10-Q 1 afh-20220930.htm 10-Q afh-20220930
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: COMMISSION FILE NUMBER:
September 30, 2022000-54627
afh-20220930_g1.jpg
ATLAS FINANCIAL HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Cayman Islands  27-5466079
(State or other jurisdiction of  (I.R.S. Employer
incorporation or organization)  Identification No.)
953 American Lane, 3rd Floor

  60173
Schaumburg, IL
  (Zip Code)
(Address of principal executive offices)  
Registrant’s telephone number, including area code: (847) 472-6700
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act: None
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  þ 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  þ   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  þ
There were 17,652,839 shares of the registrant’s common stock outstanding as of November 8, 2022, all of which are ordinary voting common shares. There are no restricted voting common shares outstanding. Of the registrant’s ordinary voting common shares outstanding, 16,421,765 shares as of November 8, 2022 were held by non-affiliates of the registrant.
For purposes of the foregoing calculation only, the registrant has included in the shares owned by affiliates, those shares owned by directors and officers of the registrant, but such inclusion shall not be construed as an admission that any such person is an affiliate for any purpose.


Atlas Financial Holdings, Inc.
Index to Quarterly Report on Form 10-Q
September 30, 2022




Part I. Financial Information
Item 1. Financial Statements
Atlas Financial Holdings, Inc.
Condensed Consolidated Statements of Financial Position
($ in ‘000s, except for share and per share data)September 30, 2022December 31, 2021
Assets(unaudited)
Cash and cash equivalents$82 $2,274 
Restricted cash1,957 3,637 
Premiums receivable (net of allowance of $225 and $225)
8,748 11,397 
Intangible assets, net893 983 
Property and equipment, net1,455 2,503 
Right-of-use asset18 237 
Notes receivable— 18,017 
Credit facility fee, net— 584 
Other assets797 1,053 
Assets held for sale7,500 7,500 
Total assets$21,450 $48,185 
Liabilities
Premiums payable$10,177 $13,593 
Lease liability18 224 
Due to deconsolidated affiliates— 19,957 
Notes payable, net36,098 33,102 
Other liabilities and accrued expenses7,444 6,811 
Total liabilities$53,737 $73,687 
Commitments and contingencies (see Note 7)
Shareholders' Deficit
Ordinary voting common shares, $0.003 par value, 800,000,001 shares authorized, shares issued: September 30, 2022 - 17,652,839 and December 31, 2021 - 15,052,839; shares outstanding: September 30, 2022 - 17,652,839 and December 31, 2021 - 14,797,334
$54 $45 
Restricted voting common shares, $0.003 par value, 33,333,334 shares authorized, shares issued and outstanding: September 30, 2022 and December 31, 2021 - 0
— — 
Additional paid-in capital86,219 83,086 
Treasury stock, at cost: 0 and 255,505 shares of ordinary voting common shares at September 30, 2022 and December 31, 2021, respectively
— (3,000)
Retained deficit(118,560)(105,633)
Accumulated other comprehensive income, net of tax— — 
Total shareholders' deficit$(32,287)$(25,502)
Total liabilities and shareholders' deficit$21,450 $48,185 
    
See accompanying Notes to Condensed Consolidated Financial Statements.
1
Atlas Financial Holdings, Inc.
Condensed Consolidated Statements of Operations
Condensed Consolidated Statements of Operations
($ in ‘000s, except for share and per share data) Three months ended September 30,Nine months ended September 30,
2022202120222021
(unaudited)(unaudited)
Commission income$760 $2,046 $2,232 $5,530 
Net realized gains (losses)— (1,475)1 (2,940)
Other income310 1,212 1,422 2,773 
Total revenue1,070 1,783 3,655 5,363 
Acquisition costs398 1,105 1,312 2,954 
Other underwriting expenses3,587 4,094 13,006 11,190 
Amortization of intangible assets30 98 90 293 
Forgiveness of Paycheck Protection Program loan— — — (4,601)
Interest expense, net801 556 2,174 1,639 
Total expenses4,816 5,853 16,582 11,475 
Loss from operations before income taxes(3,746)(4,070)(12,927)(6,112)
Income tax benefit— — — — 
Loss from continuing operations(3,746)(4,070)(12,927)(6,112)
Income from discontinued operations, net of tax— 14 — 165 
Net loss$(3,746)$(4,056)$(12,927)$(5,947)
Basic net (loss) income per share attributable to common shareholders
Continuing operations$(0.21)$(0.31)$(0.77)$(0.45)
Discontinued operations— — — 0.01 
Net loss$(0.21)$(0.31)$(0.77)$(0.44)
Diluted net (loss) income per share attributable to common shareholders
Continuing operations$(0.21)$(0.31)$(0.77)$(0.45)
Discontinued operations— — — 0.01 
Net loss$(0.21)$(0.31)$(0.77)$(0.44)
Basic weighted average common shares outstanding17,652,839 12,973,964 16,781,195 13,665,609 
Diluted weighted average common shares outstanding17,652,839 12,973,964 16,781,195 13,665,609 
Condensed Consolidated Statements of Comprehensive Loss
Net loss$(3,746)$(4,056)$(12,927)$(5,947)
Other comprehensive loss:
Changes in net unrealized investment gains (losses)— 1 — (21)
Reclassification to net loss— (16)— (175)
Other comprehensive loss— (15)— (196)
Total comprehensive loss$(3,746)$(4,071)$(12,927)$(6,143)
See accompanying Notes to Condensed Consolidated Financial Statements.
2
Atlas Financial Holdings, Inc.
Condensed Consolidated Statements of Shareholders’ Deficit
($ in ‘000s)Ordinary Voting Common SharesRestricted Voting Common SharesAdditional Paid-In CapitalTreasury StockRetained DeficitAccumulated Other Comprehensive IncomeTotal Share-holders’ Equity (Deficit)
Balance December 31, 2020$37 $— $81,840 $(3,000)$(100,199)$430 $(20,892)
Net loss— — — — (2,550)— (2,550)
Other comprehensive loss— — — — — (171)(171)
Share-based compensation— — 10 — — — 10 
Balance March 31, 2021 (unaudited)37 — 81,850 (3,000)(102,749)259 (23,603)
Net income— — — — 659 — 659 
Other comprehensive loss— — — — — (10)(10)
Share-based compensation— — 156 — — — 156 
Balance June 30, 2021 (unaudited)37 — 82,006 (3,000)(102,090)249 (22,798)
Net loss— — — — (4,056)— (4,056)
Other comprehensive loss— — — — — (15)(15)
Shares issued on Credit Agreement8 — 927 — — — 935 
Share-based compensation— — 31 — — — 31 
Balance September 30, 2021 (unaudited)$45 $— $82,964 $(3,000)$(106,146)$234 $(25,903)
Balance December 31, 2021$45 $— $83,086 $(3,000)$(105,633)$— $(25,502)
Net loss— — — — (4,151)— (4,151)
Shares issued on Credit Agreement8 — 1,067 — — — 1,075 
Equity component of Credit Agreement— — 352 — — — 352 
Share-based compensation— — 30 — — — 30 
Balance March 31, 2022 (unaudited)53 — 84,535 (3,000)(109,784)— (28,196)
Net loss— — — — (5,030)— (5,030)
Shares issued on Credit Agreement— — 18 — — — 18 
Equity component of Credit Agreement— — 2,206 — — — 2,206 
Issuance of treasury shares— — (3,000)3,000 — — — 
Share-based compensation— — 124 — — — 124 
Balance June 30, 2022 (unaudited)$53 $— $83,883 $— $(114,814)$— $(30,878)
Net loss— — — — (3,746)— (3,746)
Equity component of Credit Agreement— — 2,301 — — — 2,301 
Share-based compensation1 — 35 — — — 36 
Balance September 30, 2022 (unaudited)$54 $— $86,219 $— $(118,560)$— $(32,287)
See accompanying Notes to Condensed Consolidated Financial Statements.
3
Atlas Financial Holdings, Inc.
Condensed Consolidated Statements of Cash Flows
($ in ‘000s)Nine months ended September 30,
20222021
(unaudited)
Operating activities:
Net loss$(12,927)$(5,947)
Adjustments to reconcile net loss to net cash flows used in operating activities:
Income from discontinued operations, net of taxes— (165)
Depreciation and amortization1,049 1,456 
Share-based compensation expense189 197 
Amortization of intangible assets90 293 
Non-cash lease expense219 485 
Net realized (gains) losses(1)2,940 
Amortization of financing costs641 129 
Forgiveness of Paycheck Protection Program loan— (4,601)
Net changes in operating assets and liabilities:
Premiums receivable, net2,649 (3,971)
Due from deconsolidated affiliates18,017 — 
Other assets255 343 
Premiums payable(3,416)1,296 
Operating lease liabilities(206)(647)
Due to deconsolidated affiliates(19,957)(79)
Other liabilities and accrued expenses633 705 
Net cash flows used in operating activities - continuing operations(12,765)(7,566)
Net cash flows used in operating activities - discontinued operations— (4,866)
Net cash flows used in operating activities(12,765)(12,432)
Investing activities:
Purchases of:
Property, equipment and other— (4)
Proceeds from sale of:
Property, equipment and other1 12 
Net cash flows provided by investing activities - continuing operations1 8 
Net cash flows provided by investing activities - discontinued operations— 3,342 
Net cash flows provided by investing activities1 3,350 
Financing activities:
Principal increase of senior notes2,192 — 
Proceeds from notes payable6,700 2,000 
Repayment of notes payable— (326)
Net cash flows provided by financing activities - continuing operations8,892 1,674 
Net cash flows provided by financing activities - discontinued operations— — 
Net cash flows provided by financing activities8,892 1,674 
Net change in cash and cash equivalents and restricted cash - continuing operations(3,872)(5,884)
Cash and cash equivalents and restricted cash, beginning of period5,911 13,554 
Less: cash and cash equivalents of discontinued operations - beginning of period— 3,029 
Cash and cash equivalents and restricted cash of continuing operations, beginning of period5,911 10,525 
Cash and cash equivalents and restricted cash of continuing operations, end of period$2,039 $4,641 
Supplemental disclosure of cash information:
Cash paid for:
4
($ in ‘000s)Nine months ended September 30,
20222021
(unaudited)
Income taxes$— $— 
Interest— 969 
See accompanying Notes to Condensed Consolidated Financial Statements.
5
Atlas Financial Holdings, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
1. Nature of Operations and Basis of Presentation
Atlas Financial Holdings, Inc. (“Atlas”, “We”, “us”, “our” or the “Company”) commenced operations on December 31, 2010. The primary business of Atlas focuses on a managing general agency (“MGA”) strategy, primarily through our wholly owned subsidiary, Anchor Group Management, Inc. (“AGMI”). AGMI focuses on a niche market orientation for the “light” commercial automobile sector. This sector includes taxi cabs, limousine, livery, full-time transportation network companies (“TNC”) drivers/operators, and other specialty commercial auto operators. Automobile insurance products provide insurance coverage in three major areas: liability, accident benefits and physical damage.
Atlas’ business is carried out through its subsidiaries: AGMI, UBI Holdings Inc. (“UBI Holdings”) and UBI Holdings’ wholly-owned subsidiaries, optOn Digital IP Inc. (“OOIP”) and optOn Insurance Agency Inc. (“optOn” and together with OOIP and UBI Holdings, “UBI”).
Prior to a strategic transition, our core business was the underwriting and risk bearing of commercial automobile insurance policies, focusing on the “light” commercial automobile sector, through American Country Insurance Company (“American Country”), American Service Insurance Company, Inc. (“American Service”) and Gateway Insurance Company (“Gateway” and together with American Country and American Service, the “ASI Pool Companies”) and Global Liberty Insurance Company of New York (“Global Liberty” and together with the ASI Pool Companies, the “Insurance Subsidiaries”), along with our wholly owned MGA, AGMI. The ASI Pool Companies were placed into rehabilitation under the statutory control of the Illinois Department of Insurance during the second half of 2019 and were subsequently placed into liquidation and have been deconsolidated from our consolidated financial statements as of October 1, 2019 as a result of these actions. Other regulatory actions were taken in certain states, including restriction, suspension, or revocation of certain state licenses and certificates of authority held by the ASI Pool Companies preceding and following the initiation of rehabilitation.
During the fourth quarter of 2019, the Company began actively pursuing the potential sale of Global Liberty, and as a result, Global Liberty was held for sale and thus classified as a discontinued operation from October 1, 2019 through September 30, 2021. Global Liberty was placed into liquidation by the New York Department of Financial Services in October 2021 and, as a result, it has been deconsolidated from our consolidated financial statements beginning October 2021.
Atlas’ ordinary common shares are listed on the OTC Markets system under the symbol “AFHIF”.
Basis of Presentation
These statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The consolidated financial statements include the accounts of Atlas and the entities it controls. Equity investments in entities that we do not consolidate, including corporate entities in which we have significant influence and partnership and partnership-like entities in which we have more than minor influence over operating and financial policies, are accounted for under the equity method unless we have elected the fair value option. All significant intercompany accounts and transactions have been eliminated.
The results for the three and nine months ended September 30, 2022 are not necessarily indicative of the results expected for the full calendar year.
The accompanying unaudited condensed consolidated financial statements, in accordance with Securities and Exchange Commission (“SEC”) rules for interim periods, do not include all of the information and notes required by GAAP for complete financial statements and should be read in conjunction with Atlas’ Annual Report on Form 10-K for the year ended December 31, 2021, which provides a more complete understanding of the Company’s accounting policies, financial position, operating results, business properties, and other matters. Atlas has consistently applied the same accounting policies throughout all periods presented.
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Estimates and Assumptions
The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates and changes in estimates are recorded in the accounting period in which they are determined. Significant estimates in the accompanying financial statements include revenue recognition, evaluation of assets for impairment, valuation of financing instruments, and deferred tax asset valuation.
Revenue Recognition
Revenues from contracts with customers include both commission and fee income. The recognition and measurement of revenue is based on the assessments of individual contract terms. As an MGA, AGMI has contracts with various insurance carrier partners to write premiums for specific programs which determines AGMI’s commission income revenue. Each contract specifies what our performance obligations are as an MGA and what determines our commission income revenue, generally gross written premiums, net of cancellations and refunds, multiplied by an MGA commission percentage. Under these contracts there are a number of performance obligations; however, it is the bundle of these services and not a single obligation that results in the performance of the MGA under the contracts. The Company considers these performance obligations as a non-bifurcated bundle of services where the performance obligations are satisfied simultaneous to the point in time where AGMI issues a policy, or cancels a policy to an insured. The commission rate stated in the individual contract is the standalone selling price of these non-bifurcated services, which is allocated to the service bundle and not to any individual obligation under the various contracts.
Seasonality
Our insurance business is seasonal in nature. Our ability to generate commission income is also impacted by the timing of policy effective periods in the states in which we operate and products provided by our business partners. For example, January 1st, March 1st and July 1st are common taxi cab renewal dates in jurisdictions in which our companies have written business historically.
Operating Segments
The Company operates in one business segment, the Managing General Agency segment.
2. New Accounting Standards
There have been no recent pronouncements or changes in pronouncements during the nine months ended September 30, 2022, as compared to those described in our Annual Report on Form 10-K for the twelve months ended December 31, 2021, that are of significance or potential significance to Atlas. Pertinent Accounting Standard Updates (“ASUs”) are issued from time to time by the Financial Accounting Standards Board (“FASB”) and are adopted by the Company as they become effective. All recently issued accounting pronouncements with effective dates prior to October 1, 2022 have been adopted by the Company.
3. Intangible Assets
Intangible Assets by Major Asset Class
($ in ‘000s)Economic Useful LifeGross Carrying AmountAccumulated AmortizationAccumulated ImpairmentNet
As of September 30, 2022
Trade name and trademark15 years$1,800 $907 $— $893 
As of December 31, 2021
Trade name and trademark15 years$1,800 $817 $— $983 
Customer relationship10 years2,700 1,770 930 — 
$4,500 $2,587 $930 $983 
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4. Loss From Continuing Operations per Share
Computations of Basic and Diluted Loss per Common Share from Continuing Operations
($ in ‘000s, except share and per share amounts)Three months ended September 30,Nine months ended September 30,
2022202120222021
Basic
Loss from continuing operations before income taxes$(3,746)$(4,070)$(12,927)$(6,112)
Income tax expense— — — — 
Net loss attributable to common shareholders from continuing operations$(3,746)$(4,070)$(12,927)$(6,112)
Basic weighted average common shares outstanding17,652,839 12,973,964 16,781,195 13,665,609 
Loss per common share basic from continuing operations$(0.21)$(0.31)$(0.77)$(0.45)
Diluted
Basic weighted average common shares outstanding17,652,839 12,973,964 16,781,195 13,665,609 
Dilutive potential ordinary shares:
Dilutive stock options outstanding— — — — 
Diluted weighted average common shares outstanding17,652,839 12,973,964 16,781,195 13,665,609 
Loss per common share diluted from continuing operations$(0.21)$(0.31)$(0.77)$(0.45)
Common shares are defined as ordinary voting common shares, restricted voting common shares and participative restricted stock units (“RSUs”). Earnings per common share diluted is computed by dividing net loss by the weighted average number of common shares outstanding for each period plus the incremental number of shares added as a result of converting dilutive potential ordinary voting common shares, calculated using the treasury stock method. Atlas’ potential dilutive ordinary voting common shares consists of outstanding stock options to purchase ordinary voting common shares and warrants to purchase 2,387,368 ordinary voting common shares of Atlas for $0.69 per share (as indicated in the Schedule 13G filing by American Financial Group, Inc. dated January 20, 2022).
The outstanding principal balance of the Term Loans (as defined herein) under the Credit Agreement (as defined herein) can be converted at any time into ordinary voting common shares, at the applicable Lender’s (as defined herein) discretion, at a rate of $0.35 per share, except that paid-in-kind interest included in the amount presented by a Lender for conversion may, at the Borrowers’ (as defined herein) discretion be paid in cash or converted into ordinary voting common shares at the same rate. As of November 8, 2022, no such conversion has taken place.
Atlas’ dilutive potential ordinary voting common shares consist of outstanding stock options to purchase ordinary voting common shares. The effects of these convertible instruments are excluded from the computation of earnings per common share diluted from continuing operations in periods in which the effect would be anti-dilutive. For the three and nine months ended September 30, 2022 and 2021, all exercisable stock options, warrants and conversion rights under the Credit Agreement were deemed to be anti-dilutive.
8
5. Contracts with Customers
The revenue included as commission income was $760,000 and $2.0 million for the three months ended September 30, 2022 and 2021, respectively, and $2.2 million and $5.5 million for the nine months ended September 30, 2022 and 2021, respectively.
The balance of receivables related to contracts with customers, which is recorded as part of premiums receivable on the condensed consolidated statements of financial position, as of September 30, 2022 and December 31, 2021:
Components of Commission Receivables
($ in ‘000s)September 30, 2022December 31, 2021
Commission receivable, beginning of period$2,551 $2,577 
Commission revenue2,232 5,923 
Net change in cash received(2,864)(5,949)
Commission receivable, end of period$1,919 $2,551 
6. Income Taxes
Reconciliation of U.S. Statutory Marginal Income Tax Rate to the Effective Tax Rate - Continuing Operations
($ in ‘000s)Three months ended September 30,Nine months ended September 30,
2022202120222021
Amount%Amount%Amount%Amount%
Provision for taxes at U.S. statutory marginal income tax rate$(787)21.0 %$(855)21.0 %$(2,715)21.0 %$(1,284)21.0 
Provision for deferred tax assets deemed unrealizable (valuation allowance)784 (20.9)855 (21.0)2,425 (18.8)2,241 (36.7)
Nondeductible expenses— — — — — — 2 — 
Stock compensation3 (0.1)— — 290 (2.2)7 (0.1)
Gain from debt extinguishment— — — — — — (966)15.8 
Provision for income taxes for continuing operations$— — %$— — %$— — %$— — %
Reconciliation of U.S. Statutory Marginal Income Tax Rate to the Effective Tax Rate - Discontinued Operations
($ in ‘000s)Three months ended September 30,Nine months ended September 30,
2022202120222021
Amount%Amount%Amount%Amount%
Provision for taxes at U.S. statutory marginal income tax rate$— — %$3 21.0 %$— — %$35 21.0 %
Provision for deferred tax assets deemed unrealizable (valuation allowance)— — (3)(21.0)— — (35)(21.0)
Provision for income taxes for discontinued operations$— — %$— — %$— — %$— — %
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Components of Income Tax Benefit - Continuing Operations
($ in ‘000s)Three months ended September 30,Nine months ended September 30,
2022202120222021
Current tax expense$— $— $— $— 
Components of Income Tax Benefit - Discontinued Operations
($ in ‘000s)Three months ended September 30,Nine months ended September 30,
2022202120222021
Current tax expense$— $— $— $— 
During 2013 and 2019, due to shareholder activity, “triggering events” as determined under Internal Revenue Code (“IRC”) Section 382 may have occurred. As a result, under IRC Section 382, the use of the Company’s net operating loss (“NOL”) and other carryforwards generated prior to the “triggering events” may be subject to a yearly limitation as a result of this “ownership change” for tax purposes, which is defined as a cumulative change of more than 50% during any three-year period by shareholders owning 5% or greater portions of the Company’s shares. Due to the mechanics of the Section 382 calculation when there are multiple triggering events, the Company’s losses will generally be limited based on the thresholds of the 2019 triggering event. The Company has established a valuation allowance against the NOLs that will expire unused as a result of the yearly limitation.
Components of Deferred Income Tax Assets and Liabilities
($ in ‘000s)September 30, 2022December 31, 2021
Gross deferred tax assets:
Losses carried forward$8,814 $6,657 
Investment in affiliates28,250 28,250 
Bad debts47 47 
Fixed assets608 437 
Stock compensation50 320 
Other1,126 670 
Valuation allowance(38,319)(35,894)
Total gross deferred tax assets576 487 
Gross deferred tax liabilities:
Intangible assets188 206 
Other388 281 
Total gross deferred tax liabilities576 487 
Net deferred tax assets$— $— 
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Net Operating Loss Carryforward as of September 30, 2022 by Expiry
($ in ‘000s)
Year of OccurrenceYear of ExpirationAmount
20112031$1 
2012203270 
201520351 
2017203712,085 
2018Indefinite8,245 
2019Indefinite5,241 
2020Indefinite4,687 
2021Indefinite1,372 
2022Indefinite10,270 
Total$41,972 
Deferred tax assets are recognized to the extent that it is probable that future taxable income will be available against which they can be utilized. When considering the extent of the valuation allowance on Atlas’ deferred tax assets, weight is given by management to both positive and negative evidence. GAAP states that a cumulative loss in recent years is a significant piece of negative evidence that is difficult to overcome in determining that a valuation allowance is not needed against deferred tax assets. Based on Atlas’ cumulative loss in recent years and certain deferred tax assets subject to a yearly limitation under Section 382 which will likely result in expiration before utilization, Atlas has recorded a valuation allowance of $38.3 million and $35.9 million for its gross future deferred tax assets as of September 30, 2022 and December 31, 2021, respectively.
Atlas accounts for uncertain tax positions in accordance with the income taxes accounting guidance. Atlas has analyzed filing positions in the federal and state jurisdictions where it is required to file tax returns, as well as the open tax years in these jurisdictions. Atlas believes that its federal and state income tax filing positions and deductions will be sustained on audit and does not anticipate any adjustments that will result in a material change to its financial position. Therefore, no reserves for uncertain federal and state income tax positions have been recorded. Atlas would recognize interest expense and penalties related to unrecognized tax benefits as a component of the provision for federal income taxes. Atlas did not incur any federal income tax related interest income, interest expense or penalties for the three and nine months ended September 30, 2022 and 2021. Tax year 2018 and years thereafter are subject to examination by the Internal Revenue Service (“IRS”).
7. Commitments and Contingencies
In the ordinary course of its business, Atlas is involved in legal proceedings, including lawsuits, regulatory examinations and inquiries.
Atlas is exposed to credit risk on balances receivable from insureds and agents. Credit exposure to any one individual insured is not material. The policies placed with risk-taking partners are distributed by agents who may manage cash collection on its behalf pursuant to the terms of their agency agreement. Atlas has procedures to monitor and minimize its exposure to delinquent agent balances, including, but not limited to, reviewing agent account statements, processing policy cancellations for non-payment and other collection efforts deemed appropriate. As a managing agent, our ability to generate commission revenue is pursuant to contractual agreements with risk-taking partners. Our objective is to maintain long-term relationships with these risk-taking partners. Such relationships are dependent upon market conditions, business results, and other factors which may be outside of our control.
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8. Property and Equipment
Property and Equipment Held
($ in ‘000s)September 30, 2022December 31, 2021
Buildings1
$— $— 
Land1
— — 
Building improvements1
— — 
Leasehold improvements5 39 
Internal use software12,795 12,795 
Computer equipment1,630 1,842 
Furniture and other office equipment1,059 1,086 
Total$15,489 $15,762 
Accumulated depreciation and amortization(14,034)(13,259)
Total property and equipment, net$1,455 $2,503 
1 Held for sale
Depreciation expense and amortization from continuing operations was $347,000 and $378,000 for the three months ended September 30, 2022 and 2021, respectively, and $1.0 million and $1.5 million for the nine months ended September 30, 2022 and 2021, respectively. For the year ended December 31, 2021, depreciation expense and amortization from continuing operations was $1.8 million.
During 2016, Atlas purchased a building and land to serve as its new corporate headquarters to replace its former leased office space. Atlas’ Chicago area staff moved into this space in late October 2017 and occupies approximately 70,000 square feet in the building. An unrelated tenant occupies the remaining office space in the building, pursuant to a lease agreement with American Insurance Acquisition, Inc. (“American Acquisition”), a subsidiary of Atlas. Rental income related to this lease agreement was $123,000 and $119,000 for the three months ended September 30, 2022 and 2021, respectively, and $369,000 and $357,000 for the nine months ended September 30, 2022 and 2021, respectively. Depreciation expense related to the building and its improvements was $0 for each of the three months ended September 30, 2022 and 2021, and $0 and $284,000 for the nine months ended September 30, 2022 and 2021, respectively. The decrease in depreciation expense for the corporate headquarters is a result of the held for sale status of the corporate headquarters.
On April 1, 2021, the Company transitioned the assets related to its corporate headquarters from long-lived asset held and used to long-lived assets held for sale. The Company engaged an independent third party that is actively marketing the sale of the corporate headquarters including the land, building, building improvements and contents including furniture and fixtures. The Company engaged an independent third party that performed a valuation of the corporate headquarters and determined the fair market value as $7.5 million as of March 4, 2022. The valuation of the corporate headquarters resulted in a net realized loss totaling $7.0 million for the year ended December 31, 2021. On August 2, 2022, the Company and the regulators of Illinois and New York, in their capacity as liquidators of the estates of the Company’s former insurance company subsidiaries as mortgagees (the “Insurance Regulators”), had agreed in principal to an auction sale process for the Company’s HQ, furnishing and fixtures and land. Details related to this agreement were disclosed via Form 8-K on August 4, 2022. The Company ran an auction for the building, contents and property during the week of October 3, 2022 with a confidential reserve price agreed with the Insurance Regulators. 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 is continuing to work towards a sale of the property. For more information regarding the sale of the Company’s corporate headquarters, see Part I, Item 2, “Management’s Discussion and Analysis of Results of Operations.”
Amortization expense recorded to internal-use projects in the post-implementation/operation stage was $302,000 for each of the three months ended September 30, 2022 and 2021, and $906,000 for each of the nine months ended September 30, 2022 and 2021. For the three and nine months ended September 30, 2022 and 2021, the Company did not capitalize any projects in the application development stage.
Realized gains on disposals of fixed assets totaled $1,000 and $12,000 for the nine months ended September 30, 2022 and 2021, respectively. There were no gains or losses on disposals of fixed assets for each of the three months ended September 30, 2022 and 2021.
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9. Share-Based Compensation
On January 6, 2011, Atlas adopted a stock option plan (“Stock Option Plan”) in order to advance the interests of Atlas by providing incentives to certain eligible employees and service providers, as approved by the Compensation Committee. In the second quarter of 2013, a new equity incentive plan (“2013 Equity Incentive Plan”) was approved by the Company’s common shareholders at the Annual General Meeting, and Atlas ceased to grant new stock options under the Stock Option Plan. The 2013 Equity Incentive Plan provided for the grant of the restricted stock, restricted stock units, stock options and other forms of equity incentives to eligible persons as part of their compensation. The 2013 Equity Incentive Plan was considered a continuation, and an amendment and restatement of the Stock Option Plan, although outstanding stock options issued pursuant to the Stock Option Plan continued to be governed by the terms of the Stock Option Plan. As of September 30, 2022, all outstanding stock options were issued under the 2013 Equity Incentive Plan.
In the second quarter of 2022, a new equity incentive plan (“2022 Equity Incentive Plan”) was approved by the Company’s common shareholders at the Annual General Meeting, and Atlas ceased to grant new stock options under the 2013 Equity Incentive Plan. The 2022 Equity Incentive Plan is an equity-based compensation plan, pursuant to which Atlas may issue restricted stock, restricted stock units, stock options, stock appreciation rights, performance stock, performance units, and other forms of equity and equity-based incentives to eligible persons as part of their compensation. Outstanding stock options issued pursuant to the 2013 Equity Incentive Plan will continue to be governed by the terms of the 2013 Equity Incentive Plan.
Stock Options
Stock Option Activity
Nine months ended September 30,
20222021
Number of OptionsWeighted Average Exercise PriceNumber of OptionsWeighted Average Exercise Price
Outstanding, beginning of period1,197,500 $2.63 181,500 $13.51 
Granted— — 1,016,000 0.49 
Exercised— — — — 
Canceled(520,500)5.42 — — 
Outstanding, end of period677,000 $0.49 1,197,500 $2.63 
There are no stock options that are exercisable as of September 30, 2022. The stock option grants outstanding have a weighted average remaining life of 5.56 years and have a fair value of $0 as of September 30, 2022.
On March 12, 2015, the Board of Directors of Atlas granted equity awards of (i) 200,000 restricted stock grants for ordinary voting common shares of the Company and (ii) 200,000 options to acquire ordinary voting common shares to the executive officers of the Company as part of the Company’s annual compensation process. The awards were made under the Company’s 2013 Equity Incentive Plan. The awards vest in five equal annual installments of 20%, provided that an installment shall not vest unless an annual performance target based on specific book value growth rates linked to return on equity goals is met. In the event the performance target is not met in any year, the 20% installment for such year shall not vest, but such non-vested installment shall carry forward and can become vested in future years (up to the fifth year from the date of grant), subject to achievement in a future year of the applicable performance target for such year. For the three and nine months ended September 30, 2022 and 2021, no shares of either of the restricted stock grants for ordinary voting common shares or the options to acquire ordinary voting common shares vested due to not meeting annual performance targets. During 2020, 140,000 of the option awards were canceled as a result of not meeting the annual performance targets and an additional 53,500 options were canceled due to the departure of a former officer. During the first quarter of 2022, the remaining, 181,500 option awards were canceled as a result of not meeting the annual performance targets. The Monte-Carlo simulation model was used, for both the options and restricted stock grants for ordinary voting common shares, to estimate the fair value of compensation expense as a result of the performance based component of these grants. Utilizing the Monte-Carlo simulation model, the fair values were $1.5 million and $1.9 million for the options and restricted stock grants for ordinary voting common shares, respectively. This expense was amortized over the anticipated vesting period.
On April 22, 2021, the Company granted an aggregate of 1,016,000 options (“Options”) with an exercise price of $0.49 per common share of the Company to directors, managers, and executives pursuant to the Company’s 2013 Equity Incentive Plan. This exercise price is the average of the high bid and low asked prices on the date of the grant quoted on the OTC Bulletin
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Board Service. The Options granted to management vest in three equal installments, with each installment vesting on the 1st, 2nd and 3rd anniversary of the date of the grant. The Options granted to independent directors vested immediately upon the date of the grant. The Options will expire on the seventh anniversary of the date of the grant. In the event of a change of control of the Company, or should a director’s or employee’s service with the Company be terminated other than for cause or voluntary resignation, any unvested Options will immediately vest. During the first nine months of 2022, 339,000 Options were canceled because the Options were not exercised after voluntary terminations. The estimated fair values of the Options are amortized to expense over the Options’ vesting period. The Company estimated the fair value of the Options at the date of the grant using the Black-Scholes option pricing model with the following weighted average assumptions:
Expected risk-free interest rate1.6 %
Volatility180.8 %
Expected life (in years)7.0
On December 31, 2018, the Company awarded restricted stock unit grants for ordinary voting common shares of the Company to its external directors pursuant to a director equity award agreement dated December 31, 2018. The awards, which were approved by the Company’s Board of Directors in March 2018, were valued at $40,000 per external director (“Aggregate Award”) and were made under the Company’s 2013 Equity Incentive Plan. The number of restricted stock units awarded was determined by dividing (A) the Aggregate Award by (B) the closing price of a Company ordinary voting common share at the close of market on April 4, 2018, which was $10.50 per share. For new directors, the Aggregate Award is proportionate to the director’s start date and priced as of that same day. During 2018, the Company awarded 17,524 RSU grants having an aggregate grant date fair value of $179,000.
On September 12, 2022, the Company awarded 100,000 restricted stock unit grants for ordinary voting common shares of the Company to each of its external directors as part of their compensation. The awards were valued at $11,000 per external director and vest over a two-year period.
Restricted Shares
Restricted Stock Grants for Ordinary Voting Common Shares and Restricted Share Unit Activity
Nine months ended September 30,
20222021
Number of SharesWeighted Average Fair Value at Grant DateNumber of SharesWeighted Average Fair Value at Grant Date
Non-vested, beginning of period$— $— $3,301 $10.22 
Granted200,000 0.11 — — 
Vested— — (3,301)0.12 
Canceled— — — — 
Non-vested, end of period$