FATHOM DIGITAL MANUFACTURING CORPORATION The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited interim consolidated financial statements and notes thereto included in Part I, Item 1 of this Quarterly Report, together with our audited consolidated financial statements for our most recently completed fiscal year set forth under Item 8 of our 2021 Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in Item 1A "Risk Factors" of our 2021 Form 10-K and other filings under the Exchange Act.
Overview
Fathom Digital Manufacturing Corporation was incorporated inDelaware inDecember 2021 as part of the completion of the business combination of Altimar Acquisition Corp II and Fathom Opco (the "Business Combination"). However, our roots stretch back over 35 years with the founding of several of our subsidiaries. The terms "Fathom" the "Company," "we," "us," and "our" as used herein refer to the business and operations ofFathom Digital Manufacturing Corporation and its consolidated subsidiaries. We are a leading national on-demand digital manufacturing platform at the forefront of the Industry 4.0 revolution. Industry 4.0 utilizes e-commerce, automation, and data sharing in a cyber-physical system to communicate and cooperate in the manufacturing process over the Internet of Things ("IoT"). Using our expansive manufacturing footprint and extensive expertise in both additive and traditional manufacturing, we provide comprehensive product development and on-demand manufacturing services to many of the largest and most innovative companies in the world. Our unified suite of manufacturing technologies, processes, and proprietary software enables us to deliver hybridized solutions that meet the specific needs of our customers, empowering them to tackle complex manufacturing problems and accelerate product development cycles.
Our differentiated strategy focuses on speed, problem solving, adaptive technical responsiveness, and a technology agnostic approach across our 25 plus manufacturing processes to meet customers' design intent. This allows our customers to iterate faster, often shortening their product development and production cycles from months to days.
We seamlessly blend in-house capabilities consisting of plastic and metal
additive technologies, injection molding and tooling, computer numerical control
("CNC") machining, and precision sheet metal fabrication. We operate over 530
advanced manufacturing systems across 25 unique manufacturing processes and a
450,000 sq. ft. manufacturing footprint, spanning 12 facilities located
primarily within the U.S. We believe we are positioned to serve the largest
geographic markets in which our customers are located and enable cost effective
and rapid turnaround times for our customers. Our scale and the breadth of
offerings allow our customers to consolidate their supply chain and product
development needs through the ability to source through a single manufacturing
supplier. Fathom's manufacturing technologies and capacity are further extended
through the utilization of a selected group of highly qualified suppliers that
specialize in injection molding and tooling and CNC machining.
We have experienced significant growth since inception both organically and
through our successful and proven acquisition playbook, which is enabled by our
proprietary software platform that allows for a streamlined integration of
acquired companies. Over the past three years, we have successfully completed 13
acquisitions to bolster our operations and offerings. Fathom started as Midwest
Composite Technologies, LLC ("MCT"), a leader in prototyping and low-volume
services. Founded in 1984, MCT specialized in model making, industrial design,
and rapid prototyping. Today, MCT serves companies through a variety of in-house
additive manufacturing technologies, including 3D printing and processing, CNC
machining, injection molding, and industrial design capabilities.
In September 2019 , we acquired Kemeera, LLC to expand our additive, CNC
machining, injection molding, and development and engineering services, as well
as bring urethane casting capabilities. In December 2019 , we acquired ICOMold,
LLC ("ICOMold") to expand our injection molding capabilities and significantly
enhance our customer experience by bringing in-house an interactive, automated
quotation system capable of providing feedback in 30 seconds with an intuitive,
customer-facing project management portal, which we have continued to develop
and enhance. Our acquisition of ICOMold also expanded our capabilities into
China .
In July 2020 , we acquired Incodema, LLC and Newchem, LLC to expand our in-house
manufacturing processes to include precision sheet metal engineering solutions,
including a broad array of sheet metal cutting and forming solutions such as
laser cutting, micro waterjet, specialty stamping, and photochemical etching,
among others, for quick and complex, tight tolerance parts. In August 2020 , we
acquired GPI Prototype & Manufacturing Services, LLC ("GPI") to expand our
additive manufacturing capabilities. GPI was one of the first metal additive
manufacturing service providers in the U.S. , bringing metallurgical expertise
in-house and enabling the Company to produce metal parts with complex geometries
for on-demand manufacturing applications. In December 2020 , we acquired
Dahlquist Machine, LLC to expand our precision machining capabilities with
state-of-the-art CNC mills and lathes for high-speed precision machining of
light metals, aluminum, and plastics. In December 2020 , we also acquired
Majestic Metals, LLC , further expanding our precision sheet metal fabrication
capabilities. Further, in December 2020 , we acquired Mark Two Engineering, LLC
expanding our precision machining services and footprint in the medical device
industry.
In February 2021 , we acquired Summit Tooling, Inc. and Summit Plastics LLC ,
further expanding our plastic injection mold manufacturing capabilities. In
April 2021 , we acquired Centex Machine and Welding Inc. and Laser Manufacturing,
Inc. to expand our high-precision manufacturing services specializing in CNC
machining and medical device manufacturing. In April 2021 , we also acquired
Sureshot Precision, LLC (d/b/a Micropulse West) expanding our Electrical
Discharge Machine ("EDM") services, and CNC and manual machining capabilities.
Further, in April 2021 , we acquired Precision Process, LLC specializing in CNC
machining, engineering support, and EDM services.
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--------------------------------------------------------------------------------Factors Affecting the Comparability of our Results of Operations
As a result of a number of factors, our historical results of operations are not comparable from period to period and may not be comparable to our financial results of operations in future periods. Set forth below is a brief discussion of the key factors that may impact the comparability of our results of operations in future periods.
Impact of the Business Combination
Fathom is subject to corporate level tax rates at the federal, state and local levels. Fathom OpCo was and is treated as a flow-through entity forU.S. federal income tax purposes, and as such, has generally not been subject toU.S. federal income tax at the entity level. Accordingly, other than for certain consolidated subsidiaries of the Predecessor that are structured as corporations and unless otherwise specified, the historical results of operations and other financial information of the Predecessor presented does not include any provision forU.S. federal income tax. Fathom paysU.S. federal and state income taxes as a corporation on its share of our taxable income. The Business Combination was accounted for as a business combination using the acquisition method of accounting. Accordingly, the assets and liabilities, including any identified intangible assets, were recorded at their preliminary fair values at the date of completion of the Business Combination, with any excess of the purchase price over the preliminary fair value recorded as goodwill. The application of business combination accounting required the use of significant estimates and assumptions. As a result of the application of accounting for the Business Combination, the historical consolidated financial statements of Fathom OpCo are not necessarily indicative of the Fathom's future results of operations, financial position and cash flows. For example, increased tangible and intangible assets resulting from adjusting the basis of tangible and intangible assets to their fair value would result in increased depreciation and amortization expense in the periods following the consummation of the Business Combination. In connection with the Business Combination, we entered into a Tax Receivable Agreement ("TRA") with certain of our pre-Business Combination owners that provides for the payment by Fathom to such owners of 85% of the benefits that Fathom is deemed to realize as a result of the Company's share of existing tax basis acquired in the Business Combination and other tax benefits related to entering into the TRA. Additionally, in connection with the Business Combination, we have accounted for the issuance of warrants and earnout shares as liabilities which require re-measurement to fair value at the end of each reporting period, as applicable, and adopted the Fathom 2021 Omnibus Incentive Plan which will result in higher share-based compensation expenses.
Impact of Becoming a
We expect to continue to incur additional costs associated with operating as a public company, including human resources, legal, consulting, regulatory, insurance, accounting, investor relations and other expenses that we did not incur as a private company. The Sarbanes-Oxley Act and rules adopted by theSEC require public companies to implement specified corporate governance practices that are not applicable to a private company. These additional rules and regulations increased our legal, regulatory and financial compliance costs and will make some activities more time-consuming and costly.
Key Factors Affecting Our Results
Our financial position and results of operations depend to a significant extent on the following factors:
Industry Opportunity and Competitive Landscape
The market in which we operate is projected to grow from$25 billion in 2021 to$33 billion in 2025, fueled by growth in demand for additive manufacturing and continuing trends in customer outsourcing of production needs. We operate in a large, fragmented, and competitive industry, competing for customers with a range of digital manufacturers, digital manufacturing brokers, and regional design bureaus. We believe we are uniquely positioned as the only full-service outsourced solution built specifically to cater to the manufacturing needs of enterprise-level corporate customers. In particular, we believe we compare favorably to other industry participants on the basis of the following competitive factors:
• Fathom offers a wide breadth of advanced manufacturing processes,
including additive 2.0 and emerging technologies;
• We have a proven track record of serving blue-chip, enterprise-level
corporate customers;
• We offer our clients turnaround times in as little as 24-hours, nationwide;
• Our unified digital customer experience supplemented by with embedded
support teams;
• Fathom provides the industry's only team of dedicated customer-facing
engineers, unlocking the broadest parts envelope and providing customers
with high-value customized parts;
• Our list of certifications validates our capabilities and precision
(tight tolerances, handling of sensitive client data, etc.);
• We possess a wealth of material expertise, technical designcapabilities, and engineering resources which we leverage to deliver
superior customer results regardless of manufacturing process and
production material; and
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• Our successful and proven acquisition integration playbook for strategic
growth opportunities.
Customer Product Life Cycle and Connectivity
We believe that a number of trends affecting our industry have affected our results of operations and may continue to do so. For example, we believe that many of our target customers are facing three mega trends which are disrupting long-term product growth models including (i) increased pressure to shorten product life-cycles, (ii) the demand for manufactured parts on-demand, and (iii) expectation to deliver products that are personalized and customized to unique customer specifications. We believe we continue to be well positioned to benefit from these trends given our proprietary technology alignment with Industry 4.0 trends that enables us to automate and integrate processes involved in manufacturing custom parts. The COVID-19 pandemic has also impacted the manufacturing environment. For example, the pandemic accelerated the digitization of manufacturing as companies pivoted to a work-from-home and socially-distanced manufacturing plant environment. As a result, the adoption of e-commerce was accelerated, which allows opportunity for us to provide valuable solutions to manufacturers looking to build resiliency in their supply chains through fast, on-demand manufacturers. While our business may be positively affected by these trends, our results may also be favorably or unfavorably impacted by other trends that affect product developer and engineer orders for custom parts in low volumes, including, among others, economic conditions, changes in product developer and engineer preferences or needs, developments in our industry and among our competitors, and developments in our customers' industries. For a more complete discussion of the risks facing our business, see Item 1A. "Risk Factors" of our 2021 Form 10-K.
Manufacturing Facilities and Capacity
We believe our combined facilities are adequate for our development and production needs in the near future. Should we need to add space or transition into new facilities, we believe we have the ability to expand our footprint on commercially reasonable terms.
Impacts of the COVID-19 pandemic
The full extent of the impact and effects of the COVID-19 pandemic will depend on future developments, including, among other factors, the duration, spread and resurgences of the virus, including variants thereof, along with related travel advisories and restrictions, the recovery time of the disrupted supply chains and industries, the impact of labor market interruptions, the impact of government interventions, the pace, scope and efficacy of vaccination and booster programs, and general uncertainty as to the impact of COVID-19, including variants and resurgences, on the global economy.
Further discussion of the potential impacts on our business and results of operations from the COVID-19 pandemic is provided in the section entitled "Risk Factors" in Part I, Item 1A of our 2021 Form 10-K.
Comparison of the three months endedSeptember 30, 2022 andSeptember 30, 2021 Three Months Ended Change September 30, 2022 September 30, 2021 (dollars in thousands) (Successor) (Predecessor) $ % Revenue$ 40,210 $ 41,481$ (1,271 ) -3.1 % Cost of revenue 25,144 26,581 (1,437 ) -5.4 % Gross profit 15,066 14,900 166 1.1 % Operating expenses Selling, general, and administrative 11,960 10,681 1,279 12.0 % Depreciation and amortization 4,627 2,148 2,479 115.4 % Restructuring 996 - 996 Goodwill Impairment 1,066,564 - 1,066,564 Total operating expenses 1,084,147 12,829 1,071,318 8350.8 % Operating (loss) income (1,069,081 ) 2,071 (1,071,152 ) -51721.5 % Interest expense and other (income) expense Interest expense 2,406 4,376 (1,970 ) -45.0 % Other expense 81 592 (511 ) -86.3 % Other income (25,548 ) (150 ) (25,398 ) 16932.0 % Total interest expense and other (income) expense, net (23,061 ) 4,818 (27,879 ) -578.6 % Net loss before income tax (1,046,020 ) (2,747 ) (1,043,273 ) 37978.6 % Income tax expense 87 729 (642 ) -88.1 % Net loss (1,046,107 ) (3,476 ) (1,042,631 ) 29995.1 % Net loss attributable to Fathom OpCo non-controlling interest (556,027 ) - (556,027 ) Net loss attributable to controlling interest (490,080 ) (3,476 ) (486,604 ) 13999.0 % Comprehensive loss: Income from foreign currency translation adjustments - 201 (201 ) -100.0 % Comprehensive loss, net of tax$ (490,080 ) $ (3,275 )$ (486,805 ) 14864.3 % 30
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Revenue
Revenue for the three months endedSeptember 30, 2022 was$40,210 compared to$41,481 in the three months endedSeptember 30, 2021 , a decrease of 3.10%. The year-over-year decrease was primarily due to one-time COVID-19 deferred orders in our injection molding technology during the three months endedSeptember 30, 2021 . Gross Profit Gross profit for the three months endedSeptember 30, 2022 totaled$15,066 or 37.5% of revenue, compared to$14,900 or 35.9% of revenue, for the three months endedSeptember 30, 2021 , primarily driven by favorable pricing on materials.
Operating Expenses
Selling, general and administrative (SG&A) expenses were$11,960 and$10,681 for the three months endedSeptember 30, 2022 andSeptember 30, 2021 , respectively. The$1,279 , or 12.0%, increase in SG&A expenses was primarily driven by stock based compensation of$1,762 in the three months endedSeptember 30, 2022 and by additional costs related to being a public company. Depreciation and amortization expenses were$4,627 and$2,148 for the three months endedSeptember 30, 2022 andSeptember 30, 2021 , respectively. The increase of$2,479 or 115.4%, was primarily driven by an increase in intangible assets related to the Business Combination resulting in amortization expenses associated with those assets. Restructurings of$996 represents costs to consolidate ourOakland, CA facility into Fathom headquarters inHartland, WI , facility, transition finance to a shared-service model, and consolidated a limited number of leadership roles, as announced in our reorganization plan onJuly 7, 2022 . There were no restructuring charges for the three months endedSeptember 30, 2021 .
The goodwill impairment charge of
Operating Income (Loss)
Operating loss was$1,069,081 for the three months endedSeptember 30, 2022 and operating income was$2,071 for the three months endedSeptember 30, 2021 . The additional losses were primarily driven by the goodwill impairment charge, restructuring costs, additional costs related to being a public company, and additional amortization of the increased intangible assets related to the Business Combination.
Interest Expense and Other Expense (Income)
Interest expense was$2,406 and$4,376 for the three months endedSeptember 30, 2022 andSeptember 30, 2021 , respectively. The decrease in interest expense is primarily due to lower debt atSeptember 30, 2022 as compared toSeptember 30, 2021 and lower interest rates under the New Credit Agreement. Other expenses were$81 and$592 for the three months endedSeptember 30, 2022 andSeptember 30, 2021 , respectively. The decrease in other expenses of$511 is due to fewer non-operating expenses in the business for the three months endedSeptember 30, 2022 . Other income was$25,548 and$150 for the three months endedSeptember 30, 2022 andSeptember 30, 2021 , respectively. The increase in other income of$25,633 represents the changes in fair value in the earnout share liabilities and the warrant liability during the three months endedSeptember 30, 2022 of$18,080 and$7,400 , respectively. Income Taxes We recorded income tax expense of$87 and$729 for the three months endingSeptember 30, 2022 andSeptember 30, 2021 , respectively. For the three months endedSeptember 30, 2022 the tax benefit was impacted by permanent difference with respect to gains and losses recorded on the Fathom earnout shares liability, sponsor earnout shares liability, and warrant liabilities. During the 2021 predecessor period, certain subsidiaries of Fathom OpCo which were previously held as corporations forU.S. federal tax purposes, were reorganized into flow-through entities in non-taxable transactions. As a result, deferred tax liabilities pertaining to the corporate subsidiaries were reversed as income tax benefits during the 2021 Predecessor Period. 31 -------------------------------------------------------------------------------- Comparison of the nine months endedSeptember 30, 2022 andSeptember 30, 2021 Nine Months Ended Change September 30, September 30, 2022 2021 (dollars in thousands) (Successor) (Predecessor) $ % Revenue$ 122,737 $ 107,887$ 14,850 13.8 % Cost of revenue 80,126 66,080 14,046 21.3 % Gross profit 42,611 41,807 804 1.9 % Operating expenses Selling, general, and administrative 38,341 27,111 11,230 41.4 % Depreciation and amortization 13,595 7,355 6,240 84.8 % Restructuring 996 - 996 Goodwill Impairment 1,066,564 - 1,066,564 Total operating expenses 1,119,496 34,466 1,085,030 3148.1 % Operating (loss) income (1,076,885 ) 7,341 (1,084,226 ) -14769.5 % Interest expense and other (income) expense Interest expense 5,738 8,800 (3,062 ) -34.8 % Other expense 276 9,007 (8,731 ) -96.9 % Other income (88,771 ) (3,215 ) (85,556 ) 2661.2 % Total interest expense and other (income) expense, net (82,757 ) 14,592 (97,349 ) -667.1 % Net loss before income tax (994,128 ) $ (7,251 )$ (986,877 ) 13610.2 % Income tax expense 167 807 (640 ) -79.3 % Net loss (994,295 ) $ (8,058 )$ (986,237 ) 12239.2 % Net loss attributable to Fathom OpCo non-controlling interest (561,728 ) - (561,728 ) Net loss attributable to controlling interest (432,567 ) (8,058 ) (424,509 ) 5268.2 % Comprehensive loss: (Loss) Income from foreign currency translation adjustments (107 ) 96 (203 ) -211.5 % Comprehensive loss, net of tax$ (432,674 ) $ (7,962 )$ (424,712 ) 5334.2 % Revenue Revenue for the nine months endedSeptember 30, 2022 was$122,737 compared to$107,887 in the nine months endedSeptember 30, 2021 , an increase of 13.8%. The year-over-year growth was driven by an increase in the volume of customers served, primarily through acquisition-related activity, and growth within Fathom's strategic accounts.
Gross Profit
Gross profit for the nine months endedSeptember 30, 2022 totaled$42,611 , or 34.7% of revenue, compared to$41,807 , or 38.8% of revenue, for the nine months endedSeptember 30, 2021 . The decrease in gross profit is primarily driven by an increase of$3,241 in amortization expense related to inventory step-up adjustments from purchase accounting following the completion of the Business Combination onDecember 23, 2021 .
Operating Expenses
SG&A expenses were$38,341 and$27,111 for the nine months endedSeptember 30, 2022 andSeptember 30, 2021 , respectively. The$11,230 , or 41.4%, increase in SG&A expenses was primarily driven by stock based compensation of$5,687 in the nine months endedSeptember 30, 2022 and by additional costs related to being a public company. Depreciation and amortization expenses were$13,595 and$7,355 for the nine months endedSeptember 30, 2022 andSeptember 30, 2021 , respectively. The increase of$6,240 or 84.8%, was primarily driven by an increase in intangible assets related to the Business Combination resulting in amortization expenses associated with those assets. Restructuring of$996 represents costs to consolidate ourOakland, CA facility into Fathom headquarters inHartland, WI , facility transition finance to a shared-service model, and consolidated a limited number of leadership roles, as announced in our reorganization plan onJuly 7, 2022 . There were no restructuring charges for the nine months endedSeptember 30, 2021 .
The goodwill impairment charge of
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--------------------------------------------------------------------------------Operating Income (Loss)
Operating loss was$1,076,885 for the nine months endedSeptember 30, 2022 and operating income was$7,341 for the nine months endedSeptember 30, 2021 . The operating loss was primarily driven by the goodwill impairment charge, restructuring costs, additional costs related to related to being a public company, non-cash amortization of the increased intangible assets relating to the Business Combination, inventory step-up from purchase accounting, professional fees, and additional employees.
Interest Expense and Other Expense (Income)
Interest expense was$5,738 and$8,800 for the nine months endedSeptember 30, 2022 andSeptember 30, 2021 , respectively. The decrease in interest expense is primarily due to lower debt atSeptember 30, 2022 as compared toSeptember 30, 2021 and lower interest rates under the New Credit Agreement. Other expenses were$276 and$9,007 for the nine months endedSeptember 30, 2022 andSeptember 30, 2021 , respectively. The decrease in other expenses of$7,760 is due to non-recurring expenses related to the Summit acquisition that took place in the nine month period endingJune 30, 2021 . Other income was$88,771 and$3,215 for the nine months endedSeptember 30, 2022 andSeptember 30, 2021 , respectively. The increase in other income of$85,556 represents the changes in fair value in the earnout share liabilities and the warrant liability during the nine months endedSeptember 30, 2022 of$59,980 and$28,000 , respectively. Income Taxes We recorded income tax expense of$167 and$807 for the nine months endingSeptember 30, 2022 andSeptember 30, 2021 , respectively. For the three months endedSeptember 30, 2022 the tax provision was impacted by permanent difference with respect to gains and losses recorded on the Fathom earnout shares liability, sponsor earnout shares liability, and warrant liabilities. The tax benefit was further impacted by discrete impacts related to the impairment of goodwill. During the 2021 predecessor period, certain subsidiaries of Fathom OpCo which were previously held as corporations forU.S. federal tax purposes, were reorganized into flow-through entities in non-taxable transactions. As a result, deferred tax liabilities pertaining to the corporate subsidiaries were reversed as income tax benefits during the 2021 Predecessor Period.
Non-GAAP Information
This Quarterly Report on Form 10-Q includes Adjusted Net Income (Loss) and
Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization
("Adjusted EBITDA"), which are non-GAAP financial measures that we use to
supplement our results presented in accordance with GAAP. We believe Adjusted
Net Income (Loss) and Adjusted EBITDA are useful in evaluating our operating
performance, as they are similar to measures reported by our public competitors
and regularly used by securities analysts, institutional investors and other
interested parties in analyzing operating performance and prospects. Adjusted
Net Income (Loss) and Adjusted EBITDA are not intended to be a substitute for
any GAAP financial measure and, as calculated by us, may not be comparable to
other similarly titled measures of performance of other companies within our
industry or in other industries. These non-GAAP financial measures supplement
and should be considered in addition to and not in lieu of our, GAAP results.
We include these non-GAAP financial measures because they are used by management
to evaluate Fathom's core operating performance and trends and to make strategic
decisions regarding the allocation of capital and new investments. Adjusted Net
Income (Loss) and Adjusted EBITDA exclude certain expenses that are required in
accordance with GAAP because they are non-recurring (for example, in the case of
transaction-related costs), non-cash (for example, in the case of depreciation
and amortization) or are not related to our underlying business performance (for
example, in the case of interest income and expense).
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--------------------------------------------------------------------------------Adjusted Net Income (Loss)
We define and calculate Adjusted Net Income (Loss) as net loss before the impact of any increase or decrease in the estimated fair value of the Company's warrants and earnout shares as well as transaction-related costs and certain other non-cash and non-core items.
The table below presents our Adjusted Net Income (Loss) reconciled to our net income (loss), the most directly comparable GAAP measure, for the periods indicated:
Three Months Ended Nine Months Ended
September 30 , September
30,
(dollars in 2022 September 30, 2021 2022 September 30, 2021 thousands) (Successor) (Predecessor) (Successor) (Predecessor) Net (loss)$ (1,046,107 ) $ (3,476 )$ (994,295 ) $ (8,058 ) Acquisition - - - 4,045 expenses(1) Stock 1,762 - 5,687 - compensation Inventory - (277 ) 3,241 - step-up amortization Goodwill 1,066,564 1,066,564 Impairment Restructuring 996 996 Change in fair (7,400 ) - (28,000 ) - value of warrant liability(2) Change in fair (18,080 ) - (59,980 ) - value of Earnout Shares liability(2) Change in fair - - (200 ) - value of TRA(2) Integration, 492 2,679 3,443 5,309 non-recurring, non-operating, cash, and non-cash costs(3) Adjusted Net$ (1,773 ) $ (1,074 )$ (2,544 ) $ 1,296 Income (Loss) (1) Represents expenses incurred related to business acquisitions; (2) Represents the income statement impacts from the change in fair value related to both the Sponsor Earnout Share liability, the Fathom Earnout Shares liability, and the Warrant liability associated with the Business Combination; and (3) Represents adjustments for other integration, non-recurring, non-operating, cash, and non-cash costs related primarily to integration costs for new acquisitions, severance, and management fees paid to our principal owner.
Adjusted EBITDA
We define and calculate Adjusted EBITDA as net income (loss) before the impact
of interest income or expense, income tax expense and depreciation and
amortization, and further adjusted for the following items: transaction-related
costs, the impact of any increase or decrease in the estimated fair value of the
Company's warrants and earnout shares, and certain other non-cash and non-core
items, as described in the reconciliation included below.
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The table below presents our Adjusted EBITDA reconciled to net income (loss),
the most directly comparable
Three Months Ended Nine Months Ended
September 30 , September
30,
(dollars in 2022 September 30, 2021 2022 September 30, 2021 thousands) (Successor) (Predecessor) (Successor) (Predecessor) Net (loss)$ (1,046,107 ) $ (3,476 )$ (994,295 ) $ (8,058 ) Depreciation and 6,335 4,381 18,539 12,006 amortization Interest 2,406 4,376 5,738 8,800 expense, net Income tax 88 729 167 807 expense Acquisition - - - 4,045 expenses(1) Inventory - (277 ) 3,241 - step-up amortization Stock 1,762 - 5,687 - compensation Goodwill 1,066,564 - 1,066,564 - Impairment Restructuring 996 996 Change in fair (7,400 ) - (28,000 ) - value of warrant liability(2) Change in fair (18,080 ) - (59,980 ) - value of Earnout Shares liability(2) Change in fair - - (200 ) - value of TRA(2) Contingent - 235 - (1,120 ) consideration Loss on - - - 2,031 extinguishment of debt Integration, 492 2,679 3,443 5,309 non-recurring, non-operating, cash, and non-cash costs(3) Adjusted EBITDA$ 7,056 $ 8,647$ 21,900 $ 23,820 (1) Represents expenses incurred related to business acquisitions; (2) Represents the impacts from the change in fair value related to both the earnout share liabilities and the warrant liabilities associated with the Business Combination; and (3) Represents adjustments for other integration, non-recurring, non-operating, cash, and non-cash costs related primarily to integration costs for new acquisitions, severance, and management fees paid to our principal owner.
Liquidity and Capital Resources
We measure liquidity in terms of our ability to fund the cash requirements of our business operations, including working capital and capital expenditure needs, contractual obligations and other commitments, with cash flows from operations and other sources of funding. Our current working capital needs relate mainly to our growth strategies, including business combination activity, capital equipment investments, and business development efforts, as well as compensation and benefits of our employees. In addition, under our New Credit Agreement, the Company is subject to various financial covenants, including quarterly net leverage and interest coverage covenants. As ofSeptember 30, 2022 , the Company was in compliance with all covenant requirements. Our ability to expand and grow our business will depend on many factors, including our working capital needs and the evolution of our operating cash flows. We had$8,004 in cash as ofSeptember 30, 2022 . We believe our operating cash flows, together with amounts available under the New Credit Agreement and our cash on hand will be sufficient to meet our anticipated working capital and capital expenditure requirements during the next 12 months. We may, however, need additional cash resources due to changed business conditions or other developments, including unanticipated regulatory developments, significant acquisitions and competitive pressures. We expect our capital expenditures and working capital requirements to continue to increase in the immediate future, as we seek to expand our product offerings across more of theU.S. Our capital expenditures in 2021 of$9.0 million equaled approximately 6.0% of annual revenue We believe that our annual future growth capital expenditures, excluding any expenditures for buildings and maintenance capital we might purchase for our operations, are likely to be approximately 6.9% of annual revenue. To the extent that our current resources are insufficient to satisfy our cash requirements, we may need to seek additional equity or debt financing. If the needed financing is not available, or if the terms of financing are less desirable than we expect, we may be forced to decrease our level of investment in new product launches and related marketing initiatives or to scale back our existing operations, which could have an adverse impact on our business and financial prospects. See Note 3-Business Combination with Fathom OpCo in the notes to our unaudited consolidated financial statements for further information. 35 --------------------------------------------------------------------------------
Borrowings and Lines of Credit
OnDecember 23, 2021 , the Company entered into the New Credit Agreement, which included a$50.0 million revolving credit facility and a$125.0 million term loan. The Company's borrowings under the revolving credit facility were$27,000 atSeptember 30, 2022 . The loans obtained under the New Credit Agreement will mature inDecember 2026 . OnNovember 10, 2022 , the Company entered into an amendment (the "Amendment") of the New Credit Agreement (as amended by the Amendment, the "Amended Credit Agreement) with the administrative agent thereof (the "Administrative Agent") and the other lenders party thereto to modify certain financial covenants. Specifically, the Amendment (i) reduced the minimum interest coverage ratio from 3.00 to 1.0 to 2.50 to 1.0 for each fiscal quarter ending in fiscal 2023, to 2.75 to 1.0 for the fiscal quarters ending onMarch 31, 2024 andJune 30, 2024 , with the minimum interest coverage ratio reverting back to 3.00 to 1.0 for each fiscal quarter ending on and afterSeptember 30, 2024 , (ii) increased the maximum net leverage ratio to 4.50 to 1.0 for each fiscal quarter ending onSeptember 30, 2022 throughJune 30, 2023 , which ratio will decrease thereafter over time until it reaches 3.50 to 1.0 for each fiscal quarter ending on and afterJune 30, 2024 , and (iii) prohibits certain restricted payments by the Company otherwise permitted by Section 6.06(g) of the Amended Credit Agreement throughSeptember 30, 2024 . The Amendment also replaces the Adjusted LIBO Rate (e.g., LIBO Rate multiplied by the then applicable statutory reserve rate per annum), plus a range of applicable margins, as an interest election under the Amended Credit Agreement, with Term SOFR plus 0.10% ("Adjusted Term SOFR") per annum and Daily Simple SOFR plus 0.10% per annum, as applicable, in each case plus an applicable margin adjustment ranging from 2.25% to 3.75% based on the Company's most recent net leverage ratio calculation as of the applicable interest determination date. In addition, the Amendment replaces the Adjusted LIBO Rate plus 1.00% per annum as one of the interest rate floors applied in determining the alternate base interest rate for ABR Loans (as defined in the Amended Credit Agreement), with Adjusted Term SOFR plus 1.00% per annum. Lastly, the Amendment provides that the applicable margin applicable to ABR Loans increase to 2.75% to the extent the Company's net leverage ratio equals or exceeds 4.00 to 1.0 on the applicable date. In connection with the preparation and execution of the Amendment, the Company paid customary arranger and lender consent fees, and reasonable and documented expenses of the Administrative Agent. The foregoing description of the Amendment and the Amended Credit Agreement is a summary and is qualified in its entirety by reference to the full text of the Amendment and the Amended Credit Agreement, which is attached to this Quarterly Report as Exhibit 10.1 and incorporated herein by reference. The Company recorded deferred financing costs of$69 and$299 , respectively for the three and nine months endedSeptember 30, 2022 in conjunction with the New Credit Agreement and the applicable principal balances are presented within Long-Term debt, net on the Company's Consolidated Balance Sheets. The Company amortizes the deferred financing costs using the effective interest method. The revolving credit facility under the Amended Credit Agreement is available for working capital and other general corporate purposes and includes a letter of credit sub-facility of up to$5.0 million . The Amended Credit Agreement also includes an uncommitted incremental facility, which, subject to certain conditions, provides for additional term loan facilities, and/or an increase in commitments under the revolving credit facility, in an aggregate amount of up to$100 million . Tax Receivable Agreement In connection with the Business Combination, we entered into the TRA with certain of our pre-Business Combination owners that provides for the payment by Fathom to such owners of 85% of the benefits that Fathom is deemed to realize as a result of the Company's share of existing tax basis acquired in the Business Combination and other tax benefits related to entering into the TRA. Actual tax benefits realized by Fathom may differ from tax benefits calculated under the TRA as a result of the use of certain assumptions in the TRA, including the use of an assumed weighted-average state and local income tax rate to calculate tax benefits. While the amount of existing tax basis, the anticipated tax basis adjustments and the actual amount and utilization of tax attributes, as well as the amount and timing of any payments under the TRA, will vary depending upon a number of factors, we expect that the payments that Fathom may make under the TRA will be approximately$98,000 based on the Company's closing share price of$2.03 atSeptember 30, 2022 . As ofSeptember 30, 2022 , we do not expect to make any material payments within the next two years and anticipate payments to become more material beginning in 2024. Cash Flow Analysis Nine Months Ended September 30, 2022 September 30, 2021 (dollars in thousands) (Successor) (Predecessor) Net cash provided by (used in) : Operating Activities $ 6,496 $ 1,737 Investing Activities (10,953 ) (74,076 ) Financing Activities (7,896 ) 74,682 Net Change in Cash and Cash Equivalents $ (12,353 ) $ 2,343 36
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Operating Activities
Net cash provided from operating activities was
Investing Activities
Cash used in investing activities of$10,953 for the nine months endedSeptember 30, 2022 represents capital expenditures. Cash used in investing activities of$74,076 for the nine months endedSeptember 30, 2021 represents the cash used in the acquisitions ofSummit Tooling Inc. , andSummit Plastics, LLC ,Precision Process Corp. ,Centex Machine and Welding, Inc. andLaser Manufacturing, Inc. , andSureshot Precision, LLC of$67,428 in the aggregate and capital expenditures of$6,648 . Financing Activities Cash used in financing activities of$7,896 for the nine months endedSeptember 30, 2022 was due to payments made on the term loan of$2,344 , contingent consideration of$2,750 , and tax payments for shares held in lieu of taxes of$2,566 . Cash provided by financing activities of$74,682 for the nine months endedSeptember 30, 2021 was primarily due to debt proceeds of$183,500 for the acquisitions, partially offset by payments on debt of$104,091 .
Critical Accounting Policies and Use of Estimates
Preparation of our financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. We believe that the most complex and sensitive judgments, because of their potential significance to the unaudited consolidated financial statements, result primarily from the need to make estimates about the effects of matters that are inherently uncertain and are described subsequently. Actual results could differ from management's estimates.
Business Combinations
We account for business acquisitions in accordance with Accounting Standards
Codification ("ASC") 805, Business Combinations ("ASC 805"). We measure the cost
of an acquisition as the aggregate of the acquisition date fair values of the
assets transferred and liabilities assumed and equity instruments issued.
Transaction costs directly attributable to the acquisition are expensed as
incurred. We record goodwill for the excess of (i) the total costs of
acquisition, fair value of any non-controlling interests and acquisition date
fair value of any previously held equity interest in the acquired business over
(ii) the fair value of the identifiable net assets of the acquired business.
The acquisition method of accounting requires us to exercise judgment and make
estimates and assumptions based on available information regarding the fair
values of the elements of a business combination as of the date of acquisition,
including the fair values of identifiable intangible assets, deferred tax asset
valuation allowances, liabilities related to uncertain tax positions and
contingencies. We must also refine these estimates over a one-year measurement
period, to reflect any new information obtained about facts and circumstances
that existed as of the acquisition date that, if known, would have affected the
measurement of the amounts recognized as of that date. If we are required to
retroactively adjust provisional amounts that we have recorded for the fair
value of assets and liabilities in connection with an acquisition, these
adjustments could materially impact our results of operations and financial
position. Estimates and assumptions that we must make in estimating the fair
value of future acquired technology, user lists and other identifiable
intangible assets include future cash flows that we expect to generate from the
acquired assets. If the subsequent actual results and updated projections of the
underlying business activity change compared with the assumptions and
projections used to develop these values, we could record impairment charges. In
addition, we have estimated the economic lives of certain acquired assets and
these lives are used to calculate depreciation and amortization expense. If our
estimates of the economic lives change, depreciation or amortization expenses
could be accelerated or slowed, which could materially impact our results of
operations.
We recognize goodwill in accordance with ASC 350, Intangibles-Goodwill and Other
("ASC 350"). Goodwill is the excess of cost of an acquired entity over the fair
value amounts assigned to assets acquired and liabilities assumed in a business
combination. Goodwill is not amortized.
Goodwill is tested for impairment annually in the fourth quarter of each year
and is tested for impairment between annual tests whenever events or changes in
circumstances indicate that the carrying value of goodwill may not be
recoverable. In addition, an impairment evaluation of our amortizable intangible
assets may also be performed if events or circumstances indicate potential
impairment. Among the factors that could trigger an impairment review are
current operating results that do not align with our annual plan or historical
performance; changes in our strategic plans or the use of our assets;
restructuring charges or other changes in our business segments; competitive
pressures and changes in the general economy or in the markets in which we
operate; and a significant decline in our stock price and our market
capitalization relative to our net book value. An impairment charge for goodwill
is recognized only when the estimated fair value of a reporting unit, including
goodwill, is less than its carrying amount. As of September 30, 2022 , a
quantitative interim goodwill impairment assessment was performed due to further
sustained declines in the Company's stock price in the three months ended
September 30, 2022 . The Company determined that the estimated fair value of the
reporting unit was less than its carrying amount. The Company recorded a
goodwill impairment charge of $1,066,564 in the unaudited consolidated
statements of comprehensive loss for the three and nine months ended September
30, 2022 .
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Evaluating the recoverability of goodwill requires judgments and assumptions
regarding future trends and events. As a result, both the precision and
reliability of our estimates are subject to uncertainty. Among the factors that
we consider in our qualitative assessment are general economic conditions and
the competitive environment; actual and projected reporting unit financial
performance; forward-looking business measurements; and external market
assessments. To determine the fair values of our reporting unit for a
quantitative analysis, we typically utilize detailed financial projections,
which include significant variables, such as projected rates of revenue growth,
profitability and cash flows, as well as assumptions regarding discount rates,
the Company's weighted average cost of capital and other data.
We recognize amortizable intangibles assets in accordance with ASC 350. Acquired
intangible assets subject to amortization are stated at cost and are amortized
using the straight-line method over the estimated useful lives of the assets.
Intangible assets that are subject to amortization are reviewed for potential
impairment whenever events or circumstances indicate that carrying amounts may
not be recoverable. Assets not subject to amortization are tested for impairment
at least annually. As of September 30, 2022 and September 30, 2021 , no
impairment charges for amortizable intangible assets have been recognized.
The estimates of fair value are based on the best information available as of
the date of the assessment, which primarily incorporates management assumptions
about expected future cash flows. Although our amortizable intangible assets are
not currently impaired, there can be no assurance that future impairments will
not occur. See Note 3-Business Combination with Fathom OpCo, and Note 8-Goodwill
and Intangible Assets, net in the accompanying notes to the unaudited
consolidated financial statements for more information.
Revenue Recognition from Contracts with Customers
Most of the Company's revenue has one performance obligation and is recognized on a point-in-time basis upon shipment. The majority of the Company's injection molding contracts have multiple performance obligations including one obligation to produce the mold and sample part and a second obligation to produce production parts. For injection molding contracts with multiple performance obligations, the Company allocates revenue to each performance obligation based on its relative standalone selling price and recognizes revenue for each performance obligation on a point-in-time basis upon shipment. We generally determine standalone selling price based on the price charged to customers. The Company's payments terms are consistent with industry standards and never exceed 12 months. Contingent Liabilities Our contingent liabilities, which are included within the "Other non-current liabilities" caption on our consolidated balance sheets, are uncertain by nature and their estimation requires significant management judgment as to the probability and estimation of the amount of liability. These contingencies include, but may not be limited to, the warrants, TRA liabilities, earnout shares, litigation, and management's evaluation of complex laws and regulations, including those relating to indirect taxes, and the extent to which they may apply to our business and industry. See Note 18 -Fair Value Measurement and Note 20 - Commitments and Contingencies in the accompanying notes to our unaudited consolidated financial statements for more information. We regularly review our contingencies to determine whether the likelihood of a liability is probable and to assess whether a reasonable estimate of the liability can be made. Determination of whether a liability estimate can be made is a complex undertaking that considers the judgement of management, third-party research, the prospect of negotiation and interpretations by regulators and courts, among other information. When liabilities can be reasonably estimated, an estimated contingent liability is recorded. We continually reevaluate our indirect tax and other positions for appropriateness.
Earnout Shares Liabilities and Warrant Liability
The fair values of the Sponsor earnout shares liability, Fathom earnout shares liability, and Warrants liability were determined usingMonte Carlo simulations that have various significant unobservable inputs. The assumptions used could have a material impact on the valuation of these liabilities, and include our best estimate of expected volatility, expected holding periods and appropriate discounts for lack of marketability. Changes in the estimated fair values of these liabilities may have material impacts on our results of operations in any given period, as any increases in these liabilities have a corresponding negative impact on ourU.S. GAAP results of operations in the period in which the changes occur. See Note 3 - Business Combination with Fathom OpCo and Note 10 - Warrant Liability in the accompanying notes to our unaudited consolidated financial statements for more information.
Impact of Changes in Accounting on Recent and Future Trends
InFebruary 2016 , theFinancial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-02, Leases (Topic 842) Section A - Leases: Amendments to the FASB Accounting Standards Codification which the company adopted in the first quarter of 2022. See Note 2 - Basis of Presentation and Note 16 - Leases in the accompanying notes to our unaudited consolidated financial statements for more information. 38 --------------------------------------------------------------------------------
Emerging Growth Company Accounting Election
Section 102(b)(1) of the Jumpstart Our Business Startups Act of 2012 ("JOBS
Act") exempts emerging growth companies from being required to comply with new
or revised financial accounting standards until private companies are required
to comply with the new or revised financial accounting standards. The JOBS Act
provides that a company can choose not to take advantage of the extended
transition period and comply with the requirements that apply to non-emerging
growth companies, and any such election to not take advantage of the extended
transition period is irrevocable. Altimar II was an emerging growth company as
defined in Section 2(a) of the Securities Act of 1933, as amended, and has
elected to take advantage of the benefits of this extended transition period.
Fathom is expected to remain an emerging growth company at least through the end
of the 2022 and is expected to continue to take advantage of the benefits of the
extended transition period. This may make it difficult or impossible to compare
Fathom financial results with the financial results of another public company
that is either not an emerging growth company or is an emerging growth company
that has chosen not to take advantage of the extended transition period
exemptions for emerging growth companies because of the potential differences in
accounting standards used.
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