FATHOM DIGITAL MANUFACTURING CORPORATION The following discussion and analysis of our financial condition and results of operations should be read in conjunction withFathom Digital Manufacturing Corporation's financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K. This discussion and analysis contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth elsewhere in this Annual Report on Form 10-K.
Overview
Fathom Digital Manufacturing Corporation was incorporated inDelaware inDecember 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 ofFathom Digital Manufacturing Corporation and its consolidated subsidiaries. We are a leading national on-demand digital manufacturing platform at the forefront of the Industry 4.0 revolution. Industry 4.0 utilizes e-commerce, automation, and data sharing in a cyber-physical system to communicate and cooperate in the manufacturing process over the Internet of Things ("IoT"). Using our expansive manufacturing footprint and extensive expertise in both additive and traditional manufacturing, we provide comprehensive product development and on-demand manufacturing services to many of the largest and most innovative companies in the world. Our unified suite of manufacturing technologies, processes, and proprietary software enables us to deliver hybridized solutions that meet the specific needs of our customers, empowering them to tackle complex manufacturing problems and accelerate product development cycles.
Our differentiated strategy focuses on speed, problem solving, adaptive technical responsiveness, and a technology agnostic approach across our 25 plus manufacturing processes to meet customers' design intent. This allows our customers to iterate faster, often shortening their product development and production cycles from months to days.
We seamlessly blend in-house capabilities consisting of plastic and metal
additive technologies, injection molding and tooling, computer numerical control
("CNC") machining, and precision sheet metal fabrication. We operate over 530
advanced manufacturing systems across 25 unique manufacturing processes and a
450,000 sq. ft. manufacturing footprint, spanning 12 facilities located
primarily within the U.S. We believe we are positioned to serve the largest
geographic markets in which our customers are located and enable cost effective
and rapid turnaround times for our customers. Our scale and the breadth of
offerings allow our customers to consolidate their supply chain and product
development needs through the ability to source through a single manufacturing
supplier. Fathom's manufacturing technologies and capacity are further extended
through the utilization of a selected group of highly qualified suppliers that
specialize in injection molding and tooling and CNC machining.
We have experienced significant growth since inception both organically and
through our successful and proven acquisition playbook, which is enabled by our
proprietary software platform that allows for a streamlined integration of
acquired companies. Over the past three years, we have successfully completed 13
acquisitions to bolster our operations and offerings. Fathom started as Midwest
Composite Technologies, LLC ("MCT"), a leader in prototyping and low-volume
services. Founded in 1984, MCT specialized in model making, industrial design,
and rapid prototyping. Today, MCT serves companies through a variety of in-house
additive manufacturing technologies, including 3D printing and processing, CNC
machining, injection molding, and industrial design capabilities. In September
2019 , we acquired Kemeera, LLC to expand our additive, CNC machining injection
molding, and development and engineering services, as well as bring urethane
casting capabilities. In December 2019 , we acquired ICOMold LLC ("ICOMold") to
expand our injection molding capabilities and significantly enhance our customer
experience by bringing in-house an interactive, automated quotation system
capable of providing feedback in 30 seconds with an intuitive, customer-facing
project management portal, which we have continued to develop and enhance. Our
acquisition of ICOMold also expanded our capabilities into China . In July 2020 ,
we acquired Incodema, LLC and Newchem, LLC to expand our in-house manufacturing
processes to include precision sheet metal engineering solutions, including a
broad array of sheet metal cutting and forming solutions such as laser cutting,
micro waterjet, specialty stamping, and photochemical etching, among others, for
quick and complex, tight tolerance parts. In August 2020 , we acquired GPI
Prototype & Manufacturing Services, LLC ("GPI") to expand our additive
manufacturing capabilities. GPI was one of the first metal additive
manufacturing service providers in the U.S. , bringing metallurgical expertise
in-house and enabling the Company to produce metal parts with complex geometries
for on-demand manufacturing applications. In December 2020 , we acquired
Dahlquist Machine, LLC to expand our precision machining capabilities with
state-of-the-art CNC mills and lathes for high-speed precision machining of
light metals, aluminum, and plastics. In December 2020 , we also acquired
Majestic Metals, LLC , further expanding our precision sheet metal fabrication
capabilities. Further, in December 2020 , we acquired Mark Two Engineering, LLC
expanding our precision machining services and footprint in the medical device
industry. In February 2021 , we acquired Summit Tooling, Inc. and Summit Plastics
LLC , further expanding our plastic injection mold manufacturing capabilities. In
April 2021 , we acquired Centex Machine and Welding Inc. and Laser Manufacturing,
Inc. to expand our high-precision manufacturing services specializing in CNC
machining and medical device manufacturing. In April 2021 , we also acquired
Sureshot Precision, LLC (d/b/a Micropulse West) expanding our Electrical
Discharge Machine ("EDM") services, and CNC and manual machining capabilities.
Further, in April 2021 , we acquired Precision Process, LLC specializing in CNC
machining, engineering support, and EDM services.
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We continue to invest significantly 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.
This diverse customer base has allowed for no single customer to represent more
than 7.1% and 4.4% of our revenue in 2022 and 2021, respectively.
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.
Factors Affecting the Comparability of our Results of Operations
As a result of a number of factors, our historical results of operations are not comparable from period to period and may not be comparable to our financial results of operations in future periods. Set forth below is a brief discussion of the key factors that may impact the comparability of our results of operations in future operations.
Impact of the Business Combination
Fathom is subject to corporate level tax rates at the federal, state and local levels. Fathom OpCo was and is treated as a flow-through entity forU.S. federal income tax purposes, and as such, has generally not been subject toU.S. federal income tax at the entity level. Accordingly, other than for certain consolidated subsidiaries of the Predecessor that are structured as corporations and unless otherwise specified, the historical results of operations and other financial information presented does not include any provision forU.S. federal income tax. Fathom paysU.S. federal and state income taxes as a corporation on its share of our taxable income. The Business Combination was accounted for as a business combination using the acquisition method of accounting. Accordingly, the assets and liabilities, including any identified intangible assets, were recorded at their preliminary fair values at the date of completion of the Business Combination, with any excess of the purchase price over the preliminary fair value recorded as goodwill. The application of business combination accounting required the use of significant estimates and assumptions. As a result of the application of accounting for the Business Combination, the historical consolidated financial statements of Fathom OpCo are not necessarily indicative of the Fathom's future results of operations, financial position and cash flows. For example, increased tangible and intangible assets resulting from adjusting the basis of tangible and intangible assets to their fair value would result in increased depreciation and amortization expense in the periods following the consummation of the Business Combination. In connection with the Business Combination, we entered into a Tax Receivable Agreement ("TRA") with certain of our pre-Business Combination owners that provides for the payment by Fathom to such owners of 85% of the benefits that Fathom is deemed to realize as a result of the Company's share of existing tax basis acquired in the Business Combination and other tax benefits related to entering into the TRA. Additionally, in connection with the Business Combination, we have accounted for the issuance of warrants and earnout shares as liabilities which require re-measurement to fair value at the end of each reporting period, as applicable, and adopted the Fathom 2021 Omnibus Incentive Plan which will result in higher share-based compensation expenses.
Impact of Becoming a
We have incurred additional costs associated with operating as a public company, including human resources, legal, consulting, regulatory, insurance, accounting, investor relations and other expenses that we did not incur as a private company. The Sarbanes-Oxley Act and rules adopted by theSEC require public companies to implement specified corporate governance practices that are not applicable to a private company. These additional rules and regulations have increased our legal, regulatory and financial compliance costs and will make some activities more time-consuming and costly. 36 --------------------------------------------------------------------------------
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 owns a wide breadth of advanced manufacturing processes,
including additive 2.0 and emerging technologies;
• We have a proven track record of serving blue-chip, enterprise-level
corporate customers;
• We offer our clients turnaround times in as little as 24-hours, nationwide;
• Our unified digital customer experience supplemented by with embedded
support teams;
• Fathom provides the industry's only team of dedicated customer-facing
engineers, unlocking the broadest parts envelope and providing customers
with high-value customized parts;
• Our list of certifications validates our capabilities and precision
(tight tolerances, handling of sensitive client data, etc.);
• We possess a wealth of material expertise, technical designcapabilities, and engineering resources which we leverage to deliver
superior customer results regardless of manufacturing process and
production material; and
• 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) 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 this Annual Report on 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.
Comparison of Years Ended
For the purposes of this section, the period fromJanuary 1, 2021 toDecember 22, 2021 is the "predecessor period", and the period fromDecember 23, 2021 toDecember 31, 2021 is the 2021 "successor period". The predecessor period and the successor period collectively are referred to as the "2021 predecessor and successor periods." Amounts appearing in the remainder of this Item 7 are in 000's. 37 --------------------------------------------------------------------------------
Period From
January 1 - December 23 - January 1 -
December 31, 31, 2021 December 22, 2021
2022 (Successor) (Predecessor)
Revenue $ 161,141 $ 4,840 $ 147,356
Cost of revenue 108,623 2,725 90,278
Gross profit 52,518 2,115 57,078
Operating expenses
Selling, general, and administrative 49,869 3,133 37,507
Depreciation and amortization 18,179 416 10,357
Restructuring 1,897 - -
Goodwill impairment 1,189,518 - -
Total operating expenses 1,259,463 3,549 47,864
Operating (loss) income (1,206,945 ) (1,434 ) 9,214
Interest expense and other (income)
expense
Interest expense 9,015 251 13,063
Other expense 350 308 21,007
Other income (99,160 ) (35,460 ) (5,174 )
Total interest expense and other
(income) expense, net (89,795 ) (34,901 ) 28,896
Net (loss) income before income tax $ (1,117,150 ) $ 33,467 $ (19,682 )
Income tax benefit (6,662 ) (3 ) (3,208 )
Net (loss) income $ (1,110,488 ) $ 33,470 $ (16,474 )
Net loss attributable to Fathom OpCo
non-controlling interest (621,903 ) (968 ) -
Net (loss) income attributable to
controlling interest (488,585 ) 34,438 -
Comprehensive income (loss):
(Loss) gain from foreign currency
translation adjustments (107 ) - 113
Comprehensive (loss) income, net of
tax $ (488,692 ) $ 34,438 $ (16,361 )
Revenue
Revenue was $161,141 for the year ended December 31, 2022 , compared to $4,840
and $147,356 , for the 2021 successor and predecessor periods, respectively. The
increase of $8,945 , or 5.9%, was primarily driven by our 2021 acquisitions, and
1.0% organic growth.
Gross Profit
Gross profit, or revenue less cost of revenue, was $52,518 , or 32.6% of revenue,
for the year ended December 31, 2022 , compared to $2,115 and $57,078 , or 43.7%
and 38.7% of revenue, for the 2021 successor and predecessor periods,
respectively. The $6,675 , or 11.3%, decrease was primarily driven by higher
material and labor costs of $6,913 and non-recurring amortization expense of
$3,241 related to inventory step-up adjustments from Business Combination
purchase accounting, partially offset by the overall increase in revenues of
$3,479 .
Operating Expenses
Selling, general and administrative ("SG&A") expenses were $49,869 for the year
ended December 31, 2022 , compared to $3,133 and $37,507 for the 2021 successor
and predecessor periods, respectively. The $9,229 increase in SG&A expenses was
driven by higher stock based compensation expense of $4,626 , primarily due to
the vesting of additional options and restricted stock units granted since the
Business Combination, and additional third-party costs of $11,500 related to
becoming a public company, including officer's & director's insurance,
consulting fees, audit fees, and tax fees., partially offset by decreased
salary, bonuses and commissions on $5,800 .
Depreciation and amortization expenses were $18,179 for the year ended December
31, 2022 , compared to $416 , and $10,357 for the 2021 successor and predecessor
periods, respectively. The increase of $7,406 , or 68.7%, was primarily driven by
a full year amortization of intangible assets related to the Business
Combination.
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Restructuring costs of $1,897 for the year ended December 31, 2022 represents
costs to consolidate our Oakland, California facility into the Hartland,
Wisconsin , facility, transition our finance function to a shared-service model,
and consolidated a limited number of leadership roles, as announced in our
reorganization plan on July 7, 2022 . There were no restructuring charges during
the 2021 successor and predecessor periods.
The goodwill impairment charge of $1,189,518 for the year ended December 31,
2022 , represents a write down of the carrying amount of goodwill from a decrease
in the Company's fair value based upon a quantitative assessment as described in
Note 8 - "Goodwill and Intangible Assets, net" to our consolidated financial
statements. There was no goodwill impairment charge recorded during the 2021
successor and predecessor periods.
Operating Income (Loss)
Operating loss was$1,206,945 for the year endedDecember 31, 2022 , compared to an operating loss of$1,434 for the 2021 successor period and an operating income of$9,214 for the 2021 predecessor period. The operating loss was primarily driven by the goodwill impairment charge described in Note 8 - "Goodwill and Intangible Assets, net" to our consolidated financial statements, as well as restructuring costs, additional stock compensation, higher amortization of intangible assets related to the Business Combination, and the inventory step-up adjustment from purchase accounting.
Interest Expense and Other Expense (Income)
Interest expense was$9,015 for the year endedDecember 31, 2022 , compared to$251 and$13,063 for the 2021 successor and predecessor periods, respectively. The decrease in interest expense of$4,299 , or 32.3%, is primarily due to lower debt for the year endedDecember 31, 2022 compared to the 2021 predecessor period, and lower average interest rates under the Credit Agreement as compared to the 2021 Bridge Loan. Other expenses were$350 for the year endedDecember 31, 2022 , compared to$308 , and$21,007 for the 2021 successor and predecessor periods, respectively. The decrease in other expenses of$20,965 , or 98.4%, is due to non-recurring expenses related to the acquisitions that completed in the 2021 predecessor period. Other income was$99,160 for the year endedDecember 31, 2022 , compared to$35,460 and$5,174 for the 2021 successor and predecessor periods, respectively. The increase in other income of$58,526 , or 144.0%, represents the changes in fair value in the earnout share liabilities and the warrant liability during year endedDecember 31, 2022 of$66,790 and$31,120 , respectively. Other income for the 2021 successor period was related to the changes in fair value in the earnout share liabilities and warrant liability of$27,260 , and$8,200 , respectively. Other income for the 2021 predecessor period included a change in fair value of contingent consideration and a gain on PPP loan forgiveness of$3,550 and$1,624 , respectively.
Income Taxes
We recorded a tax benefit of$6,662 ,$3 , and$3,208 for 2022, the 2021 successor period and the 2021 predecessor period, respectively. Our income tax benefit for the year endedDecember 31, 2022 is driven by the federal income tax at the statutory rate of$234,709 partially offset by$130,499 for the non-controlling interest impact, and$104,768 related to non-tax deductible goodwill, which is not tax deductible following our goodwill impairment charges. During the 2021 predecessor period, certain subsidiaries of Fathom OpCo which were previously held as corporations forU.S. federal tax purposes, were reorganized into flow-through entities in non-taxable transactions. As a result, deferred tax liabilities pertaining to the corporate subsidiaries were reversed as income tax benefits during the 2021 predecessor period. During the 2021 successor period, the Company was in a small taxable loss position after accounting for permanent differences on income from the change in warrant liability, earnout share liability, and sponsor earnout liability. As we have assessed that deferred tax assets in the form of net operating losses are not more likely than not to be realized, no income tax benefit was recorded from the taxable loss position.
Non-GAAP Information
This Annual Report on Form 10-K 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 security 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, may not be comparable to other similarly titled
measures of performance of other companies in other industries or within the
same industry. These non-GAAP financial measures supplement and should be
considered in addition to and not in lieu of our, U.S. GAAP results.
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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).
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 closest
Period From
January 1, 2022 -
December 31, 2022 December 23 - December 22, 2021
31, 2021 (Successor) (Predecessor)
Net income (loss) $ (1,110,488 ) $ 33,470 $ (16,474 )
Acquisition - - 4,045
expenses(1)
Transaction costs(2) - - 12,515
Stock compensation 7,386 - -
Inventory step-up 3,241 - -
amortization
Goodwill impairment 1,189,518 - -
Restructuring 1,897 - -
Change in fair value (31,120 ) (8,200 ) -
of warrant liability
(3)
Change in fair value (66,790 ) (27,260 ) -
of earnout share
liabilities(3)
Change in fair value (600 ) 300 -
of TRA liability (3)
Integration, 4,780 215 10,538
non-recurring,
non-operating, cash,
and non-cash
costs(4)
Adjusted net income $ (2,176 ) $ (1,475 ) $ 10,624
(loss)
(1) Represents expenses incurred related to business acquisitions;
(2) Represents legal, consulting, and auditing costs associated with the
Business Combination;
(3) Represents the income statement impacts from the change in fair value
related to the Sponsor Earnout Share liability, the Fathom Earnout Share
liability, the Warrant liability, and the TRA liability associated with the
Business Combination.
(4) Represents adjustments for other integration, non-recurring, non-operating,
cash, and non-cash costs related primarily to integration costs for new
acquisitions, severance, and management fees paid to our principal owner during
the predecessor period.
Adjusted EBITDA
We define and calculate Adjusted EBITDA as net losses before the impact of
interest income or expense, income tax expense and depreciation and
amortization, and further adjusted for the following items: transaction-related
costs, the impact of any increase or decrease in the estimated fair value of the
Company's warrants and earnout shares, and certain other non-cash and non-core
items, as described in the reconciliation included below.
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The table below presents our Adjusted EBITDA reconciled to net income (loss),
the closest
Period From
January 1, 2022 -
December 31, 2022 December 23 - December 22, 2021
31, 2021 (Successor) (Predecessor)
Net income (loss) $ (1,110,488 ) $ 33,470 $ (16,474 )
Depreciation and 24,896 510 16,108
amortization
Interest expense, 9,015 251 13,063
net
Income tax benefit (6,662 ) (3 ) (3,208 )
Acquisition - - 4,045
expenses(1)
Transaction costs(2) - - 12,515
Stock compensation 7,386 - -
Inventory step-up 3,241 - -
amortization
Goodwill impairment 1,189,518 - -
Restructuring 1,897 - -
Change in fair value (31,120 ) (8,200 ) -
of Warrant
liability(3)
Change in fair value (66,790 ) (27,260 ) -
of earnout share
liabilities(3)
Change in fair value (600 ) 300 -
of TRA (3)
Loss on - - 2,031
extinguishment of
debt(4)
Contingent (148 ) - (3,550 )
consideration(5)
Integration, 4,780 215 10,538
non-recurring,
non-operating, cash,
and non-cash
costs(6)
Adjusted EBITDA $ 24,925 $ (717 ) $ 35,068
(1) Represents expenses incurred related to business acquisitions;
(2) Represents legal, consulting, and auditing costs associated with the
Business Combination.
(3) Represents the income statement impacts from the change in fair value
related to the Sponsor Earnout Share liability, the Fathom Earnout Share
liability, the Warrant liability, and the TRA liability associated with the
Business Combination;
(4) Represents amounts paid to refinance debt in April 2021 ;
(5) Represents the change in fair value of contingent consideration payable to
former owners of acquired businesses;
(6) Represents adjustments for other integration, non-recurring, non-operating,
cash, and non-cash costs related primarily to integration costs for new
acquisitions, severance, and management fees paid to our principal owner during
the predecessor period.
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, capital equipment investments, and business development efforts, as well as compensation and benefits of our employees. In addition, under our Amended Credit Agreement (as defined below), the Company is subject to various financial covenants, including quarterly net leverage and interest coverage covenants. For the period endingDecember 31, 2022 , the Company was in compliance with the net interest coverage covenant. We did not meet the quarterly net leverage ratio for the period endingDecember 31, 2022 , however, the lenders provided the Company with a loan covenant waiver as of and for this quarterly period. 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$10,713 in cash as ofDecember 31, 2022 . We believe our operating cash flows, together with amounts available under the 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. 41 -------------------------------------------------------------------------------- We may, however, need additional cash resources due to changed business conditions or other developments, including unanticipated regulatory developments, significant acquisitions, and competitive pressures. Our capital expenditures in 2022 of$13,189 were approximately 8.1% of annual revenue. We believe future growth capital expenditures, excluding any expenditures for buildings and maintenance capital we might purchase for our operations, are likely to be approximately 4.0% of 2023 annual revenue. To the extent that our current resources are insufficient to satisfy our cash requirements, we may need to seek additional equity or debt financing. If the needed financing is not available, or if the terms of financing are less desirable than we expect, we may be forced to decrease our level of investment in new product launches and related marketing initiatives or to scale back our existing operations, which could have an adverse impact on our business and financial prospects.
Borrowings and Lines of Credit
OnDecember 23, 2021 , the Company entered into a new Credit Agreement (the "New Credit Agreement", which included a$50,000 revolving credit facility and a$125,000 term loan. The Company's borrowings under the revolving credit facility were$37,000 atDecember 31, 2022 . The loans obtained under these facilities will mature inDecember 2026 . As previously disclosed, the New Credit Agreement was amended as ofNovember 10, 2022 (the New Credit Agreement, as so amended, the "Amended Credit Agreement" or "First Amendment"). Specifically, the Amendment (i) reduced the minimum interest coverage ratio from 3.00 to 1.0 to 2.50 to 1.0 for each fiscal quarter ending in fiscal 2023, to 2.75 to 1.0 for the fiscal quarters ending onMarch 31, 2024 andJune 30, 2024 , with the minimum interest coverage ratio reverting back to 3.00 to 1.0 for each fiscal quarter ending on and afterSeptember 30, 2024 , (ii) increased the maximum net leverage ratio to 4.50 to 1.0 for each fiscal quarter ending onSeptember 30, 2022 throughJune 30, 2023 , which ratio will decrease thereafter over time until it reaches 3.50 to 1.0 for each fiscal quarter ending on and afterJune 30, 2024 , and (iii) prohibits certain restricted payments by the Company otherwise permitted by Section 6.06(g) of the Amended Credit Agreement throughSeptember 30, 2024 . The Amendment also replaces the Adjusted LIBO Rate (e.g., LIBO Rate multiplied by the then applicable statutory reserve rate per annum), plus a range of applicable margins, as an interest election under the Amended Credit Agreement, with Term SOFR plus 0.10% ("Adjusted Term SOFR") per annum and Daily Simple SOFR plus 0.10% per annum, as applicable, in each case plus an applicable margin adjustment ranging from 2.25% to 3.75% based on the Company's most recent net leverage ratio calculation as of the applicable interest determination date. In addition, the Amendment replaces the Adjusted LIBO Rate plus 1.00% per annum as one of the interest rate floors applied in determining the alternate base interest rate for ABR Loans (as defined in the Amended Credit Agreement), with Adjusted Term SOFR plus 1.00% per annum. Lastly, the Amendment provides that the applicable margin applicable to ABR Loans increase to 2.75% to the extent the Company's net leverage ratio equals or exceeds 4.00 to 1.0 on the applicable date. In connection with the preparation and execution of the Amendment, the Company paid customary arranger and lender consent fees, and reasonable and documented expenses of the Administrative Agent. The foregoing description of the Amendment and the Amended Credit Agreement is a summary and is qualified in its entirety by reference to the full text of the Amendment and the Amended Credit Agreement, which is attached to this Quarterly Report as Exhibit 10.1 and incorporated herein by reference. OnMarch 24, 2023 , the Company entered into an amendment of the Amended Credit Agreement (as amended by the Second Amendment, the "Second Amended Credit Agreement" or "Second Amendment") with the administrative agent thereof (the "Administrative Agent") and the other lenders party thereto to modify certain financial covenants. References in this Annual Report to the "Credit Agreement" means the New Credit Agreement, the Amended Credit Agreement or the Second Amended Credit Agreement, as the context requires. 42 -------------------------------------------------------------------------------- Specifically, the Second Amendment (i) suspends, through the fiscal quarter ending onDecember 31, 2023 , applicability of the interest coverage ratio covenant, and reduces the interest coverage ratio from 2.00 to 1.00 for the fiscal quarters ending onMarch 31, 2024 andJune 30, 2024 , from 2.25 to 1.00 for the fiscal quarter ending onSeptember 30, 2024 , from 2.50 to 1.00 for the fiscal quarter ending onDecember 31, 2024 , and from 3.00 to 1.00 for the fiscal quarter ending onMarch 31, 2025 and each fiscal quarter thereafter, (ii) suspends through the fiscal quarter ending onDecember 31, 2023 applicability of the net leverage ratio covenant, and reduces the net leverage ratio from 5.00 to 1.00 for the fiscal quarter ending onMarch 31, 2024 , from 4.75 to 1.00 for the fiscal quarter ending onJune 30, 2024 , from 4.50 to 1.00 for the fiscal quarter ending onSeptember 30, 2024 , from 4.00 to 1.00 for the fiscal quarter ending onDecember 31, 2024 , and from 3.50 to 1.00 for the fiscal quarter ending onMarch 31, 2025 and each fiscal quarter thereafter, (iii) establishes a new quarterly Minimum EBITDA financial covenant of$3,100 for the three months ending onMarch 31, 2023 ,$8,750 for the six months ending onJune 30, 2023 ,$16,750 for the nine months ending onSeptember 30, 2023 , and$24,400 for the year ending onDecember 31, 2023 (excluding for purposes of this covenant adjustments otherwise made pursuant to clauses (xii) through (xviii) of the definition thereof in the Second Amended Credit Agreement), (iv) establishes a new minimum Liquidity covenant (as defined in the Second Amended Credit Agreement) of at least$13,500 on the last day of any month ending on or afterMarch 31, 2023 through and includingDecember 31, 2024 , and (v) prohibits certain investments and restricted payments by the Company otherwise permitted by Article VI of the Second Amended Credit Agreement throughDecember 31, 2024 . Under the Amended Credit Agreement the Company is subject to various financial covenants, including quarterly net leverage and interest coverage. For the period endingDecember 31, 2022 , the Company was in compliance with the net interest coverage covenant. We did not meet the quarterly net leverage ratio for the period endingDecember 31, 2022 , however, the lenders provided the Company with a loan covenant waiver as of and for the three months endedDecember 31, 2022 . In connection with the preparation and execution of the Second Amendment, the Company paid$524 in customary arranger and lender consent fees, and reasonable and documented expenses of the Administrative Agent. The foregoing description of the Second Amendment and the Second Amended Credit Agreement is a summary and is qualified in its entirety by reference to the full text of the Second Amendment and the Second Amended Credit Agreement, which is attached to this Annual Report as Exhibit 10.7 and incorporated herein by reference. The Company recorded deferred financing costs for 2022, and the 2021 Successor Period of$411 , and$1,828 , respectively. in conjunction with the Credit Agreement and the applicable principal balances are presented within Long-Term debt, net on the Company's Consolidated Balance Sheets. The Company amortizes the deferred financing costs using the effective interest method. The revolving credit facility under the 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, and/or an increase in commitments under the revolving credit facility, in an aggregate amount of up to$100,000 .
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$79,000 based on the Company's closing share price of$1.32 atDecember 31, 2022 . As ofDecember 31, 2022 , we do not expect to make any material payments within the next two years, and anticipate payments to become more material beginning in 2025. OnApril 4, 2023 , the Tax Receivable Agreement was amended and restated by Fathom and theCORE 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 Tax Receivable Agreement of certain intended tax benefits to affiliates of theCORE 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 Tax Receivable Agreement. A copy of the Amended and Restated Tax Receivable Agreement is filed as Exhibit 10.1 to this Annual Report and incorporated herein by reference. 43 --------------------------------------------------------------------------------
Cash Flow Analysis
Period From
January 1, 2022 - December 23 - January 1 -
December 31, 2022 December 31, December 22, 2021
(dollars in thousands) 2021 (Successor) (Predecessor)
Net cash provided by (used in) :
Operating Activities $ 3,080 $ 521 $ 7,223
Investing Activities (13,189 ) - (76,400 )
Financing Activities 572 - 70,566
Operating Activities
Net cash provided by operating activities was $3,080 for the year ended December
31, 2022 , compared to $521 and $7,223 for the 2021 successor and predecessor
periods, respectively. This decrease of $4,664 is primarily due to higher
operating loss, and increased working capital requirements,
Investing Activities
Cash used in investing activities was$13,189 for the year endedDecember 31, 2022 , compared to$0 and$76,400 for the 2021 successor and predecessor periods, respectively. The decrease of$63,211 was driven by a reduction of the overall cash used in acquisitions by Fathom OpCo for the 2021 predecessor period of$67,428 , compared to$0 cash used for acquisitions by Fathom for the year endedDecember 31, 2022 , partially offset by an increase in capital expenditures for the year endedDecember 31, 2022 of$13,189 , compared to$8,972 for the 2021 successor and predecessor periods combined.
Financing Activities
Cash provided by financing activities was$572 for the year endedDecember 31, 2022 , compared to$0 and$70,566 for the 2021 successor and predecessor periods, respectively. Proceeds provided by financing activities for the year endedDecember 31, 2022 came from a$10,000 draw on the revolver facility, and proceeds from issuance of common stock under our ESPP, partially offset by principal payments on our Term Loan of$3,125 , tax payments for employee shares withheld in lieu of taxes of$2,976 , debt financing fees of$411 related to the Amended Credit Agreement, and contingent consideration payments of$2,750 . The cash provided by financing activities for the 2021 predecessor period was driven by the proceeds related to the 2021 Bridge Loan of$183,500 , partially offset by payments on the 2021 Term Loan and extinguishment of the 2020 credit facilities of$104,091 .
Critical Accounting Policies and Use of Estimates
Preparation of our financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses. See Note 2-Significant Accounting Policies in the accompanying notes to our consolidated financial statements which describes the significant accounting policies used in preparation of the consolidated financial statements. We believe that the most complex and sensitive judgments, because of their potential significance to the consolidated financial statements, result primarily from the need to make estimates about the effects of matters that are inherently uncertain and are described subsequently. Actual results could differ from management's estimates.
Business Combinations
We account for business acquisitions in accordance with Accounting Standards
Codification ("ASC") 805, Business Combinations ("ASC 805"). We measure the cost
of an acquisition as the aggregate of the acquisition date fair values of the
assets transferred and liabilities assumed and equity instruments issued.
Transaction costs directly attributable to the acquisition are expensed as
incurred. We record goodwill for the excess of (i) the total costs of
acquisition, fair value of any non-controlling interests and acquisition date
fair value of any previously held equity interest in the acquired business over
(ii) the fair value of the identifiable net assets of the acquired business.
44
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The acquisition method of accounting requires us to exercise judgment and make
estimates and assumptions based on available information regarding the fair
values of the elements of a business combination as of the date of acquisition,
including the fair values of identifiable intangible assets, deferred tax asset
valuation allowances, liabilities related to uncertain tax positions and
contingencies. We must also refine these estimates over a one-year measurement
period, to reflect any new information obtained about facts and circumstances
that existed as of the acquisition date that, if known, would have affected the
measurement of the amounts recognized as of that date. If we are required to
retroactively adjust provisional amounts that we have recorded for the fair
value of assets and liabilities in connection with an acquisition, these
adjustments could materially impact our results of operations and financial
position. Estimates and assumptions that we must make in estimating the fair
value of future acquired technology, user lists and other identifiable
intangible assets include future cash flows that we expect to generate from the
acquired assets. If the subsequent actual results and updated projections of the
underlying business activity change compared with the assumptions and
projections used to develop these values, we could record impairment charges. In
addition, we estimate the economic lives of certain acquired assets and these
lives are used to calculate depreciation and amortization expense. If our
estimates of the economic lives change, depreciation or amortization expenses
could be accelerated or slowed, which could materially impact our results of
operations.
We recognize goodwill in accordance with ASC 350, Intangibles-Goodwill and Other
("ASC 350"). Goodwill is the excess of cost of an acquired entity over the fair
value amounts assigned to assets acquired and liabilities assumed in a business
combination. Goodwill is not amortized.
As a result of sustained decreases in the Company's publicly quoted share price,
lower market multiples for a relevant peer group, and challenging macroeconomic
conditions, the Company concluded during the third quarter that there were
impairment indicators and conducted a quantitative goodwill impairment
assessment, including additional testing of its definite-lived intangibles, and
other long-lived assets as of September 30, 2022 . As a result of this
assessment, the Company did not identify an impairment to its definite-lived
intangible assets or other long-lived assets, but the Company recorded a
$1,066,564 non-deductible, non-cash goodwill impairment charge for the three and
nine months ended September 30, 2022 in our unaudited consolidated statements of
comprehensive income (loss). During the fourth quarter the Company's stock price
experienced an additional sustained decline, and the Company evidenced further
deterioration in the macroeconomic conditions, triggering a further impairment
analysis as of December 31, 2022 . As a result of this assessment the Company did
not identify an impairment to its definite-lived intangible assets or other
long-lived assets, but it did result in the recognition of an additional
impairment charge for the remaining goodwill of $122,954 for the quarter ended
December 31, 2022 , in our consolidated statements of comprehensive loss. There
were no goodwill impairment charges for the 2021 Successor Period and 2021
Predecessor Period.
The Company estimated the fair value of the Company using an equal allocation
between the discounted cash flow method under the income approach and the public
company guideline method under the market approach. The significant assumptions
used in the valuation include revenue growth rates, future gross profit margins
and operating expenses used to calculate projected future cash flows,
determination of the weighted average cost of capital, and future economic and
market conditions. The terminal value is based on an exit revenue multiple which
requires significant assumptions regarding the selections of appropriate
multiples that consider relevant market trading data. The Company bases its
estimates and assumptions on its knowledge of the digital manufacturing
industry, recent performance, expectations of future performance and other
assumptions the Company believes to be reasonable.
We recognize intangibles assets in accordance with ASC 350. Acquired intangible
assets subject to amortization are stated at fair value and are amortized using
the straight-line method over the estimated useful lives of the assets.
Intangible assets that are subject to amortization are reviewed for potential
impairment whenever events or circumstances indicate that carrying amounts may
not be recoverable. Assets not subject to amortization are tested for impairment
at least annually. As of December 31, 2022 and December 31, 2021 , no impairment
charges for intangible assets have been recognized.
The estimates of fair value are based on the best information available as of
the date of the assessment, which primarily incorporates management assumptions
about expected future cash flows. Although these assets are not currently
impaired, there can be no assurance that future impairments will not occur. See
Note 3-Business Combination with Fathom OpCo, Note 4 - Fathom OpCo Predecessor
Period Acquisitions, and Note 8-Goodwill and Intangible Assets in the
accompanying notes to the consolidated financial statements for more
information.
45
--------------------------------------------------------------------------------Revenue Recognition from Contracts with Customers
The Company accounts for revenue under ASC Topic 606, Revenue from Contracts
with Customer's ("ASC 606"). Most of the Company's revenue has one performance
obligation and is recognized on a point-in-time basis upon shipment. Over the
course of 2022, we were not able to support overtime revenue recognition for
customer contracts within our injection molding business and transitioned to
recognizing revenue on a point in time basis upon shipment. This change in
revenue recognition is immaterial to the overall financial statements in all
periods included in this Form 10-K. The Company's payments terms are consistent
with industry standards and never exceed 12 months.
Contingent Liabilities
Our contingent liabilities, which are included within the "Other non-current liabilities" caption on our consolidated balance sheets, are uncertain by nature and their estimation requires significant management judgment as to the probability and estimation of the amount of liability. These contingencies include, but may not be limited to, warrants, TRA liabilities, earnout shares, litigation, and management's evaluation of complex laws and regulations, including those relating to indirect taxes, and the extent to which they may apply to our business and industry. See Note 19 - Fair Value Measurement and Note 20 - Commitments and Contingencies in the accompanying notes to our consolidated financial statements for more information. We regularly review our contingencies to determine whether the likelihood of a liability is probable and to assess whether a reasonable estimate of the liability can be made. Determination of whether a liability estimate can be made is a complex undertaking that considers the judgement of management, third-party research, the prospect of negotiation and interpretations by regulators and courts, among other information. When liabilities can be reasonably estimated, an estimated contingent liability is recorded. We continually reevaluate our indirect tax and other positions for appropriateness.
Shared Based Compensation
Our historical and outstanding stock-based compensation awards, including the issuances of options and other stock awards under our equity compensation plans, have typically included service-based or performance-based vesting conditions. For awards with only service-based vesting conditions, we record compensation cost for these awards using the straight-line method over the vesting period. For awards with performance-based vesting conditions, we recognize compensation cost on a tranche-by-tranche basis. Share based compensation expense is measured based on the grant-date fair value of the share based awards and is recognized over the requisite service period of the awards. We use the Black-Scholes option pricing model to value our stock option awards. The Black-Scholes model requires management to make a number of key assumptions, including expected volatility, expected term, risk-free interest rate and expected dividends. The risk-free interest rate is estimated using the rate of return onU.S. treasury notes with a life that approximates the expected term. The expected term assumption used in the Black-Scholes model represents the period of time that the options are expected to be outstanding and is estimated using the midpoint between the requisite service period and the contractual term of the option. The assumptions underlying these valuations represent management's best estimates, which involve inherent uncertainties and the application of management judgment. As a result, if factors or expected outcomes change and our management uses significantly different assumptions or estimates, our stock-based compensation expense for future periods could be materially different, including as a result of adjustments to share based compensation expense recorded for prior period.
Earnout Shares Liabilities and Warrant Liability
The fair values of the Sponsor earnout shares liability, Fathom earnout shares liability, and Warrants liability were determined usingMonte Carlo simulations that have various significant unobservable inputs. The assumptions used could have a material impact on the valuation of these liabilities, and include our best estimate of expected volatility, expected holding periods and appropriate discounts for lack of marketability. Changes in the estimated fair values of these liabilities may have material impacts on our results of operations in any given period, as any increases in these liabilities have a corresponding negative impact on ourU.S. GAAP results of operations in the period in which the changes occur. See Note 3 - Business Combination with Fathom OpCo and Note 9 - Warrant Liability in the accompanying notes to our consolidated financial statements for more information. 46 --------------------------------------------------------------------------------
Impact of Changes in Accounting on Recent and Future Trends
InFebruary 2016 , theFinancial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-02, Leases ("Topic 842") Section A - Leases: Amendments to the FASB Accounting Standards Codification ("ASC"). The standard requires lessees to recognize the assets and liabilities arising from leases on the balance sheet and retains a distinction between classification of leases. The classification criteria for distinguishing between finance leases and operating leases are substantially similar to the classification criteria for distinguishing between capital leases and operating leases in the previous lease guidance. The Company adopted this standard and related amendments in the first quarter of 2022, using the modified retrospective approach. Using the modified retrospective approach, the Company determined an incremental borrowing rate at the date of adoption based on the total lease term and total minimum rental payments. The modified retrospective approach provides a method for recording existing leases at adoption with a cumulative adjustment to retained earnings. The Company elected the package of practical expedients, which permits the Company to not reassess (1) whether any expired or existing contracts are or contain leases, (2) the lease classification for any expired or existing leases, and (3) any initial direct costs for any expired or existing leases as of the effective date. The Company also elected the practical expedient to not allocate lease considerations between lease and non-lease components for real estate leases. As such, real estate lease considerations are treated as a single lease-component and accounted for accordingly. The Company excludes leases with an initial term of 12 months or less from the application of Topic 842. Adoption of the new standard resulted in the recording of$3,122 and$8,195 of current lease liabilities and long-term lease liabilities, respectively, and$11,986 in corresponding right-of-use lease assets. The difference between the approximate value of the right-of-use lease assets and lease liabilities is attributable to future rent escalations. The cumulative change in the beginning accumulated deficit was$82 due to the adoption of Topic 842. There was no material impact on the Company's consolidated statement of comprehensive loss or consolidated statement of cash flows. The Company's comparative periods continue to be presented and disclosed in accordance with previous lease guidance.
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.
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