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Fathom Digital Manufacturing Corp - Quarter Report: 2023 June (Form 10-Q)

10-Q

 

ROC

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended June 30, 2023

OR

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

For the transition period from to

Commission File Number: 001-39994

 

Fathom Digital Manufacturing Corporation

(Exact name of registrant as specified in its charter)

 

 

Delaware

40-0023833

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer
Identification No.)

1050 Walnut Ridge Drive

Hartland, WI

53029

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (262) 367-8254

 

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

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Class A common stock, par value $0.0001 per share

 

FATH

 

New York Stock Exchange

Warrants to purchase Class A common stock

 

FATH.WS

 

New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

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

As of August 11, 2023, there were 70,085,417 shares of the registrant's Class A common stock outstanding and 65,547,589 shares of the registrant's vote-only, non-economic Class B common stock outstanding.

 

 

 

 


 

Table of Contents

 

 

 

Page

 

 

 

 

Cautionary Note regarding forward-looking statements

3

 

 

 

PART I

FINANCIAL INFORMATION

4

 

 

 

Item 1.

Financial Statements

4

 

Condensed Consolidated Balance Sheets

4

 

Condensed Consolidated Statements of Comprehensive (Loss) Income

5

 

Condensed Consolidated Statement of Shareholders' Equity and Redeemable Non-Controlling Interest

7

 

Condensed Consolidated Statements of Cash Flows

8

 

Notes to Unaudited Condensed Consolidated Financial Statements

9

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

23

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

31

Item 4.

Controls and Procedures

32

 

 

 

PART II

OTHER INFORMATION

33

 

 

 

Item 1.

Legal Proceedings

33

Item 1A.

Risk Factors

33

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

33

Item 3.

Defaults Upon Senior Securities

33

Item 4.

Mine Safety Disclosures

33

Item 5.

Other Information

33

Item 6.

Exhibits

34

 

Signatures

35

 

 


 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements made in this Quarterly Report on Form 10-Q are “forward looking statements.” Statements regarding our expectations regarding our business are “forward looking statements.” In addition, words such as “estimates,” “projected,” “expects,” “estimated,” “anticipates,” “forecasts,” “plans,” “intends,” “believes,” “seeks,” “may,” “will,” “would,” “future,” “propose,” “target,” “goal,” “objective,” “outlook” and variations of these words or similar expressions (or the negative versions of such words or expressions) are intended to identify forward-looking statements. The forward-looking statements contained in this Quarterly Report on Form 10-Q and in our other periodic filings are not guarantees of future performance, conditions or results and are based on our current expectations and beliefs concerning future developments and their potential effects on us. There can be no assurance that future developments affecting us will be those that we have anticipated. These forward-looking statements involve a number of risks, uncertainties (some of which are beyond our control) or other assumptions that may cause actual results or performance to be materially different from those expressed or implied by these forward-looking statements. These risks and uncertainties include, but are not limited to, those risks described under Part II, Item 1A "Risk Factors" in this Quarterly Report on Form 10-Q and "Risk Factor Summary" Item 1A. "Risk Factors” and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, as amended by Amendment No.1 thereto (the "2022 Form 10-K"). Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, actual results may vary in material respects from those projected in these forward-looking statements. We may face additional risks and uncertainties that are not presently known to us, or that we deem to be immaterial, which may also impair our business, financial condition or prospects. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws.

3


 

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

Fathom Digital Manufacturing Corporation

Condensed Consolidated Balance Sheets

(In thousands, except share amounts)

 

Period Ended

 

 

June 30, 2023
(Unaudited)

 

 

December 31, 2022

 

Assets

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

Cash

 

$

10,733

 

 

$

10,713

 

Accounts receivable, net (1)

 

 

24,496

 

 

 

28,641

 

Inventory

 

 

17,177

 

 

 

15,718

 

Prepaid expenses and other current assets

 

 

2,618

 

 

 

3,588

 

Total current assets

 

 

55,024

 

 

 

58,660

 

Property and equipment, net

 

 

48,384

 

 

 

47,703

 

Right-of-use lease assets, net

 

 

12,034

 

 

 

12,565

 

Intangible assets, net

 

 

242,342

 

 

 

251,412

 

Other non-current assets

 

 

144

 

 

 

175

 

Total assets

 

$

357,928

 

 

$

370,515

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

Accounts payable(2)

 

$

10,311

 

 

$

7,982

 

Accrued expenses

 

 

8,155

 

 

 

8,176

 

Current lease liability

 

 

2,233

 

 

 

2,374

 

Other current liabilities

 

 

3,478

 

 

 

4,828

 

Current portion of debt, net

 

 

49,167

 

 

 

42,744

 

Total current liabilities

 

 

73,344

 

 

 

66,104

 

Long-term debt, net

 

 

109,551

 

 

 

114,327

 

Fathom earnout shares liability

 

 

808

 

 

 

5,960

 

Sponsor earnout shares liability

 

 

137

 

 

 

930

 

Warrant liability

 

 

600

 

 

 

2,780

 

Payable to related parties pursuant to the tax receivable agreement (includes $4,050 and $4,000 at fair value, respectively)

 

 

28,263

 

 

 

25,360

 

Noncurrent lease liability

 

 

10,285

 

 

 

11,083

 

Total liabilities

 

 

222,988

 

 

 

226,544

 

Commitments and Contingencies:

 

 

 

 

 

 

Contingently Redeemable Preferred Equity:

 

 

 

 

 

 

Redeemable non-controlling interest in Fathom OpCo

 

 

80,059

 

 

 

92,207

 

Shareholders' Equity:

 

 

 

 

 

 

Class A common stock, $0.0001 par value; 300,000,000 shares authorized; issued and outstanding 70,085,417 and 65,808,764 shares as of June 30, 2023 and December 31, 2022, respectively

 

 

7

 

 

 

7

 

Class B common stock, $0.0001 par value; 180,000,000 shares authorized; issued and outstanding 66,547,589 and 70,153,051 shares as of June 30, 2023 and December 31, 2022, respectively

 

 

7

 

 

 

7

 

Class C common stock, $0.0001 par value; 10,000,000 shares authorized; 0 shares issued and outstanding as of June 30, 2023 and December 31, 2022, respectively

 

 

-

 

 

 

-

 

Preferred Stock, $0.0001 par value; 10,000,000 shares authorized; 0 shares issued and outstanding as of June 30, 2023 and December 31, 2022, respectively

 

 

-

 

 

 

-

 

Additional paid-in-capital

 

 

592,068

 

 

 

587,941

 

Accumulated other comprehensive loss

 

 

(107

)

 

 

(107

)

Accumulated deficit

 

 

(537,094

)

 

 

(536,084

)

Shareholders’ equity attributable to Fathom Digital Manufacturing Corporation

 

 

54,881

 

 

 

51,764

 

Total Liabilities, Shareholders’ Equity, and Redeemable Non-Controlling Interest

 

$

357,928

 

 

$

370,515

 

(1) Inclusive of allowance for expected credit losses of $570 as of June 30, 2023 and allowance for doubtful accounts of $876 as of December 31, 2022, respectively

(2) Inclusive of accounts payable to related parties of $1,021 and $1,007 as of June 30, 2023 and December 31, 2022, respectively

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

4


 

Fathom Digital Manufacturing Corporation

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

(In thousands, except shares, and per share amounts)

 

 

Three Months Ended

 

 

Six Months Ended

 

 

June 30, 2023

 

 

 

June 30, 2022

 

 

June 30, 2023

 

 

 

June 30, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

34,474

 

 

 

$

41,985

 

 

$

69,481

 

 

 

$

82,526

 

Cost of revenue (1) (2) (3)

 

 

23,940

 

 

 

 

26,437

 

 

 

47,002

 

 

 

 

54,981

 

Gross profit

 

 

10,534

 

 

 

 

15,548

 

 

 

22,479

 

 

 

 

27,545

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general, and administrative

 

 

9,445

 

 

 

 

11,617

 

 

 

20,217

 

 

 

 

26,381

 

Depreciation and amortization

 

 

4,643

 

 

 

 

4,452

 

 

 

9,218

 

 

 

 

8,968

 

Restructuring

 

 

1,406

 

 

 

 

-

 

 

 

2,056

 

 

 

 

-

 

Total operating expenses

 

 

15,494

 

 

 

 

16,069

 

 

 

31,491

 

 

 

 

35,349

 

Operating loss

 

 

(4,960

)

 

 

 

(521

)

 

 

(9,012

)

 

 

 

(7,804

)

Interest expense and other (income) expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

3,959

 

 

 

 

1,858

 

 

 

7,429

 

 

 

 

3,332

 

Other expense

 

 

65

 

 

 

 

129

 

 

 

138

 

 

 

 

195

 

Other income

 

 

(1,784

)

 

 

 

(36,108

)

 

 

(8,103

)

 

 

 

(63,223

)

Total interest expense and other (income) expense, net

 

 

2,240

 

 

 

 

(34,121

)

 

 

(536

)

 

 

 

(59,696

)

Net (loss) income before income tax

 

$

(7,200

)

 

 

$

33,601

 

 

$

(8,476

)

 

 

$

51,892

 

Income tax expense (benefit)

 

 

64

 

 

 

 

(683

)

 

 

119

 

 

 

 

(1,386

)

Net (loss) income

 

$

(7,264

)

 

 

$

34,284

 

 

$

(8,595

)

 

 

$

53,278

 

Net loss attributable to Fathom OpCo non-controlling interest (Note 14)

 

 

(4,139

)

 

 

 

(442

)

 

 

(7,585

)

 

 

 

(5,702

)

Net (loss) income attributable to controlling interest

 

 

(3,125

)

 

 

 

34,726

 

 

 

(1,010

)

 

 

 

58,980

 

Comprehensive (loss) income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from foreign currency translation adjustments

 

 

-

 

 

 

 

-

 

 

 

-

 

 

 

 

(107

)

Comprehensive (loss) income, net of tax

 

$

(3,125

)

 

 

$

34,726

 

 

$

(1,010

)

 

 

$

58,873

 

Earnings per Share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income per share attributable to shares of Class A common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.04

)

 

 

$

0.66

 

 

$

(0.01

)

 

 

$

1.14

 

Diluted

 

$

(0.02

)

 

 

$

0.26

 

 

$

(0.01

)

 

 

$

0.44

 

Weighted average Class A common shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

69,703,407

 

 

 

 

52,259,885

 

 

 

68,382,896

 

 

 

 

51,530,961

 

Diluted

 

 

136,302,053

 

 

 

 

135,524,773

 

 

 

136,213,635

 

 

 

 

135,305,168

 

 

(1)
Inclusive of $1,822 and $1,541 of depreciation and amortization for the three months ended June 30, 2023 and June 30, 2022, respectively; and of $3,325 and $3,236 for the six months ended June 30, 2023 and June 30, 2022, respectively;
(2)
Inclusive of $2,346 and $1,852 of cost of revenue related to inventory purchases from a related party for the three months ended June 30, 2023 and June 30, 2022, respectively; and $4,078 and $4,137 for the six months ended June 30, 2023 and June 30, 2022, respectively; and
(3)
Inclusive of $0 and $0 of inventory step-up amortization for the three months ended June 30, 2023 and June 30, 2022, respectively, and $0 and $3,241 for the six months ended June 30, 2023 and June 30, 2022, respectively

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

 

5


 

Fathom Digital Manufacturing Corporation

Condensed Consolidated Statement of Shareholders' Equity and Redeemable Non-Controlling Interest

(Unaudited)

(In thousands, except share amounts)

 

 

 

Class A Common Shares

 

 

Class B Common Shares

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of Shares

 

 

Par Value ($0.0001 per share)

 

 

Number of Shares

 

 

Par Value ($0.0001 per share)

 

 

Additional Paid-in Capital

 

 

Accumulated Deficit

 

 

Accumulated Other Comprehensive Loss

 

 

Total Equity Attributable to Fathom

 

 

 

Redeemable Non-controlling Interest

 

Balance at January 1, 2023

 

 

65,808,764

 

 

$

7

 

 

 

70,153,051

 

 

$

7

 

 

$

587,941

 

 

$

(536,084

)

 

$

(107

)

 

$

51,764

 

 

 

$

92,207

 

Equity based compensation

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,093

 

 

 

-

 

 

 

-

 

 

 

1,093

 

 

 

 

-

 

Net income (loss)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

2,115

 

 

 

-

 

 

 

2,115

 

 

 

 

(3,447

)

Vesting of restricted shares, net of tax withholding

 

 

277,480

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

-

 

Exchange of Class B common stock and Fathom Opco units

 

 

3,460,270

 

 

 

-

 

 

 

(3,460,270

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

-

 

Non-controlling interest remeasurement

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

4,477

 

 

 

-

 

 

 

-

 

 

 

4,477

 

 

 

 

(4,477

)

Tax receivable agreement liability on capital transactions

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(2,500

)

 

 

-

 

 

 

-

 

 

 

(2,500

)

 

 

 

-

 

Tax impact of exchange of Class B common stock and Fathom Opco units

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

-

 

Balance at March 31, 2023

 

 

69,546,514

 

 

$

7

 

 

 

66,692,781

 

 

$

7

 

 

$

591,011

 

 

$

(533,969

)

 

$

(107

)

 

$

56,949

 

 

 

$

84,283

 

Equity based compensation

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,239

 

 

 

-

 

 

 

-

 

 

 

1,239

 

 

 

 

-

 

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(3,125

)

 

 

-

 

 

 

(3,125

)

 

 

 

(4,139

)

Vesting of restricted shares, net of tax withholding

 

 

143,829

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

-

 

Issuance of Class A shares under Employee Stock Purchase Plan

 

 

249,648

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

86

 

 

 

-

 

 

 

-

 

 

 

86

 

 

 

 

-

 

Exchange of Class B common stock and Fathom Opco units

 

 

145,192

 

 

 

-

 

 

 

(145,192

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

-

 

Non-controlling interest remeasurement

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

85

 

 

 

-

 

 

 

-

 

 

 

85

 

 

 

 

(85

)

Tax receivable agreement liability on capital transactions

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(353

)

 

 

-

 

 

 

-

 

 

 

(353

)

 

 

 

-

 

Tax impact of exchange of Class B common stock and Fathom Opco units

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

-

 

Balance at June 30, 2023

 

 

70,085,183

 

 

$

7

 

 

 

66,547,589

 

 

$

7

 

 

$

592,068

 

 

$

(537,094

)

 

$

(107

)

 

$

54,881

 

 

 

$

80,059

 

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

6


 

Fathom Digital Manufacturing Corporation

Condensed Consolidated Statement of Shareholders' Equity and Redeemable Non-Controlling Interest

(Unaudited)

(In thousands, except share amounts)

 

 

 

Class A Common Shares

 

 

Class B Common Shares

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of Shares

 

 

Par Value ($0.0001 per share)

 

 

Number of Shares

 

 

Par Value ($0.0001 per share)

 

 

Additional Paid-in Capital

 

 

Accumulated Deficit

 

 

Accumulated Other Comprehensive Loss

 

 

Total Equity Attributable to Fathom

 

 

 

Redeemable Non-controlling Interest

 

Balance at January 1, 2022

 

 

50,785,656

 

 

$

5

 

 

 

84,294,971

 

 

$

8

 

 

$

466,345

 

 

$

(47,581

)

 

$

 

 

$

418,777

 

 

 

$

841,982

 

Equity based compensation

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

2,130

 

 

 

-

 

 

 

-

 

 

 

2,130

 

 

 

 

-

 

Cumulative effect from adoption of ASC 842

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

82

 

 

 

-

 

 

 

82

 

 

 

 

-

 

Net income (loss)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

24,258

 

 

 

-

 

 

 

24,258

 

 

 

 

(5,259

)

Other Comprehensive loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(107

)

 

 

(107

)

 

 

 

-

 

Balance at March 31, 2022

 

 

50,785,656

 

 

$

5

 

 

 

84,294,971

 

 

$

8

 

 

$

468,475

 

 

$

(23,241

)

 

$

(107

)

 

$

445,140

 

 

 

$

836,723

 

Equity based compensation

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,795

 

 

 

-

 

 

 

-

 

 

 

1,795

 

 

 

 

-

 

Net income (loss)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

34,726

 

 

 

-

 

 

 

34,726

 

 

 

 

(442

)

Vesting of restricted shares, net of tax withholding

 

 

530,532

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(2,258

)

 

 

-

 

 

 

-

 

 

 

(2,258

)

 

 

 

-

 

Exchange of Class B common stock and Fathom Opco units

 

 

10,280,331

 

 

 

1

 

 

 

(10,280,331

)

 

 

(1

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

-

 

Non-controlling interest remeasurement

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

86,666

 

 

 

-

 

 

 

-

 

 

 

86,666

 

 

 

 

(86,666

)

Tax receivable agreement liability on capital transactions

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(15,870

)

 

 

-

 

 

 

-

 

 

 

(15,870

)

 

 

 

-

 

Tax impact of exchange of Class B common stock and Fathom Opco units

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

7,415

 

 

 

-

 

 

 

-

 

 

 

7,415

 

 

 

 

-

 

Balance at June 30, 2022

 

 

61,596,519

 

 

$

6

 

 

 

74,014,640

 

 

$

7

 

 

$

546,223

 

 

$

11,485

 

 

$

(107

)

 

$

557,614

 

 

 

$

749,615

 

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

 

7


 

Fathom Digital Manufacturing Corporation

Condensed Consolidated Statements of Cash Flows (Unaudited)

(In thousands)

 

 

Six Months Ended

 

 

June 30, 2023

 

 

June 30, 2022

 

Cash Flows from Operating Activities

 

 

 

 

 

 

Net (loss) income attributable to controlling interest

 

$

(1,010

)

 

$

58,980

 

Adjustments to reconcile net income to net cash from operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

12,543

 

 

 

12,204

 

Amortization of inventory step-up

 

 

-

 

 

 

3,241

 

(Gain) Loss on disposal of property and equipment

 

 

-

 

 

 

(164

)

Share-based compensation

 

 

2,332

 

 

 

3,925

 

Noncash lease expense, net

 

 

336

 

 

 

266

 

Deferred taxes

 

 

-

 

 

 

(2,199

)

Bad debt expense

 

 

68

 

 

 

-

 

Non-controlling interest share of Fathom OpCo net loss

 

 

(7,585

)

 

 

(5,701

)

Change in fair value of Fathom earnout shares liability

 

 

(5,152

)

 

 

(36,610

)

Change in fair value of Sponsor earnout shares liability

 

 

(793

)

 

 

(5,290

)

Change in fair value of warrant liability

 

 

(2,180

)

 

 

(20,600

)

Change in fair value of tax receivable agreement

 

 

50

 

 

 

(200

)

Change in fair value of contingent consideration

 

 

-

 

 

 

(148

)

Amortization of debt financing costs

 

 

296

 

 

 

230

 

Changes in operating assets and liabilities that provided cash:

 

 

 

 

 

 

Accounts receivable

 

 

4,077

 

 

 

(1,430

)

Inventory

 

 

(1,459

)

 

 

(4,176

)

Prepaid expenses and other assets

 

 

1,001

 

 

 

985

 

Accounts payable

 

 

1,211

 

 

 

(324

)

Accrued liabilities and other

 

 

(1,612

)

 

 

1,277

 

Net cash provided by operating activities

 

 

2,123

 

 

 

4,266

 

 

 

 

 

 

 

 

Cash Flows from Investing Activities

 

 

 

 

 

 

Purchase of property and equipment

 

 

(3,036

)

 

 

(6,671

)

Net cash used in investing activities

 

 

(3,036

)

 

 

(6,671

)

 

 

 

 

 

 

 

Cash Flows from Financing Activities

 

 

 

 

 

 

Proceeds from revolving credit facility, net

 

 

5,000

 

 

 

-

 

Payments on debt

 

 

(3,126

)

 

 

(1,562

)

Payments on finance leases

 

 

(162

)

 

 

(157

)

Payment of debt issuance costs

 

 

(524

)

 

 

-

 

Tax payment for shares withheld in lieu of taxes

 

 

-

 

 

 

(2,258

)

Proceeds from issuance of common stock under ESPP

 

 

86

 

 

 

-

 

Cash paid for contingent consideration

 

 

(341

)

 

 

(2,750

)

Net cash provided by (used in) financing activities

 

 

933

 

 

 

(6,727

)

 

 

 

 

 

 

 

Effect of exchange rate changes on cash, and cash equivalents

 

 

-

 

 

 

(107

)

 

 

 

 

 

 

 

Net increase (decrease) in cash

 

 

20

 

 

 

(9,239

)

 

 

 

 

 

 

 

Cash, beginning of period

 

 

10,713

 

 

 

20,357

 

Cash, end of period

 

$

10,733

 

 

$

11,118

 

 

 

 

 

 

 

 

Supplemental Cash Flows Information:

 

 

 

 

 

 

Cash paid for interest

 

$

6,601

 

 

$

1,686

 

Cash paid for taxes

 

 

577

 

 

 

-

 

Cash paid to related parties

 

 

4,065

 

 

 

4,826

 

 

 

 

 

 

 

 

Significant Non-Cash Transactions:

 

 

 

 

 

 

Property and equipment noncash transaction

 

 

1,118

 

 

 

1,485

 

Right-of-use assets acquired through lease liabilities

 

$

788

 

 

$

11,986

 

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

 

8


Fathom Digital Manufacturing Corporation
Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except share amounts)

Note 1. Nature of Business

Fathom Digital Manufacturing Corporation (“Fathom”, "Successor", or the “Company”) was incorporated as a Delaware corporation on December 23, 2021. Fathom was previously named Altimar Acquisition Corp. II ("Altimar II") before deregistering as an exempted company in the Cayman Islands. Fathom, through its consolidated subsidiary, Fathom Holdco, LLC (“Fathom OpCo”), is a leading on-demand digital manufacturing platform in North America, providing comprehensive product development and manufacturing services to many of the largest and most innovative companies in the world.

 

Fathom OpCo was formed on April 16, 2021, as a limited liability company in accordance with the provisions of the Delaware Limited Liability Company Act, for the purpose of holding a 100 percent equity interest in MCT Group Holdings, LLC and its subsidiaries (“MCT Holdings”) and holding a 100 percent equity interest in Incodema Holdings, LLC and its subsidiaries (“Incodema Holdings”). Capitalized terms used but not otherwise defined herein have the meanings given to such terms in the Company's Annual Report on Form 10-K for the year ended December 31, 2022, as amended by Amendment No.1. thereto (the "2022 Form 10-K").

Note 2. Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements include the accounts of Fathom Digital Manufacturing Corporation and all majority-owned subsidiaries and entities in which a controlling interest is maintained. All significant intercompany transactions and balances have been eliminated in consolidation.

The unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and the rules and regulations of the Securities and Exchange Commission (“SEC”) applicable to interim reports. Accordingly, they do not include all the information and notes required by GAAP for complete financial statements and should be read in conjunction with the audited financial statements included in our 2022 Form 10-K. The Company's annual reporting period is the calendar year.

In the Company’s opinion, the unaudited condensed consolidated financial statements contain all adjustments, consisting of adjustments of a normal, recurring nature, necessary to present fairly the financial position, results of operations and cash flows for the periods presented. The results of operations for the three and six months ended June 30, 2023, are not necessarily indicative of the results to be expected for the full year. The preparation of financial statements in accordance with GAAP requires management to make estimates, judgments, and assumptions that affect the amounts reported in the financial statements. Actual results may differ from those estimates, judgments, and assumptions. Amounts in the prior years' unaudited condensed consolidated financial statements are reclassified whenever necessary to conform to the current year's presentation.

The condensed consolidated financial statements included in this Form 10-Q have been prepared using the going concern basis of accounting, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The reasonable probability of the Company being in non-compliance with the minimum EBITDA debt covenant requirements as of September 30, 2023, will require the Company to seek an amendment, waiver, or other changes to the Credit Agreement. At this time, we expect to be able to successfully complete one of these actions; however there is no assurance that we will be successful, and our inability to obtain on acceptable terms such relief would likely have a material adverse effect on the Company. This uncertainty raises substantial doubt about the Company’s ability to continue as a going concern within one year after the issuance date of the accompanying unaudited condensed consolidated financial statements.

 

Recently Adopted Accounting Standards

The FASB issued ASU 2016-13, Financial Instruments—Credit Losses: Measurement of Credit Losses on Financial Instruments ("ASC 326"), which amends the impairment model by requiring entities to use a forward-looking approach based on expected losses to estimate credit losses on certain types of financial instruments including trade receivables and available for sale debt securities. ASC 326 is effective for fiscal years beginning after December 15, 2022, with early adoption permitted. The new standard was effective for the Company beginning January 1, 2023, and was applied using a modified retrospective transition method. The FASB subsequently issued other related ASUs that amend ASU No. 2016-13 to provide clarification and additional guidance. The Company concluded that the adoption of ASC 326 did not have a material impact on the condensed consolidated financial statements.

Note 3. Immaterial Error Correction of Previously Issued Financial Statements

The Company has made certain adjustments to previously reported amounts for correcting immaterial errors in our unaudited condensed consolidated financial statements as of and for the three and six months ended June 30, 2022. These adjustments corrected our income tax benefit (expense) and associated deferred tax liability or deferred tax asset due to completion of a comprehensive review of our opening tax basis acquired in the Business Combination.

 

We evaluated these matters in accordance with SAB No. 99, Materiality and SAB No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements and determined that their related impact was not material to the financial statements for any prior annual or interim periods. The Company will correct previously reported financial information for these immaterial matters in our future

9


Fathom Digital Manufacturing Corporation
Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except share amounts)

filings, as applicable. These corrections of immaterial errors do not have any impact on the previously reported financial information for the fiscal year ended December 31, 2022.

 

In addition, we made an adjustment to correct an immaterial presentation error regarding the effect of exchange rate changes on cash in our unaudited condensed consolidated statements of cash flows.

 

A summary of the adjustments to our prior period unaudited condensed consolidated statement of comprehensive income (loss) is presented below:

 

 

Three Months Ended June 30, 2022

 

 

As Reported

 

 

Adjustments

 

 

As Adjusted

 

Net income before income tax

 

$

33,601

 

 

$

-

 

 

$

33,601

 

Income tax benefit

 

 

(378

)

 

 

(305

)

 

 

(683

)

Net income

 

 

33,979

 

 

 

(305

)

 

 

34,284

 

Net loss attributable to Fathom OpCo non-controlling interest

 

 

(442

)

 

 

-

 

 

 

(442

)

Net income attributable to controlling interest

 

 

34,421

 

 

 

(305

)

 

 

34,726

 

Comprehensive income (loss):

 

 

 

 

 

 

 

 

 

Loss from foreign currency translation adjustments

 

 

-

 

 

 

-

 

 

 

-

 

Comprehensive income, net of tax

 

$

34,421

 

 

$

(305

)

 

$

34,726

 

 

 

Six Months Ended June 30, 2022

 

 

As Reported

 

 

Adjustments

 

 

As Adjusted

 

Net income before income tax

 

$

51,892

 

 

$

-

 

 

$

51,892

 

Income tax expense (benefit)

 

 

79

 

 

 

(1,465

)

 

 

(1,386

)

Net income

 

 

51,813

 

 

 

(1,465

)

 

 

53,278

 

Net loss attributable to Fathom OpCo non-controlling interest

 

 

(5,702

)

 

 

-

 

 

 

(5,702

)

Net income attributable to controlling interest

 

 

57,515

 

 

 

(1,465

)

 

 

58,980

 

Comprehensive income (loss):

 

 

 

 

 

 

 

 

 

Loss from foreign currency translation adjustments

 

 

(107

)

 

 

-

 

 

 

(107

)

Comprehensive income, net of tax

 

$

57,408

 

 

$

(1,465

)

 

$

58,873

 

 

The following table presents the effect of the adjustments to our prior period unaudited condensed consolidated statement of cash flows.

 

 

Six Months Ended June 30, 2022

 

 

 

As Reported

 

 

Adjustments

 

 

As Adjusted

 

Cash Flows from Operating Activities

 

 

 

 

 

 

 

 

 

Net income

 

$

57,515

 

 

$

1,465

 

 

$

58,980

 

Adjustments to reconcile net income to net cash from operating activities:

 

 

 

 

 

 

 

 

 

Deferred taxes

 

 

(734

)

 

 

(1,465

)

 

 

(2,199

)

Foreign currency translation adjustment

 

 

(107

)

 

 

107

 

 

 

-

 

Net cash provided by operating activities

 

 

4,159

 

 

 

107

 

 

 

4,266

 

Net cash used in investing activities

 

 

(6,671

)

 

 

-

 

 

 

(6,671

)

Net cash used in financing activities

 

 

(6,727

)

 

 

-

 

 

 

(6,727

)

 

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash, and cash equivalents

 

 

-

 

 

 

(107

)

 

 

(107

)

 

 

 

 

 

 

 

 

 

 

Net decrease in cash

 

$

(9,239

)

 

$

-

 

 

$

(9,239

)

 

The following table presents the effect of the adjustments to our prior period unaudited condensed consolidated statement of shareholders' equity and redeemable non-controlling interest.

 

 

 

June 30, 2022

 

 

 

As Reported

 

 

Adjustments

 

 

As Adjusted

 

Accumulated deficit

 

$

9,913

 

 

$

1,572

 

 

$

11,485

 

Additional paid-in-capital

 

 

554,159

 

 

 

(7,936

)

 

 

546,223

 

Other comprehensive loss

 

 

-

 

 

 

(107

)

 

 

(107

)

Total equity attributable to Fathom

 

 

564,085

 

 

 

(6,471

)

 

 

557,614

 

 

10


Fathom Digital Manufacturing Corporation
Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except share amounts)

Note 4. Revenue

The Company accounts for revenue in accordance with ASC 606. Revenue is recognized in five steps. The Company identifies the contract with the customer, identifies the performance obligations in the contract, determines the transaction price, allocates the transaction price to the performance obligations, and recognizes revenue when (or as) each performance obligation is satisfied. Collectability is a required component of a valid contract. The Company assesses collectability based on a number of factors, including the customer’s past payment history and current creditworthiness. If collectability is not considered probable at inception, the Company would recognize revenue upon cash collection.

 

The Company provides high quality, advanced rapid prototyping, precision manufacturing and finishing services in low-to-mid volume production scenarios. The Company’s suite of on-demand digital manufacturing services includes additive manufacturing, machining, and molding technologies as well as sheet metal cutting, etching, and forming solutions for customers in the aerospace and defense, electronics, medical, automotive, consumer, and industrial industries, among others. As a result, the majority of revenue recognized in a reporting period is based on completed, invoiced contracts.

 

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account in ASC 606. Substantially all of the Company’s Additive Manufacturing, CNC Machining, Urethane Casting, Precision Sheet Metal, and Chemical Etching contracts have a single performance obligation. 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. For the year ended December 31, 2022, and the three months ended March 31, 2023, the Company was not able to support over time revenue recognition for performance obligations to produce the mold and sample part and therefore recognized revenue for each performance obligation on a point-in time basis upon shipment. Effective for the three months ended June 30, 2023, the Company has enabled additional processes and controls to support recognizing revenue using the input method basis for those performance obligations where appropriate. This change in revenue recognition policy is immaterial to the overall financial statements in all periods included in this Form 10-Q.

 

Revenue by product line for the three and six months ended June 30, 2023 and June 30, 2022 are as follows:

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30, 2023

 

 

June 30, 2022

 

 

June 30, 2023

 

 

June 30, 2022

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

Additive Manufacturing

 

$

3,287

 

 

$

4,410

 

 

$

6,875

 

 

$

8,559

 

Injection Molding

 

 

6,064

 

 

 

7,093

 

 

 

10,743

 

 

 

13,908

 

CNC Machining

 

 

13,240

 

 

 

14,584

 

 

 

27,470

 

 

 

27,910

 

Precision Sheet Metal

 

 

10,164

 

 

 

14,751

 

 

 

20,547

 

 

 

29,434

 

Ancillary Product Lines

 

 

1,719

 

 

 

1,147

 

 

 

3,846

 

 

 

2,715

 

Total revenue

 

$

34,474

 

 

$

41,985

 

 

$

69,481

 

 

$

82,526

 

 

Note 5. Inventories

Inventory consists primarily of finished goods, raw materials, and work in process, which are recorded at the lower of cost or net realizable value, which approximates first-in, first-out (“FIFO”) cost. The Company periodically reviews its inventory for slow-moving, damaged, and discontinued items and provides allowances to reduce such items identified to their net recoverable amounts.

 

The Company’s inventory consisted of the following at June 30, 2023, and December 31, 2022:

 

 

June 30, 2023

 

 

December 31, 2022

 

Raw materials

 

$

8,474

 

 

$

4,201

 

Work in process

 

 

6,658

 

 

 

7,042

 

Finished goods

 

 

2,556

 

 

 

5,381

 

 

 

17,688

 

 

 

16,624

 

Allowance for obsolescence

 

 

(511

)

 

 

(906

)

Total

 

$

17,177

 

 

$

15,718

 

 

11


Fathom Digital Manufacturing Corporation
Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except share amounts)

Note 6. Property and Equipment

 

Property and equipment consisted of the following as of June 30, 2023, and December 31, 2022:

 

 

June 30, 2023

 

 

 

December 31, 2022

 

 

Estimated Useful Life

 

Machinery and equipment

 

$

42,314

 

 

 

$

39,516

 

 

6-10

 

Furniture and fixtures

 

 

3,628

 

 

 

 

3,100

 

 

 

10

 

Computer hardware

 

 

360

 

 

 

 

374

 

 

 

5

 

Property and leasehold improvements

 

 

7,052

 

 

 

 

6,839

 

 

3 - 23

 

Construction in progress

 

 

3,952

 

 

 

 

3,893

 

 

n/a

 

Auto / transportation equipment

 

 

319

 

 

 

 

312

 

 

 

3

 

Total

 

 

57,625

 

 

 

 

54,034

 

 

 

 

Accumulated depreciation

 

 

(9,241

)

 

 

 

(6,331

)

 

 

 

Total

 

$

48,384

 

 

 

$

47,703

 

 

 

 

 

Depreciation expense included in operating expenses for the three months ended June 30, 2023, and June 30, 2022 was $322 and $138, respectively, and $577 and $274 for the six months ended June 30, 2023 and June 30, 2022, respectively. Depreciation expense included in cost of revenues for the three months ended June 30, 2023 and June 30, 2022 was $1,607 and $1,326, respectively, and $2,895 and $2,791 for the six months ended June 30, 2023 and June 30, 2022, respectively.

Note 7. Intangible Assets, net

 

Intangible assets, net consisted of the following:

 

 

June 30, 2023

 

 

 

 

 

Gross

 

 

Accumulated Amortization

 

 

Net

 

 

Useful Life (in years)

Trade name

 

$

70,000

 

 

$

(7,115

)

 

$

62,885

 

 

15

Customer relationships

 

 

180,000

 

 

 

(14,444

)

 

 

165,556

 

 

19

Developed software

 

 

4,300

 

 

 

(1,311

)

 

 

2,989

 

 

5

Developed technology

 

 

15,700

 

 

 

(4,788

)

 

 

10,912

 

 

5

Total intangible assets

 

$

270,000

 

 

$

(27,658

)

 

$

242,342

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2022

 

 

 

 

 

Gross

 

 

Accumulated Amortization

 

 

Net

 

 

Useful Life (in years)

Trade name

 

$

70,000

 

 

$

(4,782

)

 

$

65,218

 

 

15

Customer relationships

 

 

180,000

 

 

 

(9,707

)

 

 

170,293

 

 

19

Developed software

 

 

4,300

 

 

 

(881

)

 

 

3,419

 

 

5

Developed technology

 

 

15,700

 

 

 

(3,218

)

 

 

12,482

 

 

5

Total intangible assets

 

$

270,000

 

 

$

(18,588

)

 

$

251,412

 

 

 

 

Aggregate amortization expense related to intangible assets was $4,535 and $4,535 for the three months ended June 30, 2023 and June 30, 2022, respectively, and $9,070 and $9,139 for the six months ended June 30, 2023 and June 30, 2022, respectively. There are no intangible assets with indefinite useful lives.

 

The following table represents the estimated aggregate amortization expense for each of the five succeeding fiscal calendar years and thereafter.

 

Year ended

 

Total

 

Remaining 2023

 

$

9,070

 

2024

 

 

18,140

 

2025

 

 

18,140

 

2026

 

 

18,041

 

2027

 

 

14,140

 

Thereafter

 

 

164,811

 

Total

 

$

242,342

 

 

12


Fathom Digital Manufacturing Corporation
Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except share amounts)

Note 8. Reorganization

 

In July 2022, the Company's Board of Directors approved a reorganization plan (the "Reorganization") designed to consolidate the Company’s national footprint, streamline legacy leadership, and centralize core business functions following the completion of 13 acquisitions by Fathom since 2019. Pursuant to the Reorganization, the Company intended to:

Consolidate its existing facility in Oakland, California into Fathom headquarters in Hartland, Wisconsin, improving utilization and reducing costs;
Establish a Fathom technology center in Fremont, California that will focus on new and emerging technologies, specifically in the additive market; and
Consolidate leadership and other roles through a net workforce reduction of approximately 6%, create an accounting shared service organization to streamline company-wide processes and create economies of scale while pursuing additional shared-service systems in other administrative functions.

 

The Company completed the workforce reductions and the relocation of its Oakland, California facility to Hartland, Wisconsin location during the fourth quarter of 2022.

 

On February 17, 2023, the Company committed to additional actions to continue and expand the reorganization plan, including consolidating our Austin, Texas facilities, reducing the Company’s workforce by an additional 14% to respond to market conditions and prioritizing investments and operations in line with near-term revenue generation. The Company is substantially complete with all actions associated with the reorganization plan and will record any remaining activity during the third quarter of 2023.

 

Reorganizing charges, are presented on the face of our condensed consolidated statement of comprehensive income (loss) as an operating expense and were $1,406, inclusive of inventory write-off of $1,112, and $0 for the three months ended June 30. 2023 and June 30, 2022, respectively. Reorganization charges were $2,056, inclusive of inventory write-off of $1,112, and $0 for the six months ended June 30, 2023 and June 30, 2022, respectively.

 

The following table summarizes activity in the liability related to the Company's reorganization plan.

 

Liability balance at December 31, 2022

 

$

412

 

Charges

 

 

668

 

Payments

 

 

(820

)

Liability balance at June 30, 2023

 

$

260

 

 

The reorganization liability is included as part of other current liabilities in the unaudited condensed consolidated balance sheet and as of June 30, 2023 and consists of unpaid employee termination costs of $208.

 

Note 9. Warrant Liability

 

As of June 30, 2023, the Company had 8,624,320 Public Warrants outstanding with a fair value price of $0.01 per Public Warrant, and 9,900,000 Private Placement Warrants outstanding with a fair value price of $0.05 per Private Placement Warrant. Each reporting period the public and private warrants are fair valued with the change in the fair value being recognized in the unaudited condensed consolidated statement of comprehensive income (loss). The change in the fair value was $400 and $12,500 for the three months ended June 30, 2023, and June 30, 2022, respectively and $2,180 and $20,600 for the six months ended June 30, 2023 and June 30, 2022, respectively, and is recognized in other income in the unaudited condensed consolidated statement of comprehensive income (loss).

 

The below table summarizes the number of outstanding warrants and their fair values as of June 30, 2023, and December 31, 2022. See Note 16, Fair Value Measurement, for further information.

 

 

Fair Value

 

 

# of Warrants

 

June 30, 2023

 

 

 

 

 

 

Public Warrants

 

$

78

 

 

 

8,624,320

 

Private Placement Warrants

 

$

522

 

 

 

9,900,000

 

 

 

 

 

Fair Value

 

 

# of Warrants

 

December 31, 2022

 

 

 

 

 

 

Public Warrants

 

$

720

 

 

 

8,624,320

 

Private Placement Warrants

 

$

2,060

 

 

 

9,900,000

 

 

13


Fathom Digital Manufacturing Corporation
Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except share amounts)

Note 10. Debt

 

On December 23, 2021, Fathom OpCo entered into a new Credit Agreement (as amended, the "Credit Agreement"), which included a $50,000 revolving credit facility and $125,000 term loan. The Company's borrowings under the revolving credit facility were $42,000 and $37,000 at June 30, 2023, and December 31, 2022, respectively. The loans made under the New Credit Agreement will mature in December 2026.

On November 10, 2022, the Company entered into an amendment (the "First Amendment") to the Credit Agreement. The First Amendment modified our financial covenants and also replaced the Adjusted LIBO Rate as an interest election with Term SOFR plus 0.10%.

On March 24, 2023, the Company entered into an additional amendment (the “Second Amendment”) to the Credit Agreement. The Second Amendment modified our financial covenants as disclosed in Note 11 - "Debt" of our 2022 Annual Report on Form 10-K.

The Company recorded aggregate deferred financing costs of $2,763 in conjunction with the Credit Agreement and the balance of such costs is presented net within current portion of long-term debt, net and long-term debt, net on the Company's condensed consolidated balance sheets. The Company amortizes the deferred financing costs using the effective interest method.

The revolving credit facility under the Credit Agreement is available for working capital and other general corporate purposes and includes a letter of credit sub-facility of up to $5,000. The Credit Agreement also includes an uncommitted incremental facility, which, subject to certain conditions, provides for additional term loan facilities, an increase in commitments under the Credit Agreement and/or an increase in commitments under the revolving credit facility, in an aggregate amount of up to $100,000.

The Company is subject to various financial covenants under the Credit Agreement, including minimum EBITDA and minimum liquidity. For the period ending June 30, 2023, the Company was in compliance with all debt covenants of the Credit Agreement. The Credit Agreement calls for the minimum EBITDA requirement to increase for the nine months ended September 30, 2023, and again for the twelve months ended December 31, 2023. Based on our most recent financial forecast, it is reasonably probable that we will be in non-compliance with the minimum EBITDA requirement as of September 30, 2023, and we likely will need to seek covenant relief or modifications from the lenders. Failure to comply with the covenants contained in our Credit Agreement, if not waived or further amended on acceptable terms, could give rise to an event of default and, if not cured, entitle the lenders to accelerate the indebtedness outstanding thereunder and terminate our ability to borrow in the future under the Credit Agreement. At this time, we expect to be able to successfully complete one of these actions. See Note 2, Basis of Presentation, for further information. The Company expects to meet the minimum liquidity covenant as of September 30, 2023, and December 31, 2023.

 

The Company’s debt as of June 30, 2023, and December 31, 2022 is as follows:

 

 

 

As of June 30, 2023

 

 

As of December 31, 2022

 

Debt Description

 

Interest Rate

 

 

Amount

 

 

Interest Rate

 

 

Amount

 

Credit Agreement Revolver

 

 

8.75

%

 

 

42,000

 

 

 

8.20

%

 

 

37,000

 

Credit Agreement Term Loan

 

 

9.00

%

 

 

118,750

 

 

 

8.43

%

 

 

121,875

 

Total principal long-term debt

 

 

 

 

 

160,750

 

 

 

 

 

 

158,875

 

Debt issuance costs

 

 

 

 

 

(2,032

)

 

 

 

 

 

(1,804

)

Total debt

 

 

 

 

 

158,718

 

 

 

 

 

 

157,071

 

Less: current portion of long-term debt

 

 

 

 

 

49,167

 

 

 

 

 

 

42,744

 

Long-term debt, net of current portion

 

 

 

 

$

109,551

 

 

 

 

 

$

114,327

 

 

Interest on all debt is payable in 90-day increments, with the unpaid amount due upon maturity. Interest expense associated with long-term debt was $3,959 and $1,843 for the three months ended June 30, 2023 and June 30, 2022, respectively, and $7,429 and $3,316 for the six months ended June 30, 2023 and June 30, 2022, respectively. Included in interest expense, net on the accompanying unaudited condensed consolidated statements of comprehensive (loss) income is amortization of debt issuance costs was $166, and $130 for the three months ended June 30, 2023 and June 30, 2022, respectively, and $296 and $230 for the six months ended June 30, 2023 and June 30, 2022, respectively.

In December 2022, the Company entered into a financing agreement through its insurance broker to spread the payment of its annual director’s and officer’s insurance premium over a ten-month period. Total financed payments of $1,265, including a $35 financing fee at 6.13% annual rate, will be made between January 2023 and October 2023. As of June 30, 2023, the Company recognized $801 of prepaid assets and $500 of other current liabilities in the unaudited condensed consolidated balance sheet. The Company recognized $404 and $808 of insurance expense in selling, general and administrative ("SG&A") expenses for the three and six months ended June 30, 2023, respectively.

14


Fathom Digital Manufacturing Corporation
Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except share amounts)

Note 11. Other (Income) Expense

Other income and expense, net consists of the following for the three and six months ended June 30, 2023, and June 30, 2022:

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30, 2023

 

 

June 30, 2022

 

 

June 30, 2023

 

 

June 30, 2022

 

 

Change in fair value of TRA

 

$

-

 

 

$

-

 

 

$

50

 

 

$

-

 

 

Other

 

 

65

 

 

 

129

 

 

 

88

 

 

 

195

 

 

Other expense

 

$

65

 

 

$

129

 

 

$

138

 

 

$

195

 

 

Change in fair value of Earnout Shares

 

 

(1,115

)

 

 

(22,930

)

 

 

(5,945

)

 

 

(41,900

)

 

Change in fair value of Warrants

 

 

(400

)

 

 

(12,500

)

 

 

(2,180

)

 

 

(20,600

)

 

Change in fair value of TRA

 

 

(250

)

 

 

(200

)

 

 

-

 

 

 

(200

)

 

Other

 

 

(19

)

 

 

(478

)

 

 

22

 

 

 

(523

)

 

Other income

 

$

(1,784

)

 

$

(36,108

)

 

$

(8,103

)

 

$

(63,223

)

 

 

Note 12. Shared Based Compensation

 

On December 23, 2021, the Company adopted the Fathom Digital Manufacturing 2021 Omnibus Incentive Plan (the "2021 Omnibus Plan") to encourage the profitability and growth of the Company through short-term and long-term incentives to employees that are consistent with the Company's objectives. The 2021 Omnibus Plan provides that the Company may grant options, stock appreciation rights, restricted shares, restricted stock units, performance-based awards (including performance-based restricted shares and restricted stock units), other share-based awards, other cash-based awards, and any combination of the foregoing.

 

Stock Options

 

The following table represents stock option activity for the period ended June 30, 2023.

 

 

 

Number of Shares

 

 

Weighted Average Exercise Price per Share

 

 

Average Remaining Contractual Term

 

 

Aggregate Intrinsic Value

 

Outstanding at January 1, 2023

 

 

317,091

 

 

$

8.71

 

 

 

6.17

 

 

$

-

 

Granted

 

 

1,619,695

 

 

 

0.32

 

 

 

-

 

 

 

-

 

Exercised

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Forfeited

 

 

(11,522

)

 

 

8.89

 

 

 

-

 

 

 

-

 

Expired

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Non-vested at June 30, 2023

 

 

1,925,264

 

 

$

1.89

 

 

 

6.54

 

 

$

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercisable at June 30, 2023

 

 

105,697

 

 

$

8.71

 

 

 

5.36

 

 

 

-

 

 

 

At June 30, 2023, there was approximately $1,368 of total unrecognized compensation cost related to unvested stock options granted under the 2021 Omnibus Plan. That cost is expected to be recognized over a weighted average period of 2.07 years as of June 30, 2023.

 

The Company uses authorized and unissued shares to satisfy share award exercises.

 

Restricted Stock Units

 

A summary of the status of the Company's restricted stock unit activity and the changes during the six months ended June 30, 2023, are as follows:

 

 

 

Shares

 

 

Weighted Average Grant Date Fair Value

 

 

Aggregate Intrinsic Value

 

Non-vested at January 1, 2023

 

 

6,182,337

 

 

$

9.28

 

 

$

-

 

Granted

 

 

3,201,376

 

 

 

0.52

 

 

 

-

 

Vested

 

 

(304,104

)

 

 

8.67

 

 

 

-

 

Forfeited

 

 

(451,398

)

 

 

8.01

 

 

 

-

 

Non-vested at June 30, 2023

 

 

8,628,211

 

 

$

6.01

 

 

$

-

 

 

At June 30, 2023, there was approximately $7,483 of total unrecognized compensation cost related to unvested restricted stock units granted under the 2021 Omnibus Plan. That cost is expected to be recognized over a weighted average period of 1.95 years as of June 30, 2023.

 

15


Fathom Digital Manufacturing Corporation
Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except share amounts)

Share Based Compensation Expense

Share based compensation was $1,239 and $1,795 for the three months ended June 30, 2023, and June 30, 2022, respectively, and $2,332 and $3,925 for the six months ended June 30, 2023 and June 30, 2022, respectively.

 

Employee Stock Purchase Plan

The Company's 2022 Employee Stock Purchase Plan (ESPP) allows eligible employees to purchase a variable number of shares of our common stock during each offering period at a discount through payroll deductions of up to 15% of their eligible compensation, subject to plan limitations. The ESPP provides for six-month offering periods with a single purchase period. At the end of each offering period, employees are able to purchase shares at 85% of the lower of the fair market value of our common stock on the first trading day of the offering period or on the last trading day of the offering period. We determine the fair value of stock-based compensation related to our ESPP in accordance with ASC 718 using the component measurement approach and the Black-Scholes standard option pricing model.

Employees purchased 249,648 shares of common stock under the ESPP at an average exercise price of $0.345 during the six months ended June 30, 2023. As of June 30, 2023, 966,911 shares remained available for future issuance under the ESPP.

We calculate the fair value of the shares under the ESPP using a Black-Scholes option valuation model. Expected volatilities are based upon a selection of public guideline companies. The risk-free rate was based upon U.S. Treasury rates.

The fair value of each offering period was estimated using the Black-Scholes option pricing model with the following assumptions:

 

 

Six Months Ended June 30, 2023

 

Expected term (years)

 

0.5 - 1.5

 

Expected volatility

 

 

77.5

%

Expected dividend yield

 

 

0.0

%

Risk-free interest rate

 

 

4.10

%

Fair value of share

 

$

1.32

 

 

Note 13. Earnings Per Share

 

Basic net earnings per share is computed based on the weighted average number of common shares outstanding. Diluted net earnings per share is computed based on the weighted average number of common shares outstanding, increased by the number of any additional shares that would have been outstanding had any potentially dilutive common shares been issued and reduced by the number of shares the Company could have repurchased from the proceeds from issuance of the potentially dilutive shares.

 

Only the Company's Class A common stock participates in the Company’s undistributed earnings. As such, the Company’s undistributed earnings are allocated entirely to shares of Class A common stock based on the weighted Class A common stock outstanding.

 

16


Fathom Digital Manufacturing Corporation
Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except share amounts)

The Company's basic and diluted earnings per share calculation is as follows:

 

 

 

Three Months Ended
June 30,

 

 

Six Months Ended
June 30,

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

 

Class A

 

 

Class A

 

 

Class A

 

 

Class A

 

Numerator

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(7,264

)

 

$

34,284

 

 

$

(8,595

)

 

$

53,278

 

Less: Net loss attributable to non-controlling interests

 

 

(4,139

)

 

 

(442

)

 

 

(7,585

)

 

 

(5,702

)

Net (loss) income attributable to Class A common stock

 

$

(3,125

)

 

$

34,726

 

 

$

(1,010

)

 

$

58,980

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator

 

 

 

 

 

 

 

 

 

 

 

 

Basic - weighted-average shares outstanding

 

 

69,703,407

 

 

 

52,259,885

 

 

 

68,382,896

 

 

 

51,530,961

 

Effect of dilutive securities

 

 

 

 

 

 

 

 

 

 

 

 

Assumed exchange for shares of Class A common stock

 

 

66,598,646

 

 

 

83,264,888

 

 

 

67,830,739

 

 

 

83,774,207

 

Diluted - weighted-average shares outstanding:

 

 

136,302,053

 

 

 

135,524,773

 

 

 

136,213,635

 

 

 

135,305,168

 

Net income per share

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.04

)

 

$

0.66

 

 

$

(0.01

)

 

$

1.14

 

Diluted

 

$

(0.02

)

 

$

0.26

 

 

$

(0.01

)

 

$

0.44

 

 

Note 14. Shareholders' Equity and Non-controlling Interest

 

The Company’s equity consists of a total of 500,000,000 authorized shares across all classes of capital stock. The 500,000,000 authorized shares consist of 10,000,000 authorized shares of preferred stock with a par value of $0.0001 per share, 300,000,000 authorized shares of Class A common stock with a par value of $0.0001 per share, 180,000,000 shares of Class B common stock with a par value of $0.0001 par value per share, and 10,000,000 shares of Class C common stock with a par value of $0.0001 per share. Under its charter, the Company is not permitted to issue any shares of Class C common stock.

 

As of June 30, 2023, the Company had no outstanding shares of Preferred Stock, 69,835,535 outstanding shares of Class A common stock, 66,547,589 outstanding shares of Class B common stock, and no outstanding shares of Class C common stock.

 

The table below demonstrates the calculation of the comprehensive loss attributable to the non-controlling interest holders for the three and six months ended June 30, 2023, and June 30, 2022.

 

 

 

Three Months Ended
June 30

 

 

Six Months Ended
June 30

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Fathom OpCo comprehensive loss

 

$

(8,495

)

 

$

(808

)

 

$

(16,079

)

 

$

(9,884

)

Non-controlling interest percentage

 

 

48.7

%

 

 

54.8

%

 

 

48.7

%

 

 

54.8

%

Comprehensive loss attributable to noncontrolling interest

 

$

(4,139

)

 

$

(442

)

 

$

(7,585

)

 

$

(5,702

)

 

Note 15. Leases

 

The Company leases certain manufacturing facilities, office space, and equipment and determines if an arrangement is a lease at inception. Amounts associated with operating leases and financing leases are included in right-of-use lease assets (“ROU assets”), current lease liabilities and long-term lease liabilities in the Company's unaudited condensed consolidated balance sheet.

 

ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term.

 

If the leases do not provide an implicit rate, the Company uses an incremental borrowing rate based on the information available at the lease commencement date in determining the present value of lease payments. The incremental borrowing rate is determined using a portfolio approach based on the rate of interest that we would pay to borrow an amount equal to the lease payments on a collateralized basis over a similar term. The Company uses quoted interest rates obtained from financial institutions as an input to derive its incremental borrowing rate as the discount rate for the lease.

 

Leases with an initial term of 12 months or less are not recorded on the balance sheet, and we recognize lease expense for these leases on a straight-line basis over the lease term. For lease agreements entered into or reassessed after the adoption of Topic 842, we combine lease and non-lease components.

 

17


Fathom Digital Manufacturing Corporation
Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except share amounts)

Certain leases include one or more options to renew, with renewal terms that can extend the lease term from one to 10 years or more, and the exercise of lease renewal options under these leases is at our sole discretion. Lease terms include the non-cancellable portion of the underlying leases along with any reasonably certain lease periods associated with available renewal periods. Certain of the Company’s operating leases include variable rental payments based on a percentage change of certain Consumer Price Index. Variable rental payments are recognized in the condensed consolidated statement of comprehensive income (loss) in the period in which the obligation for those payments is incurred. The depreciable life of assets and leasehold improvements are limited by the expected lease term. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.

 

 

 

Balance Sheet Location

 

June 30, 2023

 

 

December 31, 2022

 

Assets

 

 

 

 

 

 

 

 

    Operating

 

Prepaid expenses and other current assets

 

$

209

 

 

$

143

 

    Operating

 

Right-of-use operating lease assets, net

 

 

9,895

 

 

 

10,312

 

    Financing

 

Right-of-use financing lease assets, net

 

 

2,139

 

 

 

2,253

 

    Total lease assets

 

 

 

$

12,243

 

 

$

12,708

 

Liabilities

 

 

 

 

 

 

 

 

  Current

 

 

 

 

 

 

 

 

    Operating

 

Current operating lease liability

 

$

2,022

 

 

$

2,174

 

    Financing

 

Current financing lease liability

 

 

211

 

 

 

200

 

  Non-Current

 

 

 

 

 

 

 

 

    Operating

 

Long-term operating lease liability

 

 

8,269

 

 

 

8,958

 

    Financing

 

Long-term financing lease liability

 

 

2,016

 

 

 

2,125

 

  Total lease liabilities

 

 

 

$

12,518

 

 

$

13,457

 

 

The following table sets forth our lease costs included in our unaudited condensed consolidated statement of comprehensive income:

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30, 2023

 

 

June 30, 2022

 

 

June 30, 2023

 

 

June 30, 2022

 

Operating lease cost

 

$

706

 

 

$

817

 

 

$

1,495

 

 

$

1,620

 

Short-term lease cost

 

 

-

 

 

 

4

 

 

 

-

 

 

 

8

 

Financing lease cost:

 

 

 

 

 

 

 

 

-

 

 

 

 

   Amortization of ROU assets

 

 

75

 

 

 

54

 

 

 

131

 

 

 

108

 

   Interest on lease liabilities

 

 

42

 

 

 

34

 

 

 

74

 

 

 

69

 

Sublease income

 

 

(34

)

 

 

(34

)

 

 

(68

)

 

 

(68

)

 Total lease costs

 

$

789

 

 

$

875

 

 

$

1,632

 

 

$

1,737

 

 

 

 

June 30, 2023

 

June 30, 2022

Weighted-average remaining lease term (years)

 

6.2

 

3.6

Operating

 

7.5

 

8.6

Financing

 

 

 

 

Weighted-average discount rate

 

 

 

 

Operating

 

5.7%

 

4.2%

Financing

 

5.6%

 

5.6%

 

Maturities of Leases

 

 

 

Operating Leases

 

 

Financing Leases

 

 

Total

 

Remaining 2023

 

$

1,348

 

 

$

164

 

 

$

1,512

 

2024

 

 

2,469

 

 

 

335

 

 

 

2,804

 

2025

 

 

2,092

 

 

 

346

 

 

 

2,438

 

2026

 

 

1,634

 

 

 

356

 

 

 

1,990

 

2027

 

 

1,428

 

 

 

365

 

 

 

1,793

 

Thereafter

 

 

3,807

 

 

 

1,200

 

 

 

5,007

 

   Total future lease payments

 

 

12,778

 

 

 

2,766

 

 

 

15,544

 

   Less: Discount

 

 

2,487

 

 

 

539

 

 

 

3,026

 

   Present value of lease liability

 

$

10,291

 

 

$

2,227

 

 

$

12,518

 

 

18


Fathom Digital Manufacturing Corporation
Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except share amounts)

 

Note 16. Fair Value Measurement

 

The fair value of the Company’s financial assets and liabilities reflects the Company’s estimate of amounts that the Company would have received in connection with the sale of the assets or paid in connection with the transfer of the liabilities in an orderly transaction between market participants at the measurement date. In connection with measuring the fair value of its assets and liabilities, the Company seeks to maximize the use of observable inputs (market data obtained from independent sources) and to minimize the use of unobservable inputs (internal assumptions about how market participants would price assets and liabilities). The following fair value hierarchy is used to classify assets and liabilities based on the observable inputs and unobservable inputs used in order to value the assets and liabilities:

 

 

Level 1 — Quoted prices in active markets for identical assets or liabilities. An active market for an asset or liability is a market in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis.

 

Level 2 — Observable inputs other than Level 1 inputs. Examples of Level 2 inputs include quoted prices in active markets for similar assets or liabilities and quoted prices for identical assets or liabilities in markets that are not active.

 

Level 3 — Unobservable inputs based on our assessment of the assumptions that market participants would use in pricing the asset or liability.

 

The following table presents information about the Company’s liabilities that are measured at fair value on a recurring basis as of June 30, 2023.

 

 

 

Fair Value Measurements as of June 30, 2023

 

Description

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Tax Receivable Agreement

 

$

-

 

 

$

-

 

 

$

4,050

 

 

$

4,050

 

Fathom OpCo acquisitions contingent consideration

 

 

-

 

 

 

-

 

 

 

359

 

 

 

359

 

Sponsor Earnout Shares Liability

 

 

-

 

 

 

-

 

 

 

137

 

 

 

137

 

Fathom Earnout Shares Liability

 

 

-

 

 

 

-

 

 

 

808

 

 

 

808

 

Warrant liability – Public Warrants

 

 

78

 

 

 

-

 

 

 

-

 

 

 

78

 

Warrant liability – Private Placement Warrants

 

 

-

 

 

 

-

 

 

 

522

 

 

 

522

 

 

 

$

78

 

 

$

-

 

 

$

5,876

 

 

$

5,954

 

 

The following table presents information about the Company’s liabilities that are measured at fair value on a recurring basis as of December 31, 2022.

 

 

 

Fair Value Measurements as of December 31, 2022

 

Description

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Tax Receivable Agreement

 

$

-

 

 

$

-

 

 

$

4,000

 

 

$

4,000

 

Fathom OpCo acquisitions contingent consideration

 

 

-

 

 

 

-

 

 

 

700

 

 

 

700

 

Sponsor Earnout Shares Liability

 

 

-

 

 

 

-

 

 

 

930

 

 

 

930

 

Fathom Earnout Shares Liability

 

 

-

 

 

 

-

 

 

 

5,960

 

 

 

5,960

 

Warrant liability – Public Warrants

 

 

720

 

 

 

-

 

 

 

-

 

 

 

720

 

Warrant liability – Private Placement Warrants

 

 

-

 

 

 

-

 

 

 

2,060

 

 

 

2,060

 

 

 

$

720

 

 

$

-

 

 

$

13,650

 

 

$

14,370

 

 

19


Fathom Digital Manufacturing Corporation
Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except share amounts)

 

The following table presents a reconciliation of the beginning and ending balances of recurring Level 3 fair value measurements.

 

 

 

Level 3 liabilities

 

 

 

Tax Receivable Agreement liability

 

 

Fathom OpCo acquisitions contingent consideration

 

 

Sponsor Earnout shares liability

 

 

Fathom Earnout shares liability

 

 

Warrant liability – Private Placement Warrants

 

 

Total

 

Balance at December 31, 2022

 

$

4,000

 

 

$

700

 

 

$

930

 

 

$

5,960

 

 

$

2,060

 

 

$

13,650

 

Payments

 

 

-

 

 

 

(341

)

 

 

-

 

 

 

-

 

 

 

-

 

 

$

(341

)

Net (gain) loss (1)

 

 

50

 

 

 

-

 

 

 

(793

)

 

 

(5,152

)

 

 

(1,538

)

 

$

(7,433

)

Ending balance at June 30, 2023

 

$

4,050

 

 

$

359

 

 

$

137

 

 

$

808

 

 

$

522

 

 

$

5,876

 

 

(1) Net gains on changes in recurring Level 3 fair value measurements are recognized in Other expense or Other income in our unaudited condensed consolidated statement of comprehensive income (loss).

 

Valuation Methodologies for Fair Value Measurements Categorized within Level 3

 

Tax Receivable Agreement ("TRA")

 

The fair value of the TRA is based on multiple inputs and assumptions input into a Monte Carlo simulation model. The significant inputs into this model are the following: a corporate tax rate of 26.9%, an annual TRA payment date of February 17, existing non-controlling interest percentage of 48.7%, initial amortization deductions of $46,070, taxable income forecast by 2032 of $67,762, a sell-down schedule which reflects the expected sale of New Fathom Units by legacy Fathom OpCo shareholders, a Class A common stock price as of June 30, 2022 of $0.41, volatility of 79.0%, correlation between taxable income and the Class A common stock price of 25%, and a cost of debt of 10.74%.

 

Legacy Fathom OpCo Acquisitions Contingent Consideration

 

The fair values for contingent consideration payable are determined by using a discounted cash flow approach with unobservable inputs and is classified as a Level 3 liability in the fair value hierarchy. The Company’s assessment of the significance of particular inputs to these fair value measurements requires judgment and considers factors specific to each entity to which the contingent consideration relates to, for example EBITDA targets for a given period.

 

Earnout Shares Liability

 

The Earnout Shares are accounted for as liabilities in the Company's condensed consolidated balance sheet. The fair values for the Earnout Shares are estimated using a Monte Carlo simulation assuming Geometric Brownian Motion in a risk-neutral framework. The Monte Carlo simulation considers daily simulated stock prices as a proxy for the Company's daily volume-weighted average price ("VWAP"). The key inputs into the valuation of the Earnout Shares are an expected term of 3.48 years, a risk-free rate of 4.32%, operating asset volatility of 69.7%, and equity volatility of 119.9%. The operating asset volatility and the equity volatility assumptions are based on a blended average of operating and equity volatility, respectively, of publicly traded companies within the Company's peer group.

 

Warrant Liability

 

The Public and Private Placement Warrants are accounted for as liabilities in accordance with ASC 815-40 and are presented within Warrant liability in the accompanying unaudited condensed consolidated balance sheet as of June 30, 2023, and December 31, 2022. The Warrant liabilities are measured at fair value at inception and on a recurring basis, with changes in fair value presented within a change in fair value of Warrant liabilities in the statement of comprehensive (loss) income.

 

The Public Warrants are valued using a Monte Carlo simulation model; however, the inputs are calibrated such that the fair value of an individual Public Warrant is equal to the quoted and publicly traded prices for the Public Warrants. Since the fair value is based off quoted prices in an active market for identical instruments, the Public Warrants are considered to be a Level 1 fair value measurement. Since the Public Warrants are publicly traded, the price of the underlying Class A common stock, the remaining time until expiration, and the price of the Public Warrants are observable. The Monte Carlo simulation model is calibrated by adjusting the selected volatility until the value of the Public Warrants implied by the model is equal to the publicly traded Class A warrant price (Ticker: FATH.WS).

20


Fathom Digital Manufacturing Corporation
Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except share amounts)

 

The key inputs to the valuation of the Public Warrants include an expected term of 3.48 years, a strike price of $11.50, an assumption that the warrants can be early redeemed when the price of the Company's Class A common stock exceeds $18.00 for any 20 trading days within a 30-day trading period, and the warrants are assumed to remain outstanding until maturity unless they are redeemed early.

 

The Private Placement warrants are valued using a Black-Scholes option pricing approach, which is considered to be a Level 3 fair value measurement. The volatility for the Private Placement warrants, a key input into the valuation, was estimated to be 102.0% based on the publicly traded per share price of the Company's Class A common stock as of June 30, 2023. Other key inputs into the valuation include a term of 3.48 years, a strike price of $11.50 per share, and an assumption that the Private Placement warrants will remain outstanding until maturity since, unlike the Public Warrants, the Private Placement warrants are not redeemable.

 

In instances whereby inputs used to measure fair value fall into different levels in the above fair value hierarchy, fair value measurements in their entirety are categorized based on the lowest level input that is significant to the valuation. The Company’s assessment of the significance of particular inputs to these fair value measurements requires judgment and considers factors specific to each asset or liability.

 

Note 17. Income Taxes

 

The Company calculates the provision for income taxes during interim periods by applying an estimate of the forecasted annual effective tax rate for the full fiscal year to "ordinary" income or loss (pretax income or loss excluding unusual or infrequently occurring discrete items) for the reporting period. The provision for income taxes was $64 for the three months ending June 30, 2023, compared to a tax benefit of ($683) for the three months ended June 30, 2022. The effective tax rate, including discrete items, was (0.89%) for the three months ended June 30, 2023, compared to (2.03%) for the three months ended June 30, 2022. The provision for income taxes was $119 for the six months ending June 30, 2023 compared to ($1,386) for the six months ended June 30, 2022. The effective tax rate, including discrete items, was (1.40%) for the period ended June 30, 2023, compared to (2.67%) for the six months ended June 30, 2022. The tax provision for the three and six months ended June 30, 2023, was impacted by permanent differences with respect to gains and losses recorded on the earnout share liabilities and warrant liabilities, partially offset by the changes in valuation allowance and non-controlling interest not subject to taxes.

The Company evaluates the realizability of the deferred tax assets on a quarterly basis and establishes a valuation allowance when it is more likely than not that all or a portion of a deferred tax asset may not be realized. For the six months ended June 30, 2023, the Company made no material adjustments to its assertion that deferred tax assets are not more-likely than not to be realized.

 

As of June 30, 2023, the Company did not recognize income tax expense or benefits associated with uncertain tax positions.

Note 18. Commitments and Contingencies

 

The Company is subject to various claims, lawsuits and other legal proceedings that arise in the ordinary course of business. It is the opinion of management that the disposition or ultimate resolution of such claims and lawsuits will not have a material effect on the Company’s financial condition, comprehensive gain (loss) or cash flows.

 

Note 19. Variable Interest Entities

 

Based upon the criteria set forth in ASC 810, the Company consolidates variable interest entities (“VIEs”) in which it has a controlling financial interest and is therefore deemed the primary beneficiary. A controlling financial interest will have both of the following characteristics: (a) the power to direct the VIE activities that most significantly impact economic performance; and (b) the obligation to absorb the VIE losses and the right to receive benefits that are significant to the VIE. The Company has determined that Fathom OpCo meets the definition of a VIE and that the Company is the primary beneficiary of Fathom OpCo beginning on the date of the Business Combination, and therefore the Company must consolidate Fathom OpCo from the date of the Business Combination.

 

The following table presents a summary of the total assets, liabilities, and shareholders' equity of the Company’s condensed consolidated VIE, which is comprised solely of Fathom OpCo.

 

 

Period Ended June 30, 2023
Fathom OpCo Standalone

 

 

Period Ended December 31, 2022
Fathom OpCo Standalone

 

Total assets

 

$

357,657

 

 

$

370,245

 

Total liabilities

 

 

193,180

 

 

 

191,514

 

Total equity

 

 

164,477

 

 

 

178,731

 

 

21


Fathom Digital Manufacturing Corporation
Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except share amounts)

 

Note 20 – Subsequent Events

 

The Company evaluated subsequent events and transactions that occurred after the balance sheet date up to the date that the accompanying financial statements were issued. Based upon this review, the Company did not identify any subsequent events that would have required adjustment or disclosure in the unaudited condensed consolidated financial statements.

 

22


 

Item 2. Management’s Discussion and Analysis 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 audited condensed consolidated financial statements for our most recently completed fiscal year set forth under Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2022, as amended by Amendment No.1. thereto (the "2022 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, those discussed in Part II, Item 1A "Risk Factors" of this Form 10-Q. and those discussed in Item 1A “Risk Factors” of our 2022 Form 10-K and other filings under the Exchange Act.

 

Overview

 

Fathom Digital Manufacturing Corporation was incorporated in Delaware in December 2021. 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 of Fathom 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 400,000 sq. ft. manufacturing footprint, spanning 11 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.

 

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.

 

We continue to invest in the enhancement and expansion of our technologies, processes, and capabilities with the aim of better serving the needs of a broader set of customers and end-markets. As a result of our efforts described above, we have developed a loyal base of approximately 2,500 customers, including many of the most innovative companies in the world. Our customers span across a diverse range of end-markets, including, but not limited to, the aerospace, defense, technology, medical, automotive, and IoT sectors.

 

23


 

We believe the market for our on-demand digital manufacturing services across manufacturing applications is largely unsaturated as companies continue to realize the efficiency and effectiveness of our rapid quotation system and 3D CAD driven manufacturing processes. Our market is projected to grow, fueled by demand for additive manufacturing and continuation of the trend of customers increasingly outsourcing their prototyping and low-to-medium volume production needs. We believe our position as the only on-demand digital manufacturing platform purpose-built to serve the rapid prototyping and low-to-medium volume production needs of the largest and most innovative companies, coupled with our competitive strengths, will allow us to maintain and extend our market leading position.

 

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

 

As discussed above, the market in which we operate is projected to grow, fueled by increased 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 design capabilities, and engineering resources which we leverage to deliver superior customer results regardless of manufacturing process and production material; and

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 Annual Report on Form 10-K for the year ended December 31, 2022, as amended by Amendment No.1. thereto (the "2022 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.

 

24


 

Comparison of the three months ended June 30, 2023 and 2022

 

 

Three Months Ended

 

 

June 30, 2023

 

 

June 30, 2022

 

 

 

 

 

 

 

 

Revenue

 

$

34,474

 

 

$

41,985

 

Cost of revenue

 

 

23,940

 

 

 

26,437

 

Gross profit

 

 

10,534

 

 

 

15,548

 

Operating expenses

 

 

 

 

 

 

Selling, general, and administrative

 

 

9,445

 

 

 

11,617

 

Depreciation and amortization

 

 

4,643

 

 

 

4,452

 

Restructuring

 

 

1,406

 

 

 

-

 

Total operating expenses

 

 

15,494

 

 

 

16,069

 

Operating loss

 

 

(4,960

)

 

 

(521

)

Interest expense and other (income) expense

 

 

 

 

 

 

Interest expense

 

 

3,959

 

 

 

1,858

 

Other expense

 

 

65

 

 

 

129

 

Other income

 

 

(1,784

)

 

 

(36,108

)

Total interest expense and other (income) expense, net

 

 

2,240

 

 

 

(34,121

)

Net (loss) income before income tax

 

 

(7,200

)

 

 

33,601

 

Income tax expense (benefit)

 

 

64

 

 

 

(683

)

Net (loss) income

 

 

(7,264

)

 

 

34,284

 

Net loss attributable to Fathom OpCo non-controlling interest (Note 14)

 

 

(4,139

)

 

 

(442

)

Net (loss) income attributable to controlling interest

 

 

(3,125

)

 

 

34,726

 

Comprehensive income:

 

 

 

 

 

 

Loss from foreign currency translation adjustments

 

 

-

 

 

 

-

 

Comprehensive (loss) income, net of tax

 

$

(3,125

)

 

$

34,726

 

 

Revenue

Revenue for the three months ended June 30, 2023, was $34,474 compared to $41,985 for the three months ended June 30, 2022, a decrease of 17.9%. The year-over-year decline was driven by ongoing softness in the macro-economic environment, mainly impacting our precision sheet metal product line.

 

Gross Profit

Gross profit for the three months ended June 30, 2023, was $10,534, or 30.6% of revenue, compared to $15,548, or 37.0% of revenue, for the three months ended June 30, 2022. The decrease in gross profit was primarily driven by lower sales volume and the associated overhead absorption impacts.

 

Operating Expenses

 

Selling, general, and administrative ("SG&A") expenses were $9,445 and $11,617 for the three months ended June 30, 2023, and June 30, 2022, respectively. The $2,172 or 18.7%, decrease was primarily driven by a reduction in third-party professional fees from higher 2022 costs associated with the Business Combination, reduced stock based compensation expense, reduced insurance costs from favorable rates, lower headcount, and the impact of the reorganization plan.

 

Depreciation and amortization expenses were $4,643 and $4,452 for the three months ended June 30, 2023, and June 30, 2022, respectively. The increase of $191, or 4.3%, was due to additional capital expenditures.

 

Restructuring expenses were $1,406 and $0 for the three months ended June 30, 2023, and June 30, 2022, respectively. The increase of $1,406 relates to the reorganization activities that the Company has performed during the three months ended June 30, 2023 that did not exist in the prior year.

 

Operating Loss

 

Operating loss was $4,960 and $521 for the three months ended June 30, 2023, and June 30, 2022, respectively. The higher operating loss was primarily driven by the lower sales volume and the associated overhead absorption impacts, restructuring charges incurred during 2023, partially offset by decreased SG&A expenses.

 

Interest Expense and Other Expense (Income)

 

Interest expense was $3,959 and $1,858 for the three months ended June 30, 2023, and June 30, 2022, respectively. The increase in interest expense is primarily due to a 4.0% rise in interest rates on our total debt as well as an additional $20,000 in borrowing on our revolving credit facility since June 2022.

 

25


 

Other income was $1,784 and $36,108 for the three months ended June 30, 2023, and June 30, 2022, respectively. The decrease in other income of $34,324 represents the changes in fair value in the earnout share liabilities and the warrant liability during the three months ended June 30, 2023, and June 30, 2022 of $21,815 and $22,930, respectively, due to a decrease in the Company's share price.

 

Income Taxes

 

We recorded a tax expense of $64 for the three months ended June 30, 2023, and a tax benefit of $683 for the three months ended June 30, 2022. For the three months ended June 30, 2023, our income tax expense was impacted by permanent differences with respect to gains and losses from the earnout share liabilities and warrant liabilities, partially offset by the changes in valuation allowance and non-controlling interest not subject to taxes. For the three months ended June 30, 2022 the tax benefit was impacted by a reduction on the deferred tax liability, partially offset by statutory income with permanent differences with respect to gains and losses recorded on the earnout share liabilities and warrant liabilities.

 

Comparison of the six months ended June 30, 2023 and 2022

 

 

Six Months Ended

 

 

June 30, 2023

 

 

June 30, 2022

 

 

 

 

 

 

 

 

Revenue

 

$

69,481

 

 

$

82,526

 

Cost of revenue

 

 

47,002

 

 

 

54,981

 

Gross profit

 

 

22,479

 

 

 

27,545

 

Operating expenses

 

 

 

 

 

 

Selling, general, and administrative

 

 

20,217

 

 

 

26,381

 

Depreciation and amortization

 

 

9,218

 

 

 

8,968

 

Restructuring

 

 

2,056

 

 

 

-

 

Total operating expenses

 

 

31,491

 

 

 

35,349

 

Operating loss

 

 

(9,012

)

 

 

(7,804

)

Interest expense and other (income) expense

 

 

 

 

 

 

Interest expense

 

 

7,429

 

 

 

3,332

 

Other expense

 

 

138

 

 

 

195

 

Other income

 

 

(8,103

)

 

 

(63,223

)

Total interest expense and other (income) expense, net

 

 

(536

)

 

 

(59,696

)

Net (loss) income before income tax

 

 

(8,476

)

 

 

51,892

 

Income tax expense (benefit)

 

 

119

 

 

 

(1,386

)

Net (loss) income

 

 

(8,595

)

 

 

53,278

 

Net loss attributable to Fathom OpCo non-controlling interest (Note 14)

 

 

(7,585

)

 

 

(5,702

)

Net (loss) income attributable to controlling interest

 

 

(1,010

)

 

 

58,980

 

Comprehensive income:

 

 

 

 

 

 

Loss from foreign currency translation adjustments

 

 

-

 

 

 

(107

)

Comprehensive (loss) income, net of tax

 

$

(1,010

)

 

$

58,873

 

 

Revenue

Revenue for the six months ended June 30, 2023, was $69,481 compared to $82,526 for the six months ended June 30, 2022, a decrease of 15.8%. The year-over-year decline was driven by ongoing softness in the macro-economic environment, mainly impacting our precision sheet metal product line.

 

Gross Profit

Gross profit for the six months ended June 30, 2023, was $22,479, or 32.4% of revenue, compared to $27,545, or 33.4% of revenue, for the six months ended June 30, 2022. The decrease in gross profit from 2022 was primarily driven by lower sales volume and the associated overhead absorption impacts.

 

Operating Expenses

 

SG&A expenses were $20,217 and $26,381 for the six months ended June 30, 2023, and June 30, 2022, respectively. The $6,164 or 23.4%, decrease was primarily driven by a reduction in third-party professional fees from higher 2022 costs associated with the Business Combination, reduced stock based compensation expense, reduced insurance costs from favorable rates, lower headcount, and the impact of the reorganization plan.

 

Depreciation and amortization expenses were $9,218 and $8,968 for the six months ended June 30, 2023, and June 30, 2022, respectively. The increase of $250, or 2.8%, was due to additional capital expenditures.

 

Restructuring expenses were $2,056 and $0 for the three months ended June 30, 2023, and June 30, 2022, respectively. The increase of $1,406 relates to the reorganization activities that the Company has performed during the three months ended June 30, 2023, that did not exist in the prior year.

 

26


 

Operating Loss

 

Operating loss was $9,012 and $7,804 for the six months ended June 30, 2023, and June 30, 2022, respectively. The higher operating loss was primarily driven by lower sales volume and the associated overhead absorption impacts, partially offset by decreased SG&A expenses.

 

Interest Expense and Other Expense (Income)

 

Interest expense was $7,429 and $3,332 for the six months ended June 30, 2023, and June 30, 2022, respectively. The increase in interest expense is primarily due to a 4.0% rise in interest rates on our total debt as well as an additional $20,000 in borrowing on our revolving credit facility since June 2022.

 

Other income was $8,103 and $63,223 for the six months ended June 30, 2023 and June 30, 2022, respectively. The decrease in other income of $55,120 represents the changes in fair value in the earnout share liabilities and the warrant liability during the six months ended June 30, 2023 and June 30, 2022 of $8,125 and $41,900, respectively, due to a decrease in the Company's share price.

 

Income Taxes

 

We recorded a tax expense of $119 for the six months ended June 30, 2023, and a tax benefit of $1,386 for the six months ended June 30, 2022. For the six months ended June 30, 2023, our income tax expense was impacted by permanent differences with respect to gains and losses from the earnout share liabilities and the warrant liabilities, partially offset by the changes in valuation allowance and non-controlling interest not subject to taxes. For the six months ended June 30, 2022 the tax benefit was impacted by a reduction on the deferred tax liability, partially offset by statutory income with permanent differences with respect to gains and losses recorded on the earnout share liabilities and warrant liabilities.

 

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 U.S. 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 U.S. 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 U.S. 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 EBITDA excludes certain expenses that are required in accordance with U.S. 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).

 

27


 

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 U.S. GAAP measure, for the periods indicated:

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

June 30, 2023

 

 

June 30, 2022

 

 

June 30, 2023

 

 

June 30, 2022

 

Net (loss) income

 

$

(7,264

)

 

$

34,284

 

 

$

(8,595

)

 

$

53,278

 

Stock compensation

 

 

1,239

 

 

 

1,796

 

 

 

2,332

 

 

 

3,926

 

Inventory step-up amortization(1)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

3,241

 

Restructuring expense

 

 

1,406

 

 

 

-

 

 

 

2,056

 

 

 

-

 

Change in fair value of warrant liability (2)

 

 

(400

)

 

 

(12,500

)

 

 

(2,180

)

 

 

(20,600

)

Change in fair value of earnout share liabilities(2)

 

 

(1,115

)

 

 

(22,930

)

 

 

(5,945

)

 

 

(41,900

)

Change in fair value of TRA liability (2)

 

 

(250

)

 

 

(200

)

 

 

50

 

 

 

(200

)

Integration, non-recurring, non-operating, cash, and non-cash costs(3)

 

 

715

 

 

 

1,047

 

 

 

1,111

 

 

 

2,951

 

Adjusted net loss

 

$

(5,669

)

 

$

1,497

 

 

$

(11,171

)

 

$

696

 

 

(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, the warrant liabilities, and the TRA liability;

(3) Represents adjustments for other integration, non-recurring, non-operating, cash, and non-cash costs related primarily to integration costs for new acquisitions, and severance.

 

28


 

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.

 

The table below presents our Adjusted EBITDA reconciled to net income (loss), the most directly comparable U.S. GAAP measure, for the periods indicated.

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

June 30, 2023

 

 

June 30, 2022

 

 

June 30, 2023

 

 

June 30, 2022

 

Net (loss) income

 

$

(7,264

)

 

$

34,284

 

 

$

(8,595

)

 

$

53,278

 

Depreciation and amortization

 

 

6,465

 

 

 

5,996

 

 

 

12,543

 

 

 

12,204

 

Interest expense, net

 

 

3,959

 

 

 

1,858

 

 

 

7,429

 

 

 

3,332

 

Income tax expense (benefit)

 

 

64

 

 

 

(378

)

 

 

119

 

 

 

(1,386

)

Stock compensation

 

 

1,239

 

 

 

1,796

 

 

 

2,332

 

 

 

3,926

 

Inventory step-up amortization(1)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

3,241

 

Restructuring expense

 

 

1,406

 

 

 

-

 

 

 

2,056

 

 

 

-

 

Change in fair value of warrant liability(2)

 

 

(400

)

 

 

(12,500

)

 

 

(2,180

)

 

 

(20,600

)

Change in fair value of earnout share liabilities(2)

 

 

(1,115

)

 

 

(22,930

)

 

 

(5,945

)

 

 

(41,900

)

Change in fair value of TRA (2)

 

 

(250

)

 

 

(200

)

 

 

50

 

 

 

(200

)

Integration, non-recurring, non-operating, cash, and non-cash costs(3)

 

 

715

 

 

 

1,047

 

 

 

1,111

 

 

 

2,951

 

Adjusted EBITDA

 

$

4,819

 

 

$

8,973

 

 

$

8,920

 

 

$

14,846

 

 

(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, the warrant liabilities, and the TRA liability;

(3) Represents adjustments for other integration, non-recurring, non-operating, cash, and non-cash costs related primarily to integration costs for new acquisitions, and severance.

 

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. The Company is subject to various financial covenants under the Credit Agreement, including minimum EBITDA and minimum liquidity. For the period ending June 30, 2023, the Company was in compliance with all debt covenants of the Credit Agreement. The Credit Agreement calls for the minimum EBITDA requirement to increase for the nine months ended September 30, 2023, and again for the twelve months ended December 31, 2023. Based on our most recent financial forecast, it is reasonably probable that we will be in non-compliance with the minimum EBITDA requirement as of September 30, 2023, and we likely will need to seek covenant relief or modifications from our lenders. Failure to comply with the covenants contained in our Credit Agreement, if not waived or further amended on acceptable terms, could give rise to an event of default and, if not cured, entitle the lenders to accelerate the indebtedness outstanding thereunder and terminate our ability to borrow in the future under the Credit Agreement. The Company expects to meet the minimum liquidity covenant as of September 30, 2023 and December 31, 2023. 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 $10,733 in cash as of June 30, 2023. We believe our operating cash flows, together with amounts available under our 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; provided, that we are able to obtain on favorable terms an amendment, waiver, or other changes to the Credit Agreement to address our anticipated failure to comply with the minimum EBITDA covenant at September 30, 2023.

 

We may, however, need additional cash resources due to changed business conditions or other developments, including competitive pressures. Beyond the next twelve months, we expect our capital expenditures and working capital requirements to continue to increase, as we seek to expand our product offerings across more of the U.S. Our capital expenditures in 2022 of $13,189 equaled approximately 8.2% of annual revenue. We believe that our annual future growth capital expenditures, excluding buildings and maintenance capital we might purchase for our operations, are likely to be approximately 4.0% of annual revenue. To the extent that our available resources are insufficient to satisfy our short-term and long-term 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.

 

29


 

Borrowings and Lines of Credit

 

On December 23, 2021, Fathom OpCo entered into the Credit Agreement, which included a $50,000 revolving credit facility and $125,000 term loan. The Company's borrowings under the revolving credit agreement were $42,000 at June 30, 2023. The loans made under the Credit Agreement will mature in December 2026.

The Company recorded aggregate deferred financing costs of $2,763 in conjunction with the Credit Agreement and the balance of such costs is presented net within current portion of long-term debt, net and long-term debt, net on the Company's condensed consolidated balance sheets. The Company amortizes the deferred financing costs using the effective interest method.

 

The Credit Agreement contains financial and other covenants that restrict our business activities and our ability to execute our strategic objectives. We recently entered into an amendment to the Credit Agreement to modify certain financial covenants. In the future, these covenants could restrict our ability to access the full capacity of the credit facilities under the Credit Agreement or require us to repay amounts borrowed. In addition, if we are not able to comply with these covenants, including as a result of not satisfying the minimum EBITDA requirement as of September 30, 2023, as discussed above under “Liquidity and Capital Resources,” we likely will need to seek covenant relief or modifications from the lenders. Failure to comply with the covenants contained in our Credit Agreement (if not waived or further amended on acceptable terms) could give rise to an event of default and, if not cured, entitle the lenders to accelerate the indebtedness outstanding thereunder and terminate our ability to borrow in the future under the Credit Agreement.

 

The revolving credit facility under the Credit Agreement is available for working capital and other general corporate purposes and includes a letter of credit sub-facility of up to $5,000. The Credit Agreement also includes an uncommitted incremental facility, which, subject to certain conditions, provides for additional term loan facilities, an increase in commitments under the Credit Agreement and/or an increase in commitments under the revolving credit facility, in an aggregate amount of up to $100,000.

 

Going Concern Consideration

The condensed consolidated financial statements included in this Form 10-Q have been prepared using the going concern basis of accounting, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The reasonable probability of the Company being in non-compliance with the minimum EBITDA debt covenant requirements as of September 30, 2023, will likely require the Company to seek an amendment, waiver, or other changes to the Credit Agreement. At this time, we expect to be able to successfully complete one of these actions; however there is no assurance that we will be successful, and our inability to obtain on acceptable terms such relief would likely have a material adverse effect on the Company. This uncertainty raises substantial doubt about the Company’s ability to continue as a going concern within one year after the issuance date of the accompanying unaudited condensed consolidated financial statements..

 

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 $62,368 based on the Company's closing share price of $0.41 at June 30, 2023. As of June 30, 2023, we do not expect to make any material payments within the next two years and anticipate payments to become more material beginning in 2025.

 

On April 4, 2023, the TRA was amended and restated by Fathom and the CORE Investors, which hold a controlling interest in Fathom. The purpose of the amendment was (i) the technical correction of an inadvertent omission from the original TRA of certain intended tax benefits to affiliates of the CORE Investors which directly or indirectly owned interests in Fathom OpCo prior to the Business Combination through entities taxed as C-Corporations and (ii) to replace LIBOR with SOFR as the reference interest rate in the agreement for the several interest rates applicable under the agreement. The correction described in clause (i) of the immediately preceding sentence did not affect Fathom’s accounting for the TRA. A copy of the Amended and Restated TRA is filed as Exhibit 10.1 to our 2022 Form 10-K and incorporated herein by reference.

 

Cash Flow Analysis

 

 

 

Six Months Ended

 

 

 

June 30, 2023

 

 

June 30, 2022

 

Net cash provided by (used in) :

 

 

 

 

 

 

Operating Activities

 

$

2,123

 

 

$

4,266

 

Investing Activities

 

 

(3,036

)

 

 

(6,671

)

Financing Activities

 

 

933

 

 

 

(6,727

)

 

30


 

Operating Activities

 

Net cash provided from operating activities was $2,123 and $4,266 for the six months ended June 30, 2023, and June 30, 2022, respectively. The decrease of $2,143 is primarily driven by a larger operating loss for the six months ended June 30, 2023, compared to the six months ended June 30, 2022, mainly from lower revenues.

 

Investing Activities

 

Cash used in investing activities of $3,036 and $6,671 for the six months ended June 30, 2023, and June 30, 2022, respectively, represents capital expenditures.

 

Financing Activities

 

Cash provided by financing activities of $933 for the six months ended June 30, 2023, was due to $5,000 of proceeds from the revolving credit facility, partially offset by payments made on the term loan and the debt issuance costs. Cash used in financing activities of $6,727 for the six months ended June 30, 2022, was due to payments made on the term loan, contingent consideration and tax payments for shares in lieu of taxes.

 

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. See Note 2—Significant Accounting Policies in the notes to our audited condensed consolidated financial statements in the Company's 2022 Form 10-K describes the significant accounting policies used in preparation of the unaudited condensed consolidated financial statements. We believe that the most complex and sensitive judgments, because of their potential significance to the unaudited condensed 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.

 

Impact of Changes in Accounting on Recent and Future Trends

The FASB issued ASU 2016-13, Financial Instruments—Credit Losses: Measurement of Credit Losses on Financial Instruments ("ASC 326"), which amends the impairment model by requiring entities to use a forward-looking approach based on expected losses to estimate credit losses on certain types of financial instruments including trade receivables and available for sale debt securities. ASC 326 is effective for fiscal years beginning after December 15, 2022, with early adoption permitted. The new standard was effective for the Company beginning January 1, 2023, and was applied using a modified retrospective transition method. The FASB subsequently issued other related ASUs that amend ASU No. 2016-13 to provide clarification and additional guidance. The Company concluded that the adoption of ASC 326 did not have a material impact on the condensed consolidated financial statements.

 

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 2023, 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.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

For quantitative and qualitative disclosures about market risk, see Item 7A. "Quantitative and Qualitative Disclosures About Market Risk" of our 2022 Form 10-K. Our exposures to market risk have not changed materially since December 31, 2022.

 

31


 

Item 4. Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed pursuant to the Exchange Act is properly and timely reported and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

 

We have evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2023, with the participation, and under the supervision, of our management, including our Chief Executive Officer and Chief Financial Officer. Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2023, our disclosure controls and procedures were ineffective to the extent of the material weaknesses described below:

 

A comprehensive system of formal policies, procedures and controls has not been fully designed or implemented to ensure appropriate document retention and achieve complete, accurate and timely financial accounting, reporting and disclosures.
Management determined that the Company has design deficiencies over revenue and expenditures, specifically around (i) customer and supplier onboarding; (ii) document retention; and (iii) a lack of evidence to support control performance. Management determined that the collective ineffective controls over revenue and expenditures constitute a material weakness.
Management determined that the Company did not maintain effective controls over the completeness, existence, accuracy, and presentation and disclosure of the accounting for income taxes and related liabilities, including (i) quarterly and year-end income tax provision and reporting; (ii) significant transactions and business events; (iii) uncertain tax positions; (iv) the tax receivable agreement liability valuation derived from our Up-C tax structure; (v) and tax related disclosures. Management determined that the ineffective controls over income tax accounting constitute a material weakness.
Management determined that the Company has design deficiencies over the completeness, accuracy, existence, and presentation and disclosure of inventory. Specifically, we did not maintain effective controls related to (i) validation of the inventory costing; (ii) consistent verification of inventory existence throughout the year basis; and (iii) reconciliation of inventory accounts. Management determined that the ineffective controls over inventory accounting constitute a material weakness.

 

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim condensed consolidated financial statements may not be prevented or detected on a timely basis.

 

In light of the material weakness described above, we performed additional analysis and other post-closing procedures to ensure our financial statements were prepared in accordance with U.S. GAAP. Accordingly, we believe that the condensed consolidated financial statements included in this report fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented.

 

Changes in Internal Control over Financial Reporting

 

There has been no change in our internal control over financial reporting that occurred during the fiscal quarter ended June 30, 2023, covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Management has identified the material weaknesses in our internal controls as noted above under "Evaluation of Disclosure Controls and Procedures."

 

The Company has a remediation plan for the identified material weaknesses that will dedicate resources and priority to accounting and finance reporting controls over revenue, expenditures, income taxes and related liabilities, and inventory. The remediation plan includes the implementation of companywide policies and procedures for critical accounting areas including revenue and inventory, the enhancement of our documentation retention policy and training for employees on internal controls over financial reporting.

 

The remediation actions are subject to ongoing senior management review, as well as Audit Committee oversight. The Company will not be able to conclude whether the steps to be taken will fully remediate the material weaknesses in internal controls over financial reporting until remediation efforts are completed, tested, and evaluated for effectiveness. Until these weaknesses are remediated, the Company plans to continue to perform additional analyses and other mitigating procedures to ensure that the condensed consolidated financial statements are prepared in accordance with U.S. GAAP.

 

32


 

PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

We may from time to time be involved in litigation and claims incidental to the conduct of our business. We are not currently subject to any pending legal (including judicial, regulatory, administrative or arbitration) proceedings that we expect to have a material impact on our condensed consolidated financial statements. However, given the inherent unpredictability of these types of proceedings and the potentially large and/or indeterminate amounts that could be sought, an adverse outcome in certain matters could have a material effect on Fathom's financial results in any particular period. See Note 18 "Commitments and Contingencies" to our unaudited condensed consolidated financial statements for additional information.

 

Item 1A. Risk Factors.

The following additional risk factor should be read in conjunction with the risk factors set forth under “Item 1A. Risk Factors” in our 2022 Form 10-K. The risks described below are further qualified by the information relating to our liquidity and capital resources and our Credit Agreement as described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources,” “ – Borrowings and Lines of Credit” and “– Going Concern Consideration.” There are no material changes to the disclosures regarding risk factors made in Part I, Item 1A of our 2022 Form 10-K, except as follows:

Our Credit Agreement requires us to comply with financial maintenance covenants, including a minimum EBITDA covenant measured as of the end of each fiscal quarter. It is reasonably probable that we will not be in compliance with the minimum EBITDA covenant as of September 30, 2023, which could result in the lenders declaring an event of default under the Credit Agreement if we are unable to obtain on acceptable terms an amendment, waiver or other change to the Credit Agreement to address this anticipated noncompliance. In the event the lenders exercise their right to accelerate the repayment of our indebtedness under the Credit Agreement, our inability to repay the debt obligation in that scenario would raise substantial doubt about the Company’s ability to continue as a going concern.

Among other covenants, the Credit Agreement calls for the minimum EBITDA requirement to increase on September 30, 2023, and again on December 31, 2023. Based on our most recent financial forecast, it is reasonably probable that we will be in non-compliance with the minimum EBITDA requirement as of September 30, 2023, and we likely will need to seek covenant relief or modifications from the lenders.

Any amendment or waiver under the Credit Agreement to address this anticipated covenant non-compliance may result in increased interest rates or premiums and more restrictive covenants and other terms less advantageous to us, and may require the payment of a fee for such amendment or waiver. There can be no assurance that we would be able to obtain a waiver or amendment on terms acceptable to us.

Even if the lenders do grant an amendment to or waiver under the Credit Agreement to address the anticipated covenant non-compliance, any future financial maintenance covenant non-compliance could give rise to an event of default thereunder.

If the lenders do not grant an amendment to or waiver of our anticipated minimum EBITDA covenant non-compliance as of September 30, 2023 or any future covenant non-compliance, the indebtedness under the Credit Agreement could be declared immediately due and payable, which would likely have a material adverse effect on the Company including raising substantial doubt about the Company’s ability to continue as a going concern.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

33


 

Item 6. Exhibits.

 

Exhibit

Number

Description

31.1*

Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2*

Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1*

Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2*

Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS

Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document.

101.SCH

 

Inline XBRL Taxonomy Extension Schema Document

101.CAL

 

Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

 

Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

 

Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE

 

Inline XBRL Taxonomy Extension Presentation Linkbase Document

104

 

Cover Page Interactive Data File (embedded within the Inline XBRL document)

 

* Filed herewith.

 

34


 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Fathom Digital Manufacturing Corporation

Date: August 14, 2023

By:

/s/ Ryan Martin

Ryan Martin

Chief Executive Officer

 

 

 

 

 

 

 

 

 

Date: August 14, 2023

 

By:

/s/ Mark Frost

 

 

 

Mark Frost

 

 

 

Chief Financial Officer

 

35