | | | | | | |
| Income from Discontinued Operations |
| ($ in ‘000s) | Three months ended September 30, | Nine months ended September 30, |
| 2021 | 2021 |
| Net premiums earned | $ | 2,464 | | $ | 7,765 | |
| Net investment loss | (13) | | (106) | |
| Net realized gains | 10 | | 155 | |
| Other income | 7 | | 7 | |
| Total revenue | 2,468 | | 7,821 | |
| Net claims incurred | 3,532 | | 5,980 | |
| Acquisition costs | (1,685) | | (280) | |
| Other underwriting expenses | 607 | | 1,956 | |
| | |
| Total expenses | 2,454 | | 7,656 | |
| Income from operations before income taxes | 14 | | 165 | |
| Income tax benefit | — | | — | |
| Net income | $ | 14 | | $ | 165 | |
| | |
| | | | | | | | |
| Statement of Comprehensive Loss |
| ($ in ‘000s) | Three months ended September 30, | Nine months ended September 30, |
| 2021 | 2021 |
| Net income | $ | 14 | | $ | 165 | |
| | |
| Other comprehensive loss: | | |
| Changes in net unrealized investments losses | 1 | | (21) | |
| Reclassification to net (loss) income | (16) | | (175) | |
| Other comprehensive loss | (15) | | (196) | |
| Total comprehensive loss | $ | (1) | | $ | (31) | |
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16. Going Concern
Under ASC 205-40 Going Concern, we have the responsibility to evaluate whether conditions and/or events raise substantial doubt about our ability to meet our future financial obligations as they become due within one year after the date that the condensed consolidated financial statements are issued. As required by this standard, our evaluation shall initially not take into consideration the potential mitigating effects of our plans that have not been fully implemented as of the date the condensed consolidated financial statements are issued.
In complying with the requirements under ASC 205-40 to complete an evaluation without considering mitigating factors, the Company considered several conditions or events including (1) uncertainty around the continued impact of the COVID-19 pandemic on the Company’s operations and consolidated financial results, (2) recurring operating losses for fiscal periods through September 30, 2022, (3) the Company’s negative equity, and (4) the Company’s working capital limitations. The above conditions raise substantial doubt about the Company’s ability to continue as a going concern for the 12-month period following the date of the issuance of the September 30, 2022 interim financial statements.
In performing the second step of this assessment, we are required to evaluate whether our plans to mitigate the conditions above alleviate the substantial doubt about our ability to meet our obligations as they become due within one year after the date that the condensed consolidated financial statements are issued. The successful restructuring and exchange of the Notes in early 2022 extended their maturity by five years and added a payment in kind feature for interest during the first two of those five years. Our future plans to mitigate the conditions above may include, without limitation, one or more of the following: (1) securing incremental capital with the objective of potentially repurchasing some or all of the New Notes at a discount to par, in the open market or otherwise, (2) securing equity or debt capital in private or public transactions, or (3) offering to exchange
some or all of the New Notes for debt, equity and/or other securities or other consideration, through privately negotiated transactions or otherwise. The constraints and requirements related to the New Notes coupled with market conditions could create limitations with respect to such alternatives.
Management believes that the Company’s capital requirements will depend on many factors, including the success of the Company’s business development efforts. Through September 30, 2022, cash flow from operations was negative as business continues to recover following the COVID-19 pandemic, and the Company expects that cash flow from operations, including holding company expenses, will be negative for the balance of the year. As a result, the Company will need to rely on cash on hand and incremental sources of capital to maintain its current infrastructure and headcount. The Company has been actively pursuing numerous additional sources of capital following the successful bond exchange. Subject to the availability of additional capital, the Company is considering alternatives, including a significant reduction in the size and scope of the organization or the sale of certain assets. Management believes the Company will most likely need to raise additional capital for working capital purposes based on the current business recovery trajectory. However, there is no assurance that such financing will be available. Should a significant reduction in the Company’s operations be deemed necessary to reduce operating expenses, there can be no assurances that we will be able to benefit from a market recovery in addition to maintaining our obligations relative to existing business. The conditions described above raise substantial doubt about our ability to continue as a going concern. The condensed consolidated financial statements of the Company do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classifications of liabilities that might be necessary should the Company be unable to continue as a going concern.
There is no assurance that sufficient funds required during the next year or thereafter will be generated from operations or that funds will be available through external sources. The lack of additional capital resulting from the inability to generate cash flow from operations or to raise capital from external sources would force the Company to substantially curtail or cease operations and would, therefore, have a material effect on the business. Furthermore, there can be no assurance that any such required funds, if available, will be available on attractive terms or will not have a significant dilutive effect on the Company’s existing shareholders. In the absence of the successful execution of one or more of the alternatives discussed above, we have therefore concluded that there is substantial doubt about our ability to continue as a going concern for the 12 month period following of the date of the issuance of the September 30, 2022 interim financial statements.
The accompanying condensed consolidated financial statements have been prepared on a going-concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The accompanying condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from our failure to continue as a going concern.
17. Subsequent Events
On October 31, 2022, the Company entered into a fifth amendment of the Credit Agreement which increased the Term Loans to $7,950,000. For more information on the Credit Agreement, see Note 14.