Business Combinations and Acquisitions

12 Months Ended

Dec. 31, 2020

As described in Note 1 - “Description of Business,” the Business Combination was consummated on February 10, 2020. For financial accounting and reporting purposes under U.S. GAAP, the Business Combination was accounted for as a reverse acquisition and recapitalization, with no goodwill or other intangible asset recorded. Under this method of accounting, Gores III (legal acquirer) is treated as the acquired entity and Shay (legal acquiree) is deemed to have issued common stock for the net assets and equity of Gores III consisting of mainly cash, accompanied simultaneously by the Recapitalization. The net assets of Gores III are stated at historical cost, and accordingly the equity and net assets of Shay have not been adjusted to fair value. Consequently, the consolidated assets, liabilities and results of operations of Shay are the historical financial statements of PAE Incorporated and the Gores III assets, liabilities and results of operations are consolidated with the assets, liabilities and results of operations of Shay beginning on the Closing Date. Shares and earnings per share information prior to the Business Combination have been retroactively restated to reflect the exchange ratio established in the Recapitalization.

Other than professional fees paid to consummate the transaction, the Business Combination primarily involved the exchange of cash and equity between Gores III, Shay and the stockholders of the respective companies. The aggregate proceeds paid to the Shay Stockholders on the Closing Date was approximately $424.2 million. The remainder of the consideration paid to the Shay Stockholders consisted of 21,127,823 newly issued shares of

Class A Common Stock of PAE Incorporated, par value $0.0001 per share (“Class A Common Stock”).

In addition to the foregoing consideration paid on the Closing Date, former stockholders of Shay are entitled to receive additional Earn-Out Shares from PAE of up to an aggregate of 4,000,000 shares of Class A Common Stock if the price of Class A Common Stock trading on the Nasdaq exceeds certain thresholds during the five-year period following the completion of the Business Combination. See Note 13 - “Stockholders’ Equity - Earn-Out Agreement” for additional information.

The Company also has certain warrants issued by Gores III that remain outstanding after the Business Combination. See Note 13 - “Stockholders’ Equity - Warrants” for further information about the warrants.

In connection with the Business Combination, the Company recorded $18.2 million, net of tax as a reduction to additional paid in capital related to the transaction costs. These costs were directly attributable to the Recapitalization. In addition, the Company recorded $3.4 million of transaction costs related to the Warrants as non-operating expense in the consolidated statement of operations.

During the third quarter, pursuant to the post-closing adjustment provisions contained in the Merger Agreement, the Company made a post-closing adjustment payment of $20.2 million to the Shay Stockholders. Additionally, during the third quarter, the Company paid $1.0 million to certain members of PAE management in connection with the post-closing adjustment, and such amount was recorded as compensation expense.

CENTRA Technology, Inc.

On November 20, 2020, the Company acquired 100% of the outstanding capital stock of CENTRA Technology, Inc. (“CENTRA”) for a consideration paid of $225.3 million, net. The results of CENTRA’s operations have been included in the Company’s consolidated financial statements since that date. This business combination expands and differentiates PAE's capabilities in intelligence analysis, communication systems integration and research and development services for intelligence and defense customers. The goodwill of $125.1 million arising from the acquisition relates primarily to revenue and cost synergies. This goodwill is not deductible for tax purposes. The total cash fair value of consideration paid for CENTRA was approximately $225.3 million.

The information presented below represents the allocation of CENTRA’s purchase price to the fair value of assets acquired and liabilities assumed, as of the acquisition date, November 20, 2020. The Company has completed the purchase accounting valuation for this acquisition. However, the below values presented might be subject to change through the measurement period of one year after acquisition date. The major classes of assets and liabilities to which the purchase price was allocated were as follows:


(in thousands)	Fair Value
Cash and cash equivalents	$	3,202
Accounts receivable	72,636
Prepaid expenses and other current assets	3,454
Property and equipment	2,848
Operating lease right-of-use assets	21,137
Intangible assets	74,100
Total assets acquired	177,377
Accounts payable	30,212
Accrued expenses	1,159
Customer advances and billings in excess of costs	2,965
Salaries, benefits and payroll taxes	7,969
Deferred income taxes	12,402
Operating lease liabilities, current portion	2,996
Other current liabilities	1,423
Long-term operating lease liabilities	18,038
Total liabilities assumed	77,164
Net identifiable assets acquired	100,213
Goodwill	125,113
Total estimated consideration transferred	$	225,326

Intangible assets acquired were as follows:


(in thousands, except years)	Weighted-average Amortization Period	Fair Value
Customer Relationships	10	$	71,800
Trade Name & Trademarks	7	2,300
Total intangible assets	10	$	74,100

The intangible trade name and trademarks is based on the strong reputation that CENTRA has, through their several brands, in the government contracting industry. This trade name is necessary to win new contracts and maintain current customer relationships. The trade name and trademark intangible was valued using the relief from royalty method, in which the value is derived from the benefit of ownership as the “relief” from royalty expense that would be incurred in the absence of ownership. The customer relationships intangible is comprised of contract backlog as of the acquisition date. Customer relationships intangible was valued using an income method approach in which the value is derived from an estimation of the after-tax cash flows specifically attributable to customer relationships. The valuation included assumptions for projections of revenue and profit margin.

The amount of revenue recognized from CENTRA in the consolidated statement of operations for the year ended December 31, 2020 amounted to $31.5 million.

Metis Solutions Corporation

On November 23, 2020, the Company completed the acquisition of 100% of the capital stock of Metis Solutions Corporation (“Metis”) for a consideration paid of $95.7 million in cash. The results of Metis operations have been included in the consolidated financial statements since that date. This business combination expands and differentiates PAE's capabilities in intelligence analysis, training and program support for intelligence and defense customers. The goodwill of $56.0 million arising from the acquisition relates primarily to revenue and cost synergies. This goodwill is not deductible for tax purposes. The total cash fair value of consideration paid for Metis was approximately $95.7 million.

The information presented below represents the allocation of Metis’ purchase price to the fair value of assets acquired and liabilities assumed, as of the acquisition date, November 23, 2020. The Company has completed the purchase accounting valuation for this acquisition. However, the below values presented might be subject to change through the measurement period of one year after acquisition date. The major classes of assets and liabilities to which the purchase price was allocated were as follows:


(in thousands)	Fair Value
Cash and cash equivalents	$	5,469
Accounts receivable	15,905
Prepaid expenses and other current assets	621
Property and equipment	27
Operating lease right-of-use assets	599
Intangible assets	37,800
Other noncurrent assets	63
Total assets acquired	60,484
Accounts payable	2,454
Accrued expenses	1,056
Customer advances and billings in excess of costs	3,420
Salaries, benefits and payroll taxes	5,486
Deferred income taxes	7,700
Operating lease liabilities, current portion	355
Long-term operating lease liabilities	240
Total liabilities assumed	20,711
Net identifiable assets acquired	39,773
Goodwill	55,967
Total estimated consideration transferred	$	95,740

Intangible assets acquired were as follows:


(in thousands, except years)	Weighted-average Amortization Period	Fair Value
Customer Relationships	11	$	32,200
Trade Name & Trademarks	7	5,600
Total intangible assets	10	$	37,800

The intangible trade name and trademarks is based on the strong reputation that Metis has in the government contracting industry. This trade name is necessary to acquire new contract and further develop current service offerings. The trade name and trademarks intangible was valued using the relief from royalty method, in which the value is derived from the benefit of ownership as the “relief” from royalty expense that would be incurred in the absence of ownership. The customer relationships intangible is comprised of contract backlog as of the acquisition date. Customer relationships intangible was valued using an income method approach in which the value is derived from an estimation of the after-tax cash flows specifically attributable to customer relationships. The valuation included assumptions for projections of revenue and profit margin.

The amount of revenue recognized from Metis in the consolidated statement of operations for the year ended December 31, 2020 amounted to $7.6 million.