The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our unaudited condensed
consolidated financial statements and related notes that appear elsewhere in
this report. In this discussion and analysis, the term "common share" refers to
the summation of ordinary voting common shares, restricted voting common shares
and participative restricted stock units when used to describe earnings (loss)
or book value per common share.
Forward-Looking Statements
In addition to the historical consolidated financial information, this report
contains "forward-looking statements," within the meaning of the Private
Securities Litigation Reform Act of 1995, which may include, but are not limited
to, statements with respect to estimates of future expenses, revenue and
profitability; trends affecting financial condition, cash flows and results of
operations; the availability and terms of additional capital; dependence on key
suppliers and other strategic partners; industry trends; the competitive and
regulatory environment; the successful integration of acquisitions; the impact
of losing one or more senior executives or failing to attract additional key
personnel; and other factors referenced in this report. Factors that could cause
or contribute to these differences include those discussed below and elsewhere,
particularly in the "Risk Factors" section of our Annual Report on Form 10-K for
the year ended December 31, 2021.
Often, but not always, forward-looking statements can be identified by the use
of words such as "plans," "expects," "is expected," "budget," "scheduled,"
"estimates," "forecasts," "intends," "anticipates," "believes" or variations
(including negative variations) of such words and phrases, or state that certain
actions, events or results "may," "could," "would," "might" or "will" be taken,
occur or be achieved. Forward-looking statements involve known and unknown
risks, uncertainties and other factors which may cause the actual results,
performance or achievements of Atlas to be materially different from any future
results, performance or achievements expressed or implied by the forward-looking
statements. Such factors include, among others, general business, economic,
competitive, political, regulatory and social uncertainties.
Although Atlas has attempted to identify important factors that could cause
actual actions, events or results to differ materially from those described in
forward-looking statements, there may be other factors that cause actions,
events or results to differ from those anticipated, estimated or intended.
Forward-looking statements contained herein are made as of the date of this
report, and Atlas disclaims any obligation to update any forward-looking
statements, whether as a result of new information, future events or results, or
otherwise. There can be no assurance that forward-looking statements will prove
to be accurate, as actual results and future events could differ materially from
those anticipated in such statements. Accordingly, readers should not place
undue reliance on forward-looking statements due to the inherent uncertainty in
them.
I. Company Overview
We are a technology and analytics driven financial services holding company
incorporated under the laws of the Cayman Islands. Our primary business is
generating, underwriting and servicing commercial automobile insurance policies
in the United States, with a niche market orientation and focus on insurance for
the "light" commercial automobile sector.
Our business currently focuses on a managing general agency strategy. Primarily
through our wholly owned subsidiary, AGMI, we are focused on maintaining and
recapturing business we have historically written in the taxi, livery/limo, and
transportation network company ("TNC") sectors as well as generating new
specialty business that fits our current underwriting parameters. We are also
actively pursuing additional programs in the "light" commercial auto space where
we believe our expertise, infrastructure and insurance technology will enable us
to increase scale and profitability, but there can be no assurance that these
programs will materialize. We believe that the specialized infrastructure and
technology platforms we've developed over the years to support our traditional
business will enable us to provide comparative advantages as a managing general
agency in other commercial auto segments. In particular, we believe our ability
to efficiently manage large numbers of small or highly transactional accounts
through our technology platform and workflows is a differentiator. We are also
evaluating opportunities to leverage our optOnTM insuretech platform, which was
developed to provide micro-duration commercial automobile insurance for
gig-economy drivers via a proprietary mobile app based ecosystem.
The sector on which we traditionally focused was comprised of taxi cabs,
non-emergency para-transit, limousine, livery, including certain full-time TNC
drivers/operators, and business auto. Our goal is to always be the preferred
specialty insurance business in any geographic areas where our value proposition
delivers benefit to all stakeholders. AGMI distributes our products through a
network of independent retail agents and actively wrote insurance in 34 states
and the District of Columbia during the first nine months of 2022. We embrace
continuous improvement, analytics and technology as a means of building on the
strong heritage our subsidiary companies cultivated in the niche markets we
serve.
25
--------------------------------------------------------------------------------
Table of Contents
Factors Affecting Our Results of Operations
We generate commission revenue by selling policies in the commercial auto
markets on behalf of our risk-taking insurance carrier partners, which
compensate us through first year and renewal commissions. We use our proprietary
technology and processes to generate and obtain consumer leads and allocate
those leads to agents whom we believe are best suited for those consumers. As a
result, one of the primary factors affecting our growth is our total number of
agents, comprised of both existing core agents and the number of new agents that
we contract to sell new policies. In our traditional target markets, we view
agents as a valuable component of helping consumers through the purchasing
process to enable them to identify the most appropriate coverage that suits
their needs. We have also developed proprietary technologies and processes that
enable us to expand our lead acquisition efforts to maintain agent productivity.
The amount of revenue we expect to recognize is based on multiple factors,
including our commission rates with our risk-taking insurance carrier partners
and the market demand for the types of products we offer. The higher our hit
ratios on new policies and the higher our retention ratios, the more revenue we
expect to generate. Additionally, we may earn certain volume-based compensation
from some unrelated risk taking partners, which can include a renewal rights
component. Our goal is to maximize policyholder lifetime value by optimizing
efficiency and scale, which starts by providing consumers with a transparent,
valuable and best-in-class consumer experience by endeavoring to support our
distribution channel effectively and providing insurance solutions that meet the
specific needs of our customers.
Recent Events
As previously disclosed and in connection with the cancellation of the Notes and
issuance of the New Notes in exchange, on January 4, 2022, the Company commenced
the Cayman Proceeding in the Cayman Court regarding the Scheme proposed by the
Company related to the Note Restructuring. Pursuant to the summons for
directions, the Company sought an order (the "Convening Order") for the
convening of a single meeting of a class of creditors affected by the Scheme
(the "Scheme Creditors") to consider and, if thought fit, approve, with or
without modification, the Scheme (the "Scheme Meeting"). At the Scheme Meeting,
the resolution was put forward that "...the Scheme of Arrangement, a copy of
which has been tabled at this Scheme Meeting, be approved subject to any
modification, addition or condition which the Grand Court of the Cayman Islands
may think to fit or impose which would not directly or indirectly have a
material adverse effect on the rights of the Scheme Creditors." The
aforementioned resolution was passed with an overwhelming majority: holders of
91.83% of the Notes in number and 99.34% par amount of those voting voted in
favor of the Scheme and, on February 25, 2022, the Cayman Court sanctioned and
approved the Scheme by entry of the Sanction Order. The Sanction Order was filed
with and accepted by the Registrar of Companies, as required by the Cayman
Court.
In furtherance of the Cayman Proceeding and in connection with the Note
Restructuring, on March 4, 2022, the Company filed the Recognition Petition,
seeking that the Bankruptcy Court enter the Recognition and Enforcement Order.
On March 4, 2022, the Bankruptcy Court entered an order, which, among other
things, scheduled the Recognition Hearing and, on the same day, the Bankruptcy
Court entered the final and non-appealable Recognition and Enforcement Order,
recognizing the Cayman Proceeding as the foreign main proceeding and enforcing
the Scheme within the territorial jurisdiction of the United States, among other
relief. Among other things, the Recognition and Enforcement Order provides that,
pursuant to section 1145 of the Bankruptcy Code, once issued, the New Notes will
be exempt from registration under Section 5 of the Securities Act, and any
applicable state and local securities laws and freely transferable, subject to
certain limitations under section 1145(b) of the Bankruptcy Code with respect to
any New Notes issued to "underwriters" as defined in section 2(a)(11) of the
Securities Act. The procurement of the Recognition and Enforcement Order was the
last in-court step in the Note Restructuring. The Recognition and Enforcement
Order was effective immediately and enforceable upon entry, authorizing the
Company to take any action to implement and effectuate the Note Restructuring,
including finalization of ancillary documents, among other things, in an effort
to proceed toward closing the Note Restructuring in accordance with the RSA.
Pursuant to the terms of the Note Restructuring, on April 14, 2022, the
Restructuring Effective Date occurred, and the Company canceled the Notes and
exchanged the Notes for the New Notes. The New Notes have an interest rate of
6.625% per annum, if paid in cash, and 7.25% per annum, if paid in kind. As a
result of the PIK feature, the New Notes were issued in denominations of $1 and
each holder of a Note received, for each Note exchanged, New Notes in an
aggregate principal amount equal to $25 plus the accrued but unpaid interest
related to the exchanged Note. The Company intends to utilize the extended
maturity of the New Notes to execute on its technology and analytics driven MGA
strategy, with the objective of creating value for all stakeholders. The New
Notes were issued in reliance on the exemption to registration provided by
section 1145 of the Bankruptcy Code, except with respect to those New Notes
issued to an "underwriter" as defined in section 2(a)(11) of the Securities Act
under section 1145(b) of the Bankruptcy Code that will be subject to certain
restrictions upon resale, and the authorization of the Bankruptcy Court pursuant
to the Recognition and Enforcement Order; however, the Company intends to use
its best efforts to seek registration of the New Notes following the Note
Restructuring subject to any applicable rules or restrictions. The terms of the
New Notes are governed by the Base Indenture, as supplemented by the First
Supplemental
26
--------------------------------------------------------------------------------
Table of Contents
Indenture and the Second Supplemental Indenture. For more information on the
Note Restructuring and the New Notes, see "Part I, Item 1, Note 14, Notes
Payable," in the Notes to Condensed Consolidated Financial Statements.
On June 9, 2022, the Company entered into a third amendment of the Credit
Agreement which increased the Term Loans to $6,200,000 and extended the maturity
date to June 30, 2024.
On June 29, 2022, the Company and Borrowers, entered into the Commitment Letter
with the Commitment Lenders, whereby the Commitment Lenders agreed to make the
Committed Loans to the Borrowers related to the Credit Agreement. In connection
with this Commitment Letter, the Company issued 100,000 ordinary voting common
shares to the Commitment Lenders. Pursuant to the Commitment Letter, the
Committed Loans would be loaned within ten days after the Effective Date, and
such Committed Loans would be made pursuant to the terms of the Credit
Agreement. The Committed Loans are subject to certain conditions, including (i)
the delivery of the closing documents required pursuant to the Credit Agreement,
(ii) that no material adverse changes with respect to the Borrowers shall have
occurred following the date of the Commitment Letter, (iii) the Execution
Condition, and (iv) the Effective Date Condition. On July 19, 2022, the
Commitment Lenders agreed to extend the Settlement Agreement Conditions by
fifteen (15) days.
On August 2, 2022, American Acquisition entered into the Settlement Agreement
with the Insurance Regulators, with the Insurance Regulators serving as
liquidators in connection with the previously announced liquidation of the
Insurance Subsidiaries. The Settlement Agreement was subject to court approval
in both Illinois and New York (each, a "Supervising Court Approval") and certain
provisions became effective on August 25, 2022 (the "Effective Date"), upon
receipt of both Supervising Court Approvals.
Pursuant to the Settlement Agreement, within thirty (30) days after the
Effective Date, American Acquisition will initiate a sale of the Company's
headquarters building via an auction process will be undertaken with a
confidential reserve price agreed between American Acquisition and the Insurance
Regulators (the "Sale"). American Acquisition and the Insurance Regulators
believed that such an auction could expedite the sale of this property, which
has been held for sale since April 1, 2021. The proceeds of the Sale will be
allocated as follows: (i) to the payment of all normal and customary costs of
selling the real estate, including, without limitation, any sales commission
owed to the auctioneer; (ii) to the payment of all past due real estate taxes on
account of the real estate; (iii) to the payment of all real estate taxes on
account of the real estate due for the current year, prorated through the date
of closing; (iv) to the payment of any mortgage liens held by the estates of the
Insurance Subsidiaries, as described in the Settlement Agreement; (v) to the
holders of any liens or claims on the real estate that are subordinate in
priority to holders of the mortgage liens referenced in clause (v); and (vi) to
American Acquisition.
Upon the entry of the Illinois Supervising Court Approval, American Acquisition
will withdraw, in writing, its assertions of rights of setoff against the
mortgage notes between American Acquisition and the consolidated estates of the
Company's former Illinois domiciled insurance subsidiaries (the "Consolidated
Estates").
Upon the later of (i) ten (10) business days after the Effective Date or (ii)
the receipt by American Acquisition, or its affiliates, of sufficient funds,
American Acquisition will pay the Liquidator $1,000,000 (the "$1 Million
Payment") in consideration for the Liquidator's (A) contemporaneous release of
all its interest in the stock of AGMI, (B) contemporaneous cancellation of the
related stock power, and (C) simultaneous delivery to American Acquisition of
the AGMI stock certificates held by the Liquidator pursuant to the previously
disclosed pledge agreement between American Acquisition and the Liquidator,
pursuant to which American Acquisition granted the Liquidator a security
interest in and stock power with respect to 49% of American Acquisition's 100%
share holding in AGMI. None of the proceeds of the Sale will be included in
determining the $1 Million Payment, and regardless of any amount realized upon a
subsequent sale of AGMI, the Consolidated Estates will not in any event be
required by American Acquisition or any of American Acquisition's affiliates to
refund or disgorge any portion of the $1 Million Payment. If American
Acquisition sells all or substantially all of the shares or assets of AGMI
within two years of the Consolidated Estates' receipt of the $1 Million Payment,
the Consolidated Estates will receive an additional payment equal to the lesser
of (i) $1,450,000 or (ii) the amount equal to (A) 49% of the proceeds of such
sale (net of direct expenses incurred by American Acquisition in connection
therewith, including reasonable fees and expenses of attorneys, financial
advisors and other professionals) minus (B) $1,000,000.
Immediately after the Supervising Court Approval in Illinois was obtained,
American Acquisition caused AGMI to pay to the Liquidator the sum of $151,000
representing a portion of the employee retention credit refund payment
previously received by AGMI.
The Settlement Agreement also includes a mutual release between American
Acquisition and the Liquidator, including, without limitation, with respect to
the mortgage as described in the Settlement Agreement, and a confirmation that
no admission of liability is being made by any party to the Settlement
Agreement.
On September 6, 2022, the Company entered into a fourth amendment of the Credit
Agreement which increased the Term Loans to $7,200,000. On September 7, 2022,
the $1,000,000 of additional Term Loans were funded and the Company used the
additional $1,000,000 of Term Loans to make the $1 Million Payment. Following
the $1 Million Payment, on September 7,
27
--------------------------------------------------------------------------------
Table of Contents
2022, the Liquidator terminated and released its security interest in 49% of the
equity interest in AGMI. On September 7, 2022, pursuant to the terms of the
Credit Agreement, the Borrowers granted to the Agent for the benefit of the
Lenders, a first-priority perfected security interest in the assets of, and the
equity interests in, AGMI to secure the payment in full of the Term Loans and
all other obligations under the Credit Agreement and related loan documentation.
Such security included an equity pledge granted by American Acquisition in favor
of the Agent, on behalf of the Lenders, in AGMI. As previously disclosed, upon
payment in full of the Term Loans, the security interest granted by the
Borrowers in favor of the Agent, on behalf of the Lenders, with respect to AGMI
and certain other subsidiaries of the Company would be terminated and released.
On September 27, 2022, the Company, two of its executive officers and the
plaintiffs reached an agreement in principle to settle an action brought by the
plaintiffs for a settlement payment of $5 million to be paid by the Company's
insurers. For more information on the Company's legal proceedings, see "Part II,
Item 1, Legal Proceedings".
During the week of October 3, 2022, the Company ran an auction for the building,
contents and property with a confidential reserve price agreed with the
Insurance Regulators in their capacity as liquidators of the Company's former
insurance company subsidiaries as mortgagees. There was significant interest
leading up to the auction, however, the bids did not reach the reserve and the
property did not sell. The Company continues to pursue a sale of the property.
On October 31, 2022, the Company entered into a fifth amendment of the Credit
Agreement which increased the Term Loans to $7,950,000. The $750,000 of
additional Term Loans was funded on November 1, 2022 and is expected to be used
for general corporate purposes.
28
--------------------------------------------------------------------------------
Table of Contents
II. Operating Results
Highlights
•Commission income was $760,000 for the three months ended September 30, 2022, a
decrease of 62.9% from $2.0 million for the three months ended September 30,
2021. Commission income from go-forward taxi, livery and business auto
production was $760,000, an increase of 27.7% from $595,000 for the three months
ended September 30, 2021.
•Total revenue was $1.1 million for the three months ended September 30, 2022, a
decrease of 40.0% from $1.8 million for the three months ended September 30,
2021.
•Loss from operating activities was $3.3 million in each of third quarter 2022
and third quarter 2021.
•Net loss from continuing operations was $3.7 million, or $0.21 per common share
diluted, in third quarter 2022 compared to net loss from continuing operations
of $4.1 million, or $0.31 per common share diluted, in third quarter 2021.
•Net income from discontinued operations was $0, or $0.00 earnings per common
share diluted, in third quarter 2022 compared to net income from discontinued
operations of $14,000, or $0.00 earnings per common share diluted, in third
quarter 2021.
© Edgar Online, source Glimpses
ATLAS FINANCIAL HOLDINGS, INC. 
