Item 7. Management’s Discussion and Analysis (“MD&A”) of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes that appear elsewhere in this report. In this discussion and analysis, the term “common share” refers to the summation of restricted voting common shares, ordinary voting common shares and participative restricted stock units when used to describe earnings (loss) or book value per common share. All amounts are in U.S. dollars, except for amounts preceded by “C” as Canadian dollars, share and per share amounts.
Forward-Looking Statements
In addition to the historical consolidated financial information, this report contains “forward-looking statements,” within the meaning of the Private Securities Litigation Reform Act of 1995, which may include, but are not limited to, statements with respect to estimates of future expenses, revenue and profitability; trends affecting financial condition, cash flows and results of operations; the availability and terms of additional capital; dependence on key suppliers and other strategic partners; industry trends; the competitive and regulatory environment; the successful integration of acquisitions; the impact of losing one or more senior executives or failing to attract additional key personnel; and other factors referenced in this report. Factors that could cause or contribute to these differences include those discussed below and elsewhere, particularly in “Part I, Item 1A, Risk Factors”.
Often, but not always, forward-looking statements can be identified by the use of words such as “plans,” “expects,” “is expected,” “budget,” “scheduled,” “estimates,” “forecasts,” “intends,” “anticipates,” “believes” or variations (including negative variations) of such words and phrases, or state that certain actions, events or results “may,” “could,” “would,” “might” or “will” be taken, occur or be achieved. Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of Atlas to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Such factors include, among others, general business, economic, competitive, political, regulatory and social uncertainties.
Although Atlas has attempted to identify important factors that could cause actual actions, events or results to differ materially from those described in forward-looking statements, there may be other factors that cause actions, events or results to differ from those anticipated, estimated or intended. Forward-looking statements contained herein are made as of the date of this report, and Atlas disclaims any obligation to update any forward-looking statements, whether as a result of new information, future events or results, or otherwise. There can be no assurance that forward-looking statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements. Accordingly, readers should not place undue reliance on forward-looking statements due to the inherent uncertainty in them.
I. Company Overview
We are a technology and analytics driven financial services holding company incorporated under the laws of the Cayman Islands. Our primary business is generating, underwriting and servicing commercial automobile insurance policies in the United States, with a niche market orientation and focus on insurance for the “light” commercial automobile sector.
Our business currently focuses on a managing general agency strategy. Primarily through our wholly owned subsidiary, AGMI, we are focused on maintaining and recapturing business we have historically written in the taxi, livery/limo, and transportation network company (“TNC”) sectors as well as generating new specialty business that fits our current underwriting parameters. We are also actively pursuing additional programs in the “light” commercial auto space where we believe our expertise, infrastructure and insurance technology will enable us to increase scale and profitability, but there can be no assurance that these programs will materialize. We believe that the specialized infrastructure and technology platforms we’ve developed over the years to support our traditional business will enable us to provide comparative advantages as a managing general agency in other commercial auto segments. In particular, we believe our ability to efficiently manage large numbers of small or highly transactional accounts through our technology platform and workflows is a differentiator. We are also evaluating opportunities to leverage our optOn TM insuretech platform which was developed to provide micro-duration commercial automobile insurance for gig-economy drivers via a proprietary mobile app based ecosystem.
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The sector on which we traditionally focused was comprised of taxi cabs, non-emergency paratransit, limousine, livery, including certain full-time TNC drivers/operators, and business auto. Our goal is to always be the preferred specialty insurance business in any geographic areas where our value proposition delivers benefit to all stakeholders. AGMI distributes our products through a network of independent retail agents, and actively wrote insurance in 35 states and the District of Columbia during 2021. We embrace continuous improvement, analytics and technology as a means of building on the strong heritage our subsidiary companies cultivated in the niche markets we serve.
Industry Trends
The “light” commercial automobile sector is a subset of the broader commercial automobile insurance industry segment, which over the long term has been historically profitable. In more recent years, the commercial automobile insurance industry has seen profitability challenges. Data compiled by S&P Global indicates that in 2021 the total market for commercial automobile liability insurance was approximately $53.5 billion. The size of the commercial automobile insurance market can be affected significantly by many factors, such as the underwriting capacity and underwriting criteria of automobile insurance carriers and general economic conditions. Historically, the commercial automobile insurance market has been characterized by periods of excess underwriting capacity and increased price competition (“Soft Market”) followed by periods of reduced underwriting capacity and higher premium rates (“Hard Market”). As of the filing of this report, commercial auto insurance has been in a prolonged Hard Market with more than forty consecutive quarters of rate increases (source: The Council of Insurance Agents & Brokers’).
Historically, operators of “light” commercial automobiles were expected to be less likely than other business segments within the commercial automobile insurance market to take vehicles out of service, as their businesses and business reputations rely heavily on availability. Our target market has changed in recent years as a result of TNC and other trends related to mobility. The significant expansion of TNC has resulted in a reduction in taxi vehicles available to insure; however, it has increased the number of livery operators. Market research also suggests that the combined addressable markets between traditional taxi, livery and TNC companies expanded during this period.
Factors Affecting Our Results of Operations
We generate commission revenue by selling policies in the commercial auto markets on behalf of our risk-taking insurance carrier partners, which compensate us through first year and renewal commissions. We use our proprietary technology and processes to generate and obtain consumer leads and allocate those leads to agents whom we believe are best suited for those consumers. As a result, one of the primary factors affecting our growth is our total number of agents, comprised of both existing core agents and the number of new agents that we contract to sell new policies. In our traditional target markets, we view agents as a valuable component of helping consumers through the purchasing process to enable them to identify the most appropriate coverage that suits their needs. We have also developed proprietary technologies and processes that enable us to expand our lead generation efforts to maintain agent productivity.
The amount of revenue we expect to recognize is based on multiple factors, including our commission rates with our risk-taking insurance carrier partners and the market demand for the types of products we offer. The higher our hit ratios on new policies and the higher the our retention ratios, the more revenue we expect to generate. Additionally, we may earn certain volume-based compensation from some unrelated risk taking partners, which can include a renewal rights component. Our goal is to maximize policyholder lifetime value by optimizing efficiency and scale, which starts by providing consumers with a transparent, valuable and best-in-class consumer experience by endeavoring to support our distribution channel effectively and provide insurance solutions that meet the specific needs of our customers.
2022 Developments
As previously disclosed and in connection with the cancellation of its 6.625% senior unsecured notes due 2022 (the “Notes”) and issuance of the Company’s 6.625%/7.25% Senior Unsecured PIK Toggle Notes due 2027 (the “New Notes” in exchange, 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 Creditors”) to consider and, if thought fit, approve, with or without modification, 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 think to fit or impose which would not directly or indirectly have a material effect on the rights of the Scheme Creditors.” The aforementioned resolution was passed with an overwhelming majority: holders of
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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.
In furtherance of the Cayman Proceeding and in connection with the Note Restructuring, 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”) to consider the Recognition Petition and related relief. The Recognition Hearing was held on March 30, 2022 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 under section 1145(b) of the 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 . The Recognition and Enforcement Order is immediately and enforceable upon entry, authorizing the Company to take any action to implement and effectuate the Note , including finalization of ancillary documents, among other things, in an effort to proceed toward the Note in accordance with the Scheme and the previously Support Agreement (the “RSA”). between the Company and the noteholders party thereto. For more information on the Note and the RSA, see “Part II, Item 8, Note 14, Notes Payable,” in the Notes to Consolidated Financial Statements.
II. Application of Critical Accounting Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to adopt accounting policies and make estimates and assumptions that affect amounts reported in the consolidated financial statements. The most critical estimates include those used in determining:
• Revenue recognition
• Impairment of financial assets;
• Valuation of financing instruments;
• Valuation of deferred tax assets.
In making these determinations, management makes subjective and complex judgments that frequently require estimates about matters that are inherently uncertain. Many of these policies, estimates and related judgments are common in the insurance and financial services industries; others are specific to our businesses and operations. It is reasonably likely that changes in these items could occur from period to period and result in a material impact on our consolidated financial statements.
A brief summary of each of these critical accounting estimates follows. For a more detailed discussion of the effect of these estimates on our consolidated financial statements, and the judgments and assumptions related to these estimates, see the referenced sections of this report. For a complete summary of our significant accounting policies, see ‘Part II, Item 8, Note 1, Nature of Operations and Basis of Presentation,’ in the Notes to Consolidated Financial Statements.
Revenue Recognition
In accordance with ASC 606, revenue is recognized when a customer obtains control of promised goods or services and is recognized in an amount that reflects the consideration that an entity expects to receive in exchange for those goods or services. We apply the following five-step model in order to determine this amount: (i) identification of the promised goods in the contract; (ii) determination of whether the promised goods are performance obligations, including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) we satisfy each performance obligation.
Significant management judgments and estimates must be made in connection with determination of the revenue to be recognized in any accounting period. If we made different judgments or utilized different estimates for any period, material differences in the amount and timing of revenue recognized could result. The accounting estimates and judgments related to the recognition of revenue require us to make assumptions about numerous factors such as the determination of the policy price.
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Before the adoption of ASC 606, we were already using a similar method to calculate the revenue value of commission on premiums written through affiliates so we believe we have the ability to make reasonable estimates for these items and have the appropriate accounting policies and controls in place to do so. The uncertainty associated with the variable consideration is subsequently resolved when the policy is issued, renews, and any adjustments are recognized to the underlying premium in the period incurred.
Impairment of Financial Assets
Atlas assesses, on a quarterly basis, whether there is objective evidence that a financial asset or group of financial assets is impaired. An investment is considered impaired when the fair value of the investment is less than its cost or amortized cost. When an investment is impaired, the Company must make a determination as to whether the impairment is other-than-temporary.
For equity securities, the Company evaluates its ability to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. Evidence considered to determine anticipated recovery are analysts’ reports on the near-term prospects of the issuer and the financial condition of the issuer or the industry, in addition to the length and extent of the market value decline. If an OTTI is identified, the equity security is adjusted to fair value through a charge to earnings.
Valuation of Financing Instruments
The Company accounts for the issued Convertible Senior Secured Delayed-Draw Credit Agreement as separate liability and equity components. The carrying amount of the liability and equity components were calculated by a third party valuation consultant utilizing the Black-Scholes modeling. The equity component is not remeasured as long as it continues to meet the conditions for equity classification. The Company has allocated issuance costs incurred to the liability and equity components. Issuance costs attributable to the liability component are being amortized to expense over the respective term of the Credit Agreement, and issuance costs attributable to the equity components were netted with the respective equity component in additional paid-in capital.
To the extent that the Company receives conversion requests prior to the maturity of the Credit Agreement, a portion of the equity component is classified as temporary equity, which is measured as the difference between the principal and net carrying amount of the Credit Agreement requested for conversion. Upon settlement of the conversion requests, the difference between the fair value and the amortized book value of the liability component of the Notes requested for conversion is recorded as a gain or loss on early conversion. The fair value of the Credit Agreement is measured based on a similar liability that does not have an associated convertible feature based on the remaining term of the Credit Agreement, which requires significant judgment.
Valuation of Deferred Tax Assets
Deferred taxes are recognized using the asset and liability method of accounting. Under this method, the future tax consequences attributable to temporary differences in the tax basis of assets, liabilities and items recognized directly in equity and the financial reporting basis of such items are recognized in the financial statements by recording deferred tax assets (“DTAs”) or deferred tax liabilities (“DTLs”).
DTAs related to the carry-forward of unused tax losses and credits, and those arising from temporary differences are recognized only to the extent that it is probable that future taxable income will be available against which they can be utilized. DTAs and DTLs are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on future tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the date of enactment or substantive enactment.
In assessing the need for a valuation allowance, Atlas considers both positive and negative evidence related to the likelihood of realization of the DTAs. Atlas performs an assessment of recoverability of its DTAs on a quarterly basis. If, based on the weight of available evidence, it is more likely than not the DTAs will not be realized, a valuation allowance is recognized in income in the period that such determination is made. Atlas has recorded a valuation allowance of $35.9 million and $33.4 million for its gross future deferred tax assets as of December 31, 2021 and 2020, respectively.
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III. Operating Results
Highlights
• Commission income was $5.9 million in 2021, an increase of 14.0% from $5.2 million in 2020.
• An impairment charge on intangible assets of $930,000 relating to the Global Liberty customer lists was recorded in 2021 compared to $0 impairments in 2020.
• Net realized losses were primarily comprised of an impairment charge on the Company’s corporate headquarters of $7.0 million in 2021. There were no impairment charges on the Company’s corporate headquarters in 2020.
• Other income increased by $1.5 million to $5.9 million from $4.4 million due to an increase of professional services revenues in 2021. Total revenue, including the impact of net realized losses, was $4.8 million in 2021 compared to $9.5 million in 2020.
• Gain on disposal of subsidiaries increased by $5.7 million due to the out-of-period adjustment recorded in 2021 relating to the deconsolidation of the ASI Pool Companies.
• During 2021 the Company received full forgiveness of both PPP Loans totaling $6.6 million.
• Net loss from continuing operations was $5.8 million, or $0.45 loss per common share diluted, in 2021 compared to a net loss from continuing operations of $13.0 million, or $1.08 loss per common share diluted, in 2020, representing an increase in earnings per common share diluted of $0.63.
• Net income from discontinued operations was $165,000, or $0.01 earnings per common share diluted in 2021 compared to $238,000, or $0.02 earnings per common share diluted, in 2020, representing a decrease in earnings per common share diluted of $0.01.
• Book value per common share increased $0.02 to $(1.72) as of December 31, 2021 from $(1.74) as of December 31, 2020.
Consolidated Performance
($ in ‘000s, except per share data)
Year ended December 31,
Commission income
Underwriting expense:
Acquisition costs
Share-based compensation
Other underwriting expenses
Total underwriting expenses
Underwriting loss
Intangible asset impairment loss
Loss from operating activities, before income taxes
Interest expense, net
Realized (losses) gains and other income
Gain on disposal of subsidiaries
Forgiveness of PPP Loans
Net loss before income taxes
Income tax benefit
Income from discontinued operations, net of tax
Net loss
Key Financial Ratios
Loss per common share diluted
Book value per common share
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Revenues
Our commission and fee income is derived from policies and premium produced by AGMI on behalf of unrelated strategic risk-taking insurance carrier partners (“insurance carrier partners”). Our underwriting approach is to price our products with the objective of generating underwriting profit for the insurance companies with whom we partner. The Company’s philosophy is to prioritize the improvement in profit margin over top line growth. As with all P&C insurance businesses, the impact of price changes, other underwriting activities and market conditions is reflected in our financial results over time. Underwriting changes on our in-force policies occur as they are renewed. This cycle generally takes twelve months for our entire book of business and up to an additional twelve months to earn a full year of premium and recognize commissions at the renewal rate.
Expenses
Acquisition costs consist principally of brokerage and agent commissions paid to our external producers.
Other underwriting expenses consist primarily of personnel related expenses (including salaries, benefits and certain costs associated with awards under our equity compensation plans, such as share-based compensation expense) and other general operating expenses incurred primarily in connection with our MGA and holding company operations. We believe that because a portion of our personnel expenses are relatively fixed in nature, changes in premium writings may impact our operating scale and operating expense ratios. Commissions and other fee related revenue were earned and recognized in connection with policies managed by AGMI. Expenses related to the deconsolidated ASI Pool entities no longer have an impact on our operating results beginning on October 1, 2019. Also, since October 1, 2019, Global Liberty has been classified as a discontinued operation and its expenses are considered as such through September 30, 2021, however, due to the liquidation order Global Liberty was deconsolidated from this report beginning October 2021.
Commission Income
AGMI earns commission for the sale of first year and renewal policies from our insurance carrier partners, which are presented in our consolidated statements of operations as commission revenue. Our contracts with our insurance carrier partners contain a commission percentage that is used to compute the total commission due per policy written. We also generate fee income in connection with individual policies as well as professional services provided to our business partners under contractual arrangements. Our commission revenue is recognized upon the sale or renewal of a policy. Certain of our contractual arrangements also include a profit related contingent commission component. After a policy is sold, we have policy management obligations to the policyholder and the insurance carrier partner, including, but not limited to, policy endorsements, policy cancellations and policy restatements. Therefore, we do incur additional expense related to our policy management requirements. Most costs associated with the sale of an individual policy are incurred prior to or at the time of the initial sale of an individual policy and are characterized in our financial statements as Other Underwriting Expenses.
Commission income relating to the business processed by AGMI increased by $728,000, or 14.0%, from $5.2 million in 2020 to $5.9 million in 2021. The increase was mainly attributed to the increase in our taxi and livery program during 2021 as compared to 2020.
Geographic Concentration
Gross Premiums Written by State
Year ended December 31,
California
New York
Virginia
Minnesota
Nevada
Indiana
South Carolina
Illinois
Maryland
Ohio
Other
Total
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Acquisition Costs
Acquisition costs of $3.2 million in 2021 compared to $2.9 million in 2020 represent commissions paid to retail agents who sell insurance policies. The increase in acquisition costs resulted from an increase in premium production of $4.0 million.
Other Underwriting Expenses
Other underwriting expenses including share based compensation and amortization of intangible assets decreased $1.5 million to $16.4 million in 2021 compared to $17.8 million in 2020. The significant variances between 2021 and 2020 are as follows:
• $7.4 million increase related to the elimination of shared services related to the deconsolidated entities;
• $3.5 million decrease in salaries and benefits related to the reduction in force;
• $1.8 million decrease related to the Employee Retention Credit of the Taxpayer Certainty and Disaster Tax Relief Act of 2020, enacted December 27, 2020, which amended and extended the employee retention credit (and the availability of certain advance payments of the tax credits) under section 2301 of the CARES Act;
• $1.0 million decrease in professional services related to the strategic shift of the Company;
• $1.3 million decrease in depreciation and amortization mainly attributed to the corporate headquarter status as held for sale;
• $586,000 decrease in premium balances allowances;
• $321,000 decrease in corporate insurance costs due to the decline in insured value; and
• $435,000 decrease in all other expenses mainly due to the impact from COVID-19 during 2021.
Intangible Asset Impairment Loss
On October 1, 2021, Global Liberty was deconsolidated from the results of the Company due to its order of liquidation filed by the Department of Financial Services of New York. As a result, the Company reviewed the impact of the liquidation on its intangible assets, specifically the intangible assets relating to the customer relationships. It was concluded that these customer relationships related mainly to the New York market. The Company has stopped producing insurance premiums in New York, no longer has a presence in the market and has not continued maintaining the customer relationships it had originally purchased. As a result, the Company fully recorded an intangible asset impairment in the amount of $930,000 relating to the Global Liberty disposition in Q4 2021. There were no intangible assets impaired during 2020.
Interest Expense, Net
On April 26, 2017, Atlas issued $25 million of five-year 6.625% senior unsecured notes and received net proceeds of approximately $23.9 million after deducting underwriting discounts and commissions and other offering expenses. Interest expense related to the senior unsecured notes was $1.9 million for each of the years ended 2021 and 2020, respectively. 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. Interest expense in 2021 and 2020 totaled $371,000 and $364,000, respectively. Prior to October 1, 2021, the interest expense payments to Global Liberty had been eliminated in consolidation. On May 1, 2020, American Acquisition entered into a PPP Loan pursuant to the CARES Act that had an interest at a rate of 1.0% per annum. Interest income related to the forgiveness of the PPP Loan for 2021 totaled $32,000 while interest expense for 2020 totaled $31,000. On September 1, 2021, the Company entered into a Credit Agreement that had an interest rate of 12% per annum. Interest expense related to the Credit Agreement for 2021 totaled $15,000. American Acquisition entered into subordinated surplus debentures (“Surplus Notes”) with the ASI Pool Companies in April 2015 that had a maturity date of April 30, 2020. Interest income related to the Surplus Notes for 2020 totaled $308,000.
Net Realized Losses and Other Income
Net realized losses totaled $7.0 million in 2021 compared to $3,000 in 2020. The change related to the impairment charges related to the Company’s headquarters building.
Atlas recorded other income of $5.9 million and $4.4 million in 2021 and 2020, respectively. The increase is related primarily to an increase in professional services revenue.
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Gain on Disposal of Subsidiaries
During the three months ended December 31, 2021, the Company recorded an out-of-period adjustment to correct premiums receivable and premiums payable related to the deconsolidated of the ASI Pool Companies. The impact resulted in a $5.6 million gain on disposal of subsidiaries for the year ended December 31, 2021. Management concluded that the correction was not material to any current or previously issued consolidated financial statements.
Forgiveness of PPP 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 (the "PPP") 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 (the “PPP Rules”). The Company was eligible for this 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 of 1934, as amended (the “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.
Loss before Income Taxes
Atlas generated pre-tax loss from continuing operations of $5.8 million and $13.5 million for each of the years ended in 2021 and 2020, respectively. The causes of these changes in pre-tax losses are attributed to the combined effects of the reasons cited in the ’Commission Income’, ‘Acquisition Costs,’ ‘Other Underwriting Expenses,’ ‘Intangible Asset Impairment Loss,’ ‘Interest Expense, Net,’ ‘Net Realized Losses and Other Income’, ‘Gain on Disposal of Subsidiaries’, and ‘Forgiveness of PPP Loans’ sections above.
Income Taxes
Atlas recorded income tax benefit of $0 and $484,000 in 2021 and 2020, respectively.
Tax Rate Reconciliation
Year ended December 31,
Provision for taxes at U.S. statutory marginal income tax rate
Provision for deferred tax assets deemed unrealizable (valuation allowance)
Nondeductible expenses
State tax (net of federal benefit)
Stock compensation
Gain from debt extinguishment
Tax rate differential
Other
Provision for income taxes for continuing operations
During 2013 and 2019, due to shareholder activity, “triggering events” as determined under IRC Section 382 occurred. As a result, under IRC Section 382, the use of the Company’s net operating loss and other carryforwards generated prior to the “triggering events” will 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 Net Operating Losses (“NOL’s) that will expire unused as a result of the yearly limitation.
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In assessing the need for a valuation allowance, Atlas considers both positive and negative evidence related to the likelihood of realization of the deferred tax assets.
Positive evidence evaluated when considering the need for a valuation allowance includes:
• current year profit;
• management’s expectations of future profit; and
• positive growth trends in gross premiums produced.
Negative evidence evaluated when considering the need for a valuation allowance includes:
• net losses generated in the three most recent years; and
• yearly limitation as required by IRC Section 382 on net operating loss carryforwards generated prior to 2013.
Net Loss and Loss per Common Share
Atlas had net loss of $5.7 million and $12.7 million in 2021 and 2020, respectively. Loss per common share diluted was $0.45 and $1.08 in 2021 and 2020, respectively.
Potential Dilutive Common Shares
Year ended December 31,
Basic weighted average common shares outstanding
Dilutive potential ordinary shares:
Dilutive stock options
Diluted weighted average common shares outstanding
The effects of convertible instruments are excluded from the computation of earnings per common share diluted in periods in which the effect would be anti-dilutive. In 2021 and 2020, all exercisable stock options were deemed to be anti-dilutive.
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IV. Financial Condition
Consolidated Statements of Financial Condition
($ in ‘000s, except for share and per share data)
December 31,
Assets
Cash and cash equivalents
Restricted cash
Premiums receivable (net of allowance of $225 and $800, respectively)
Intangible assets, net
Property and equipment, net
Right-of-use asset
Notes receivable
Credit facility fees, net
Other assets
Assets held for sale
Total assets
Liabilities
Premiums payable
Lease liability
Due to deconsolidated affiliates
Notes payable, net
Other liabilities and accrued expenses
Liabilities held for sale
Total liabilities
Shareholders' Deficit
Ordinary voting common shares, $0.003 par value, 800,000,001 shares authorized, shares issued: December 31, 2021 - 15,052,839 and December 31, 2020 - 12,248,798; shares outstanding: December 31, 2021 - 14,797,334 and December 31, 2020 - 11,993,293
Restricted voting common shares, $0.003 par value, 33,333,334 shares authorized, shares issued and outstanding: December 31, 2021 and December 31, 2020 - 0
Additional paid-in capital
Treasury stock, at cost: 255,505 shares of ordinary common voting shares at December 31, 2021 and December 31, 2020, respectively
Retained deficit
Accumulated other comprehensive income, net of tax
Total shareholders' deficit
Total liabilities and shareholders' deficit
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Deferred Tax Assets
Components of Deferred Tax
As of December 31,
Gross deferred tax assets:
Losses carried forward
Claims liabilities and unearned premium reserves
Investment in affiliates
Bad debts
Fixed assets
Stock compensation
Other
Valuation allowance
Total gross deferred tax assets
Gross deferred tax liabilities:
Deferred policy acquisition costs
Investments
Fixed assets
Intangible assets
Other
Total gross deferred tax liabilities
Net deferred tax assets
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. U.S. 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, Atlas has established a valuation allowance of $35.9 million and $33.4 million for its gross future deferred tax assets as of December 31, 2021 and 2020, respectively.
The Company had a change in control for Federal income tax purposes in 2019. As a result, the Company’s net operating losses are subject to a yearly limitation by the Internal Revenue Code.
Net Operating Loss Carryforward as of December 31, 2021 by Expiry
Year of Occurrence
Year of Expiration
Amount
Indefinite
Indefinite
Indefinite
Indefinite
Total
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Buildings and Land
In the fourth quarter of 2016, Atlas purchased a building and land for $9.3 million to serve as its corporate headquarters. In addition to the buildings and land the Company purchased furnishings and made improvements to this building of $9 million. the corporate headquarter at December 31, 2021 is classified as a held for sale asset. See ‘Part II, Item 8, Note 8, Property and Equipment’ in the Notes to Consolidated Financial Statements for further discussion of the corporate headquarters.
Off-Balance Sheet Arrangements
As of December 31, 2021 and 2020 we did not have any material off-balance sheet arrangements within the meaning of Item 303 of Regulation S-K.
Changes in Shareholders’ (Deficit) Equity
Ordinary Voting Common Shares
Restricted Voting Common Shares
Additional Paid-In Capital
Treasury Stock
Retained Deficit
Accumulated Other Comprehensive Income (Loss)
Total Shareholders' Equity (Deficit)
Balance December 31, 2019
Net loss
Other comprehensive loss
Share-based compensation
Balance December 31, 2020
Deconsolidation of Global Liberty
Net loss
Shares issued on Credit Agreement
Equity component of Credit Agreement
Other comprehensive income
Share-based compensation
Balance December 31, 2021
As of December 31, 2021, there were 14,797,334 ordinary voting common shares outstanding and no preferred shares outstanding.
On December 31, 2018, the Company awarded 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 Equity Incentive Plan. The number of restricted stock units awarded was determined by dividing (A) the Aggregate Award by (B) the closing price of one share of 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 $179,000. The RSUs will vest 33.3% on January 1 of each year with the last vesting period being 2021.
There were 0 and 3,301 non-vested RSUs issued as of December 31, 2021 and 2020, respectively. The RSUs are participative and are included in the computations of earnings per common share and book value per common share for these periods.
During 2021, the Company issued 2,804,041 ordinary voting common shares of which 2,750,000 ordinary voting common shares were issued as part of a credit facility agreement, 50,740 ordinary voting common shares were issued under the near term incentive program, and 3,301 ordinary voting common shares were issued as a result of the vesting of RSUs.
During 2020, the Company issued 210,481 ordinary voting common shares of which 202,100 ordinary voting common shares were issued under the near term incentive program while 8,381 ordinary voting common shares were issued as a result of the vesting of RSUs. Also, during the year ended December 31, 2020, 140,000 ordinary voting restricted common shares were canceled due to not meeting performance targets, and 20,000 ordinary voting restricted common shares were canceled due to the departure of a former officer.
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Mezzanine Equity
There were no preferred shares outstanding as of December 31, 2021 and 2020.
Book Value
Book Value per Common Share
($ in ‘000s, except for share and per share data)
December 31,
Shareholders’ deficit
Less: Accumulated dividends on preferred stock
Common equity
Common shares:
Common shares outstanding
Restricted stock units
Total common shares
Book value per common share outstanding
The changes to book value per common share are attributed to the combined effects of the reasons cited in the ‘Commission Income,’ ‘Acquisition Costs,’ ‘Other Underwriting Expenses,’ ‘Intangible Asset Impairment Loss,’ ‘Interest Expense, Net,’ ‘Net Realized Losses and ‘Other Income,’ ‘Gain on Disposal of Subsidiaries,’ and Forgiveness of PPP Loans’ subsections of the ‘Operating Results’ section.
Liquidity and Capital Resources
Liquidity Management
The purpose of liquidity management is to ensure there is sufficient cash to meet all financial commitments and obligations as they become due. The liquidity requirements of Atlas’ business have been met primarily by funds generated from operations, asset maturities and income and other returns received on securities. Cash provided from these sources is used primarily for payment of claims, commissions and general expenses. The sources and uses of cash have changed as a result of the Company’s strategic shift from a traditional insurance carrier based operation to a managing general agency.
As a holding company, Atlas may derive cash from its subsidiaries generally in the form of dividends and in the future may charge management fees to the extent allowed by statute or other regulatory approval requirements to meet its obligations. AGMI funds its obligations primarily through commission revenue generated by the production of insurance premiums for related and third party entities.
On April 26, 2017, Atlas issued $25 million of five-year 6.625% senior unsecured notes and received net proceeds of approximately $23.9 million after deducting underwriting discounts and commissions and other estimated offering expenses. Interest on the Notes is payable quarterly on each January 26, April 26, July 26 and October 26. Atlas may, 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 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 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 Notes are structurally subordinated to the indebtedness and other obligations of Atlas’ subsidiaries. From time to time the Company may seek to repurchase Company debt through cash repurchases in the open market or otherwise. Such repurchases, if any, will be on the terms and prices determined by the Company and will depend upon market conditions, liquidity needs and other factors. The amount of such repurchases may be material.
The Notes were issued under an indenture and supplemental indenture that contain covenants that, among other things, limit: (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.
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The Company is currently in default on interest payments related to the Notes. On August 31, 2021, the Company entered into the RSA with certain holders of the Notes memorializing the agreed-upon term of the Note Restructuring. Pursuant to the Note Restructuring, the Notes will be canceled and the New Notes will be issued in exchange on or around April 15, 2022, ahead of the Notes’ maturity date of April 26, 2022. The accrued but unpaid interest on the Notes as of the date the New Notes are issued will be capitalized and added onto the principal of the New Notes. The New Notes will be issued by the company pursuant to a second supplemental indenture and will have a maturity date of April 27, 2027. The New Notes will be unsecured, bearing an interest rate of 6.625% per annum, if paid in cash, and 7.25% per annum, if paid in kind, with a paid-in-kind (“PIK”) option allowing the Company to pay interest in kind of up to two years from the date the New Notes are issued. Additionally, the Company will have the option to redeem the New Notes after three years at the principal amount to be redeemed as well as the option to redeem New Notes in an amount related to capitalized PIK interest on the New Notes, plus any accrued but unpaid interest, in each case, with no . The same indenture covenant provisions described in the preceding paragraph will continue to apply to the New Notes.
On September 1, 2021, the Company and the Borrowers, entered into the Credit Agreement with the Agent and the Lenders, pursuant to which the Lenders made available to the Borrowers an aggregate principal amount of up to $3,000,000 Term Loans. The Credit Agreement provides for an initial advance of $2 million in Term Loans and up to an additional $1 million of 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% 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% 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 the fact that not all of the funding conditions had been met.
For more information on the Note Restructuring and the Credit Agreement, see “Part II, Item 8, Note 14, Notes Payable,” in the Notes to Consolidated Financial Statements..
Summary of Consolidated Cash Flows - Continuing Ops.
Year ended December 31,
Net cash flows used in operating activities
Net cash flows provided by (used in) investing activities
Net cash flows provided by financing activities
Net decrease in cash
Cash used in operations during 2021 and 2020 was primarily a result of the strategic shift from insurance company operations to managing general agency operations.
Cash provided by investing activities during 2021 and 2020 was the result of net sales and purchase of property and equipment.
Cash provided by financing activities during 2021 was a result of the Company receiving a PPP Loan and funding from the Credit Facility offset by mortgage payments made to the ASI Pool Companies. Cash provided by financing activities during 2020 was a result of the Company receiving a PPP Loan offset by mortgage payments made to the ASI Pool Companies.
From time to time the Company may seek to repurchase Company debt through cash repurchases in the open market or otherwise. Such repurchases, if any, will be on terms and prices determined by the Company and will depend upon market conditions, liquidity needs and other factors. The amount of such repurchases may be material, however, there were no such purchases in 2020 or 2021.
Capital Resources
The Company manages capital using both regulatory capital measures and internal metrics. The Company’s capital is primarily derived from common shareholders’ equity, retained deficit and accumulated other comprehensive (loss) income.
As a holding company, Atlas could derive cash from its subsidiaries generally in the form of dividends to meet its obligations, which will primarily consist of operating expense payments and debt payments. Atlas subsidiaries fund their obligations primarily through commission and fee income.
Ability to Meet Financial Obligations
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As discussed in greater detail in “Part II, Item 8, Note 16”, Going Concern, there is substantial doubt about whether the Company will have sufficient capital to operate through or beyond March 2023 unless the Company is successful in taking certain mitigating action (see Part II, Item 8, Note 16).
