UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

__________________________

FORM ~~10‑Q~~

10-Q

__________________________

(Mark One)

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

For the quarterly period ~~ended September 30, 2018~~

ended: June 28, 2020

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

~~FOR THE TRANSITION PERIOD FROM TO~~

For the transition period from to

Commission File Number: ~~001‑38643~~

~~GORES HOLDINGS III, INC.~~

1-38643

__________________________

PAE INCORPORATED

(Exact name of registrant as specified in its ~~Charter)~~

charter)

__________________________

~~Delaware~~	~~82-3173473~~
Delaware		82-3173473
(State or other jurisdiction of			~~(I.R.S. Employer~~
incorporation or organization)			(I.R.S. Employer Identification No.)

7799 Leesburg Pike, Suite 300 North, Falls Church, Virginia 22043

(Address of principal executive offices) (Zip Code)

(703) 717-6000

(Registrant’s telephone number, including area code)

__________________________

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

Title of each class

Trading Symbols

Name of each exchange on which registered

~~9800 Wilshire Blvd.~~

Class A Common Stock

PAE

Nasdaq Stock Market

~~Beverly Hills, CA~~

~~90212~~

~~(Address of principal executive offices)~~

Warrants

~~(Zip Code)~~

PAEWW

Nasdaq Stock Market

Indicate by check mark whether the ~~registrant:~~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~~ Yes ☒ No ☐ 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~~ Yes ☒ NO 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 ~~definition~~definitions of “large accelerated ~~filer”,~~filer,” “accelerated ~~filer”,~~filer,” “smaller reporting company,” and “emerging growth company” in Rule ~~12b‑2~~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~~12b-2 of the Exchange Act). ~~YES~~ Yes ☐ No ☒ NO ☐

The number of ~~November 13, 2018, there were 40,000,000~~ shares of the ~~Company’s Class A~~registrant’s common stock ~~par value $0.0001 per share, and 10,000,000 shares~~outstanding as of ~~the Company’s Class F common stock, par value $0.0001 per share, issued and outstanding.~~

~~TABLE OF CONTENTS~~

July 31, 2020 was 92,040,654.

		~~Page~~
~~PART I—FINANCIAL INFORMATION~~



~~Item 1.~~	~~Financial Statements~~

~~Condensed Balance Sheet (Unaudited)~~		3

~~Condensed Statement of Operations (Unaudited)~~		4

~~Condensed Statement of Changes in Stockholders’ Equity (Unaudited)~~		5

~~Condensed Statement of Cash Flows (Unaudited)~~		6

~~Notes to Condensed Financial Statements (Unaudited)~~		7

~~Item 2.~~	~~Management’s Discussion and Analysis of Financial Condition and Results of Operations~~	16

~~Item 3.~~	~~Quantitative and Qualitative Disclosures About Market Risk~~	19

~~Item 4.~~	~~Controls and Procedures~~	20

~~PART II—OTHER INFORMATION~~

~~Item 1.~~	~~Legal Proceedings~~	21

~~Item 1A.~~	~~Risk Factors~~	21

~~Item 2.~~	~~Unregistered Sales of Equity Securities and Use of Proceeds~~	21

~~Item 3.~~	~~Defaults Upon Senior Securities~~	22

~~Item 4.~~	~~Mine Safety Disclosures~~	22

~~Item 5.~~	~~Other Information~~	22

~~Item 6.~~	~~Exhibits~~	23

~~GORES HOLDINGS III, INC.~~

~~CONDENSED BALANCE SHEETS~~

September 30, 2018

December 31, 2017

(unaudited)

(unaudited)

CURRENT ASSETS:

Cash and cash equivalents

$
1,559,568

$
109,737

Prepaid assets & deferred costs

23,417

153,198

Total current assets

1,582,985

262,935

Investments and cash held in Trust Account

400,382,026

—

Total assets

$
401,965,011

$
262,935

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:

Accrued expenses, formation and offering costs

377,220

111,011

Notes payable - related party

-

150,000

Income tax payable

75,501

-

State franchise tax accrual

11,791

608

Total current liabilities

464,512

261,619

Deferred underwriting compensation

14,000,000

—

Total liabilities

14,464,512

261,619

Commitments and Contingencies:

Class A subject to possible redemption, 38,250,049 and 0 shares at
   September 30, 2018 and December 31, 2017, respectively
   (at redemption value of $10.00 per share)

382,500,490

—

Stockholders’ equity:

Preferred stock, $0.0001 par value; 1,000,000 shares authorized,
   none issued or outstanding

—

—

Common stock

Class A common stock, $0.0001 par value; 200,000,000 shares
   authorized, 1,749,951 and 0 shares issued and outstanding
   (excluding 38,250,049 and 0 shares subject to possible redemption)
   at September 30, 2018 and December, 31, 2017, respectively

175

—

Class F common stock, $0.0001 par value; 20,000,000 shares
   authorized, 10,781,250 shares issued and outstanding

1,078

1,078

Additional paid-in-capital

4,791,335

23,922

Retained earnings

207,421

(23,684
)

Total stockholders’ equity

5,000,009

1,316

Total liabilities and stockholders’ equity

$
401,965,011

$
262,935

~~See accompanying notes to~~

EXPLANATORY NOTE

This Quarterly Report on Form 10-Q (the “Form 10-Q”) contains our condensed consolidated financial statements for the ~~unaudited, condensed, interim financial statements.~~

~~GORES HOLDINGS III, INC.~~

~~STATEMENT OF OPERATIONS~~

~~(Unaudited)~~

Three

Nine

Months Ended

Months Ended

September 30,
2018

September 30,
2018

Revenues

$
—

$
—

Professional fees and other expenses

(44,312
)

(63,629
)
State franchise taxes, other than income tax

(10,591
)

(11,791
)
Net loss from operations

(54,903
)

(75,420
)
Other income - interest income

382,026

382,026

Net income/(loss) before income taxes

$
327,123

$
306,606

Provision for income tax

(75,501
)

(75,501
)
Net income/(loss) attributable to common shares

$
251,622

$
231,105

Net Income/(Loss) per ordinary share:

Class A ordinary shares - basic and diluted

$
0.04

$
0.12

Class F ordinary shares - basic and diluted

$
(0.01
)

$
(0.01
)

~~See accompanying notes to the unaudited, condensed, interim financial statements.~~

~~GORES HOLDINGS III, INC.~~

~~STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY~~

~~For the Nine months~~three-month and six-month periods ended ~~September 30, 2018~~

~~(Unaudited)~~

June 28, 2020.

Class A Ordinary Shares

Class F Ordinary Shares

Additional

Retained

Stockholder's

Shares

Amount

Shares

Amount

Paid-In Capital

Earnings

Equity

Beginning Balance at January 1, 2018

—

$
—

10,781,250

$
1,078

$
23,922

$
(23,684
)

$
1,316

Proceeds from initial public offering of Units on
   September 11, 2018 at $10.00 per Unit

40,000,000

4,000

—

—

399,996,000

—

400,000,000

Sale of 6,666,666 Private Placement Warrants
   to Sponsor on September 11, 2018 at $1.50
   per Private Placement Warrant

—

—

—

—

10,000,000

—

10,000,000

Underwriters discounts

—

—

—

—

(8,000,000
)

—

(8,000,000
)
Offering costs charged to additional paid-in capital

—

—

—

—

(731,922
)

—

(731,922
)
Deferred underwriting compensation

—

—

—

—

(14,000,000
)

—

(14,000,000
)
Class A common stock subject to possible redemption;
   38,250,049 shares at a redemption price of $10.00

(38,250,049
)

(3,825
)

—

—

(382,496,665
)

—

(382,500,490
)
Net income

—

—

—

—

—

231,105

231,105

Balance at September 30, 2018

1,749,951

$
175

10,781,250

$
1,078

$
4,791,335

$
207,421

$
5,000,009

~~See accompanying notes to the unaudited, condensed, interim financial statements~~

~~GORES HOLDINGS III, INC.~~

~~STATEMENT OF CASH FLOWS~~

~~For the Nine months ended September 30, 2018~~

~~(Unaudited)~~

Nine

Months Ended

September 30, 2018

Cash flows from operating activities:

Net income/(loss)

$
231,105

Changes in state franchise tax accrual

11,182

Changes in prepaid assets

(23,417
)
Changes in deferred offering costs associated with initial public offering

153,198

Changes in income taxes payable

75,501

Changes in accrued expenses, formation and offering costs

266,210

Net cash provided by operating activities

713,779

Cash flows from investing activities:

Cash deposited in Trust Account

(400,000,000
)
Interest reinvested in Trust Account

(382,026
)
Net cash used in investing activities

(400,382,026
)

Cash flows from financing activities:

Proceeds from sale of Units in initial public offering

400,000,000

Proceeds from sale of Private Placement Warrants to Sponsor

10,000,000

Repayment of notes and advances payable – related party

(150,000
)
Payment of underwriter's discounts and commissions

(8,000,000
)
Payment of accrued offering costs

(731,922
)
Net cash provided by financing activities

401,118,078

Increase/(decrease) in cash

1,449,831

Cash at beginning of period

109,737

Cash at end of period

$
1,559,568

Supplemental disclosure of non-cash financing activities:

Deferred underwriting compensation

$
14,000,000

Offering costs included in accrued expenses

$
343,319

Cash paid for income and state franchise taxes

$
608

~~See accompanying notes to the unaudited, condensed, interim financial statements.~~

~~GORES HOLDINGS III, INC.~~

~~NOTES TO THE UNAUDITED, CONDENSED, INTERIM FINANCIAL STATEMENTS~~

~~1. Organization and Business Operations~~

~~Organization and General~~

~~Gores Holdings III, Inc. (the “Company”) was~~We were originally incorporated in Delaware on October 23, ~~2017. The Company was~~2017 under the name “Gores Holdings III, Inc.” as a special purpose acquisition company formed for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization, or other similar Business Combination with one or more businesses (the “Business Combination”). The Company has neither engaged in any operations nor generated any operating revenue to date. The Company’s management has broad discretion with respect to the Business Combination. The Company’s Sponsor is Gores Sponsor III, LLC, a Delaware limited liability company (the “Sponsor”). The Company has selected December 31^st ~~as its fiscal year-end.~~

At September 30, 2018, the Company had not commenced any operations. All activity for the period from October 23, 2017 (inception) through September 30, 2018 relates to the Company’s formation and initial public offering (“Public Offering”) described below. The Company completed the Public Offering on September 11, 2018 (the “Public Offering Closing Date”). The Company will not generate any operating revenues until after the completion of its Business Combination, at the earliest. Subsequent to the Public Offering, the Company will generate non-operating income in the form of interest income on cash and cash equivalents from the proceeds derived from the Public Offering and the sale of the Private Placement Warrants (as defined below) held in the Trust Account (as defined below).

~~Financing~~

~~The Company intends to finance a Business Combination with the net proceeds from its $400,000,000 Public Offering and its sale of $10,000,000 of Private Placement Warrants.~~

Upon the closing of the Public Offering and the sale of the Private Placement Warrants, an aggregate of $400,000,000 was placed in a Trust Account with Continental Stock Transfer & Trust Company acting as trustee (the “Trust Account”).

~~Trust Account~~

Funds held in the Trust Account can be invested only in U.S. government treasury bills with a maturity of one hundred and eighty (180) days or less or in money market funds meeting certain conditions under Rule 2a‑7 under the Investment Company Act of 1940, as amended, that invest only in direct U.S. government obligations. As of September 30, 2018, the Trust Account consisted of cash and treasury bills.

The Company’s amended and restated certificate of incorporation provides that, other than the withdrawal of interest to fund regulatory compliance requirements and other costs related thereto (a “Regulatory Withdrawal”), subject to an annual limit of $750,000, for a maximum 24 months and/or to pay franchise and income taxes, if any, none of the funds held in trust will be released until the earliest of: (i) the completion of the Business Combination; or (ii) the redemption of any public shares of common stock properly tendered in connection with a stockholder vote to amend the Company’s amended and restated certificate of incorporation to modify the substance or timing of the Company’s obligation to redeem 100% of such public shares of common stock if the Company does not complete the Business Combination within 24 months from the closing of the Public Offering; or (iii) the redemption of 100% of the public shares of common stock if the Company is unable to complete a Business Combination within 24 months from the closing of the Public Offering, subject to the requirements of law and stock exchange rules.

~~Business Combination~~

The Company’s management has broad discretion with respect to the specific application of the net proceeds of the Public Offering, although substantially all of the net proceeds of the Public Offering are intended to be generally applied toward consummating a Business Combination. The Business Combination must bebusiness combination with one or more target ~~businesses~~businesses. On September 11, 2018, we consummated our initial public offering (the “IPO”), following which our shares began trading on the Nasdaq Stock Market (“Nasdaq”).

On February 10, 2020 (the “Closing Date”), we consummated the previously announced business combination (the “Business Combination”) pursuant to that ~~together have an aggregate fair market value~~certain Agreement and Plan of ~~at least 80% of~~Merger, dated November 1, 2019, by and among Gores Holdings III, Inc. (“Gores III”), EAP Merger Sub, Inc. (“First Merger Sub”), EAP Merger Sub II, LLC (“Second Merger Sub”), Shay Holding Corporation (“Shay”), and Platinum Equity Advisors, LLC (in its capacity as the ~~assets held~~Stockholder Representative, the “Stockholder Representative”) (the “Merger Agreement”), as more fully described in the ~~Trust Account (less any deferred underwriting commissions~~Company’s Form 8-K filed with the Securities and ~~taxes payable~~Exchange Commission on ~~interest income earned) at~~February 14, 2020, and the ~~time of the Company signing a definitive agreement in~~amendment thereto filed on March 11, 2020. In connection with the ~~Business Combination. Furthermore, there is no assurance that the Company will be able to successfully effect a Business Combination.~~

~~The Company, after signing a definitive agreement for a Business Combination, will either (i) seek stockholder approval~~closing of the Business Combination ~~at a meeting called for~~(the “Closing”), we acquired 100% of the stock of Shay (as it existed immediately prior to the Second Merger, as such ~~purpose~~term is defined in ~~connection with which stockholders may seek~~the Merger Agreement) and its subsidiaries, changed our name from “Gores Holdings III, Inc.” to ~~redeem their shares, regardless~~“PAE Incorporated”, and changed the trading symbols of ~~whether they vote for or against~~our Class A Common Stock and warrants on Nasdaq from “GRSH” and “GRSHW,” to “PAE” and “PAEWW,” respectively.

For accounting purposes, the Business Combination is treated as a reverse acquisition and recapitalization, in which Shay is considered the accounting acquirer (and legal acquiree) and Gores III is considered the accounting acquiree (and legal acquirer). Additionally, unless otherwise stated or the context indicates otherwise, with respect to the financial information contained in this Form 10-Q, including in “Part I, Item 1. Financial Statements” and the notes thereto and in “Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the financial information relating to the three-month and six-month periods ended June 30, 2019 are those of Shay and its subsidiaries, and for ~~cash equal to their pro rata share~~the three-month and six-month periods ended June 28, 2020, the financial information includes the financial information of Shay and its subsidiaries for the ~~aggregate amount then on deposit in the Trust Account as of two business days~~period prior to the ~~consummation~~Closing and the financial information of PAE Incorporated and its subsidiaries for the period subsequent to the Closing. See Note 1 – “Description of Business” and Note 6 – “Business Combinations and Acquisitions” of the Notes to the condensed consolidated financial statements for additional information.

Unless the context indicates otherwise, the terms “PAE,” the “Company,” “we,” “us,” and “our” refer to PAE Incorporated and its consolidated subsidiaries taken as a whole.

PAE Incorporated

Form 10-Q

For the Quarterly Period Ended June 28, 2020

Table of Contents


		Page No.

Part I Financial Information:
Item 1.	Financial Statements (Unaudited)
	Condensed Consolidated Statements of Operations	1
	Condensed Consolidated Statements of Comprehensive Income (Loss)	2
	Condensed Consolidated Balance Sheets	3
	Condensed Consolidated Statements of Stockholders ’Equity	4
	Condensed Consolidated Statements of Cash Flows	6
	Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	51
Item 4.	Controls and Procedures	51
Part II Other Information:
Item 1.	Legal Proceedings	52
Item 1A.	Risk Factors	52
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	53
Item 3.	Defaults Upon Senior Securities	53
Item 4.	Mine Safety Disclosures	53
Item 5.	Other Information	53
Item 6.	Exhibits	54
Signatures		55

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

PAE Incorporated

Condensed Consolidated Statements of Operations (Unaudited)

(In thousands, except per share data)


	Three Months Ended						Six Months Ended
	June 28,		June 30,		June 28,		June 30,
	2020		2019		2020		2019
Revenues	$	643,303	$	695,607	$	1,260,556	$	1,369,091

Cost of revenues	496,678		540,772		961,886		1,057,931
Selling, general and administrative expenses	105,451		126,438		242,777		261,474
Amortization of intangible assets	8,047		8,196		16,094		16,853
Total operating expenses	610,176		675,406		1,220,757		1,336,258

Program profit	33,127		20,201		39,799		32,833
Other income, net	1,168		5,958		1,954		7,678

Operating income	34,295		26,159		41,753		40,511
Interest expense, net	(13,757)		(21,617)		(34,705)		(44,277)
Income (loss) before income taxes	20,538		4,542		7,048		(3,766)
Expense (benefit) from income taxes	3,752		1,153		(4,961)		(1,994)
Net income (loss)	16,786		3,389		12,009		(1,772)
Noncontrolling interest in earnings of ventures	765		715		931		1,274
Net income (loss) attributed to PAE Incorporated	$	16,021	$	2,674	$	11,078	$	(3,046)

Net income (loss) per share attributed to PAE Incorporated:
Basic	$	0.17	$	0.13	$	0.15	$	(0.14)
Diluted	$	0.17	$	0.13	$	0.15	$	(0.14)

Weighted average shares outstanding:
Basic	92,044,098		21,127,823		75,890,028		21,127,823
Diluted	92,787,379		21,127,823		76,273,931		21,127,823

See accompanying notes to condensed consolidated financial statements

PAE Incorporated

Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)

(In thousands)


	Three Months Ended						Six Months Ended
	June 28,		June 30,		June 28,		June 30,
	2020		2019		2020		2019

Net income (loss)	$	16,786	$	3,389	$	12,009	$	(1,772)

Other comprehensive income (loss):
Change in foreign currency translation adjustment, net of tax	59		(415)		(917)		(125)
Other, net	142		421		424		843
Other comprehensive income (loss)	201		6		(493)		718

Comprehensive income (loss)	16,987		3,395		11,516		(1,054)
Comprehensive income attributed to noncontrolling interests	284		643		781		1,225
Comprehensive income (loss) attributed to PAE Incorporated	$	16,703	$	2,752	$	10,735	$	(2,279)

See accompanying notes to condensed consolidated financial statements

PAE Incorporated

Condensed Consolidated Balance Sheets (Unaudited)

(In thousands, except share and par value amounts)


	June 28,		December 31,
	2020		2019
Assets
Current assets:
Cash and cash equivalents	$	138,469	$	68,035
Accounts receivable, net	432,185		442,180
Prepaid expenses and other current assets	45,676		43,549
Total current assets	616,330		553,764

Property and equipment, net	26,841		30,404
Deferred income taxes, net	12,017		3,212
Investments	17,848		17,925
Goodwill	409,588		409,588
Intangible assets, net	164,370		180,464
Operating lease right-of-use assets, net	154,375		162,184
Other noncurrent assets	9,663		13,758
Total assets	$	1,411,032	$	1,371,299

Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	107,154	$	124,661
Accrued expenses	128,992		102,315
Customer advances and billings in excess of costs	70,695		51,439
Salaries, benefits and payroll taxes	135,177		130,633
Accrued taxes	14,614		18,488
Current portion of long-term debt, net	22,969		22,007
Operating lease liabilities, current portion	38,946		36,997
Other current liabilities	31,457		30,893
Total current liabilities	550,004		517,433

Long-term debt, net	589,828		727,930
Long-term operating lease liabilities	118,452		129,244
Other long-term liabilities	7,415		8,601
Total liabilities	1,265,699		1,383,208

Stockholders’ equity:
Preferred stock, $0.0001 par value per share, 1,000,000 shares authorized; 0 shares issued and outstanding	—		—
Common stock, $0.0001 par value per share: 210,000,000 shares authorized; 92,040,654 and 21,127,823 shares issued and outstanding as of June 28, 2020 and December 31, 2019, respectively	9		2
Additional paid-in capital	245,815		101,743
Accumulated deficit	(134,293)		(145,371)
Accumulated other comprehensive loss	(628)		(134)
Total PAE Incorporated stockholders' equity	110,903		(43,760)
Noncontrolling interests	34,430		31,851
Total liabilities and stockholders’ equity	$	1,411,032	$	1,371,299

See accompanying notes to condensed consolidated financial statements

PAE Incorporated

Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)

(In thousands, except share data)



								Accumulated		Total
								Other		PAE Incorporated				Total
	Common Stock					Additional		Accumulated		Comprehensive		Stockholders’		Noncontrolling		Stockholders’
	Shares	Amount		Paid-in Capital		Deficit		(Loss) / Income		Equity		Interests		Equity
Balance at December 31, 2018	282,047	$	3	$	101,742	$	(95,562)	$	(2,138)	$	4,045	$	27,440	$	31,485
Retrospective application of the capitalization	20,845,776	(1)		1				—		—		—		—
Adjusted balance at December 31, 2018	21,127,823	2		101,743		(95,562)		(2,138)		4,045		27,440		31,485
Net (loss) income	—	—		—		(5,719)		—		(5,719)		559		(5,160)
Other comprehensive income, net	—	—		—		—		712		712		—		712
Equity contributions from venture partners	—	—		—		—		—		—		1,350		1,350
Balance at March 31, 2019	21,127,823	2		101,743		(101,281)		(1,426)		(962)		29,349		28,387
Net income	—	—		—		2,674		—		2,674		715		3,389
Other comprehensive income, net	—	—		—		—		6		6		—		6
Net contributions from noncontrolling interests	—	—		—		—		—		—		4,050		4,050
Distributions to venture partners and other	—	—		—		—		—		—		(742)		(742)
Balance at June 30, 2019	21,127,823	$	2	$	101,743	$	(98,607)	$	(1,420)	$	1,718	$	33,372	$	35,090

PAE Incorporated

Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) (Continued)

(In thousands, except share data)


								Accumulated		Total
								Other		PAE Incorporated				Total
	Common Stock					Additional		Accumulated		Comprehensive		Stockholders’		Noncontrolling		Stockholders’
	Shares	Amount		Paid-in Capital		Deficit		(Loss) / Income		Equity		Interests		Equity
Balance at December 31, 2019	282,047	$	3	$	101,742	$	(145,371)	$	(134)	$	(43,760)	$	31,851	$	(11,909)
Retrospective application of the capitalization	20,845,776	(1)		1						—		—		—
Adjusted balance at December 31, 2019	21,127,823	2		101,743		(145,371)		(134)		(43,760)		31,851		(11,909)
Net (loss) income	—	—		—		(4,943)		—		(4,943)		166		(4,777)
Other comprehensive loss, net	—	—		—		—		(695)		(695)				(695)
Distributions to venture partners and other	—	—		—		—		—		—		152		152
Equity contributions from venture partners	—	—		13		—		—		13		—		13
Equity infusion from Gores III	46,999,787	5		364,773		—		—		364,778		—		364,778
Private placement	23,913,044	2		219,998		—		—		220,000		—		220,000
Payment to Shay Stockholders	—	—		(424,243)		—		—		(424,243)		—		(424,243)
Balance at Balance at March 29, 2020	92,040,654	9		262,284		(150,314)		(829)		111,150		32,169		143,319
Net income	—	—		—		16,021		—		16,021		765		16,786
Other comprehensive income, net	—	—		—		—		201		201		—		201
Distributions to venture partners and other	—	—		—		—		—		—		(443)		(443)
Equity contributions from venture partners	—	—		—		—		—		—		1,939		1,939
Equity infusion from Gores III	—	—		—		—		—		—		—		—
Private placement	—	—		—		—		—		—		—		—
Working capital adjustment to Shay Stockholders	—	—		(20,169)		—		—		(20,169)		—		(20,169)
Stock-based Compensation	—	—		3,700		—		—		3,700		—		3,700
Balance at June 28, 2020	92,040,654	$	9	$	245,815	$	(134,293)	$	(628)	$	110,903	$	34,430	$	145,333

See accompanying notes to condensed consolidated financial statements

PAE Incorporated

Condensed Consolidated Statements of Cash Flows (Unaudited)

(In thousands)


	Six Months Ended
	June 28,		June 30,
	2020		2019
Operating activities
Net income (loss)	$	12,009	$	(1,772)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation of property and equipment	5,072		6,301
Amortization of intangible assets	16,094		16,853
Amortization of debt issuance cost	7,821		4,082
Stock-based compensation	3,700		—
Net undistributed income from unconsolidated ventures	(1,739)		(2,184)
Deferred income taxes, net	(13,295)		(372)
Other non-cash activities, net	404		3,324
Changes in operating assets and liabilities, net:
Accounts receivable, net	9,607		28,396
Accounts payable	(17,547)		11,278
Accrued expenses	6,358		(5,166)
Customer advances and billings in excess of costs	19,282		26,297
Salaries, benefits and payroll taxes	4,310		9,845

Inventories, net	2,415		(2,051)
Prepaid expenses and other current assets	(3,256)		(545)
Other current and noncurrent liabilities	(5,101)		(9,580)
Investments	1,701		1,769
Other noncurrent assets	11,600		(9,951)
Accrued taxes	(3,847)		(4,601)
Net cash provided by operating activities	55,588		71,923
Investing activities
Expenditures for property and equipment	(1,597)		(5,633)
Other investing activities, net	37		2,042
Net cash used in investing activities	(1,560)		(3,591)
Financing activities
Net contributions from noncontrolling interests	1,950		5,400
Borrowings on long-term debt	60,468		69,319
Repayments on long-term debt	(204,464)		(136,821)
Payments of debt issuance costs	(964)		—
Recapitalization from merger with Gores III	605,713		—
Payment of underwriting and transaction costs	(27,267)		—
Distribution to selling stockholders	(419,548)		—
Other financing activities, net	(292)		(742)
Net cash provided by (used in) financing activities	15,596		(62,844)
Effect of exchange rate changes on cash and cash equivalents	810		(1,205)
Net increase in cash and cash equivalents	70,434		4,283
Cash and cash equivalents at beginning of period	68,035		50,954
Cash and cash equivalents at end of period	$	138,469	$	55,237

Supplemental cash flow information
Cash paid for interest	$	23,278	$	39,538
Cash paid for taxes	$	2,796	$	4,897
Supplemental non-cash financing activities
Working capital adjustment payable to Shay Stockholders	$	20,169	$	—

See accompanying notes to condensed consolidated financial statements

PAE Incorporated

Notes to Condensed Consolidated Financial Statements (Unaudited)

1. Description of Business ~~Combination, including interest income but less taxes payable,~~

PAE Incorporated, formerly known as Gores Holdings III, Inc. (“Gores III”), was originally incorporated in Delaware on October 23, 2017 as a special purpose acquisition company formed for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization, or ~~(ii) provide stockholders~~other similar business combination with one or more target businesses. On September 11, 2018, Gores III consummated its initial public offering (the “IPO”), following which our shares began trading on the Nasdaq Stock Market (“Nasdaq”). Unless the context otherwise indicates, references herein to the “Company" or “PAE” refer to PAE Incorporated and its consolidated subsidiaries.

On February 10, 2020 (the “Closing Date”), the Company completed the previously announced business combination (the “Business Combination”) in which Shay Holding Corporation (“Shay”) was acquired by Gores III. The transaction was completed in a multi-step process pursuant to which Shay ultimately merged with and into a wholly-owned subsidiary of Gores III, with the opportunity to sell their shares to the Company by means of a tender offer (and thereby avoid the need for a stockholder vote) for an amount in cash equal to their pro rata share of the aggregate amount then on deposit in the Trust Account as of two business days prior to the consummation of the Business Combination, including interest income but less taxes payable. The decision as to whether the Company will seek stockholder approval of the Business Combination or will allow stockholders to sell their shares in a tender offer will be made by the Company, solely in its discretion, and will be based on a variety of factors suchGores III subsidiary continuing as the timing of the transaction and whether the terms of the transaction would otherwise require the Company to seek stockholder approval, unless a vote is required by law or under NASDAQ rules. If the Company seeks stockholder approval, it will complete its Business Combination only if a majority of the outstanding shares of common stock voted are voted in favor of the Business Combination. In accordance with the Company’s charter, the Company will not redeem its public shares of common stock in an amount that would cause its net tangible assets to be less than $5,000,001. In such case, the Company would not proceed with the redemption of its public shares of common stock and the related Business Combination, and instead may search for an alternate Business Combination.

surviving company. As a result of the ~~foregoing redemption provisions and as discussed in further detail in Note 2, the public shares~~Business Combination, each share of common stock ~~will be recorded at~~of Shay was cancelled and converted into the ~~redemption amount and classified as temporary equity, in accordance with ASC 480, “Distinguishing Liabilities from Equity” (“ASC 480”) in subsequent periods.~~

~~The Company will have 24 months from the Public Offering Closing Date~~right to ~~complete its Business Combination. If the Company does not complete~~receive a Business Combination within this period of time, it shall (i) cease all operations except for the purposes of winding up; (ii) as promptly as reasonably possible, but not more than ten business days thereafter, redeem the public shares of common stock for a per share pro rata portion of the ~~Trust Account, including interest income, but less taxes~~consideration payable ~~(less up~~in connection with the transaction and Gores III acquired Shay (as it existed immediately prior to ~~$100,000~~the Second Merger, as such term is defined in the Merger Agreement) and its subsidiaries. Additionally, the stockholders of ~~such net interest income~~Shay as of immediately prior to ~~pay dissolution expenses) and (iii) as promptly as possible following such redemption, dissolve and liquidate~~ the ~~balance~~transaction hold a portion of the ~~Company’s net assets~~common stock of the Company.

Accordingly, as of the Closing Date, Shay’s historical results of operations replaced Gores III’s historical results of operations for periods prior to ~~its remaining stockholders, as part of its plan of dissolution and liquidation. The Sponsor~~the Business Combination and the ~~Company’s officers~~results of operations of both companies are included in the accompanying condensed consolidated financial statements for periods following the Closing Date. See Note 6 - “Business Combinations and ~~directors have entered into~~Acquisitions” for additional information.

PAE provides a ~~letter agreement with the Company, pursuant to which they waived their rights to participate in any redemption with respect to their Founder Shares (as defined below); however, if the Sponsor or any~~wide variety of integrated support solutions, including defense and military readiness, diplomacy, intelligence support, business process outsourcing, counter-terrorism solutions, peacekeeping, development, host nation capacity building, aircraft and ground equipment maintenance and logistics, and operations and maintenance of facilities and infrastructure. Customers include agencies of the U.S. Government, such as the Department of Defense (“DoD”) and Department of State (“DoS”), the National Aeronautics and Space Administration (“NASA”), Department of Homeland Security, intelligence community agencies and other civilian agencies, as well as allied foreign governments and international organizations such as the United Nations.

The Company’s ~~officers, directors or affiliates acquire public shares of common stock, they will be entitled to a pro rata share~~operations are organized into the following 2 reportable segments:

•Global Mission Services (“GMS”): GMS provides infrastructure and logistics management, international logistics and stabilization support, and aircraft and vehicle readiness and sustainment support. The segment focuses on customer relationships with DoD, DoS, NASA, United Nations, and other government agencies for work both in the United States and outside of the ~~Trust Account~~United States.

•National Security Solutions (“NSS”): NSS provides counter-threat solutions, business process outsourcing, adjudication support services and full life cycle support for complex legal matters. NSS focuses on customer relationships in the ~~event the Company does not complete a Business Combination within the required time period.~~

~~In the event~~areas of such distribution, it is possible that the per share value of the residual assets remaining available for distribution (including Trust Account assets) will be less than the initial public offering price per Unit in the Public Offering.

~~Emerging Growth Company~~

~~Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply~~intelligence, defense and security, and with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable. civilian agencies.

The Company ~~has elected~~separately presents the costs associated with certain corporate functions as “Corporate”, which primarily include costs that are not ~~to opt out of such extended transition period which means that when a standard is issued or revised and it has different application dates for public or private companies,~~reimbursed by the ~~Company, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard.~~

Company’s U.S. Government customers.

2. Significant Accounting Principles and Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with ~~accounting principles~~U.S. generally accepted ~~in the United States of America~~accounting principles (“U.S. GAAP”) ~~and pursuant to the accounting and disclosure rules and regulations~~for interim financial information. Accordingly, they do not include all of the ~~Securities~~information and ~~Exchange Commission (“SEC”), and reflect~~notes required by U.S. GAAP for complete financial statements. In management’s opinion, all adjustments, consisting of only of normal recurring adjustments, ~~which are, in the opinion of management,~~considered necessary for a fair presentation ~~of the financial position as of September 30, 2018 and the~~have been included. The results of operations ~~and cash flows~~ for the interim periods ~~presented. Operating results for the nine months ended September 30, 2018~~ are not necessarily indicative of the results that may be expected for the full ~~year or any other period. The accompanying~~fiscal year. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s ~~(i)~~ audited consolidated financial statements ~~as of June 30, 2018~~ and notes thereto for the ~~period from October 23, 2017 through June 30, 2018 included in~~year ended December 31, 2019, which are filed as Exhibit 99.3 to the ~~final prospectus~~Company’s Form 8-K/A filed with the SEC on ~~September 7, 2018,~~March 11, 2020.

The Company closes its books and ~~(ii) audited balance sheet~~records on the last Sunday of the calendar quarter to align its financial closing with its business processes,and therefore the closing of books and records for the second quarter was on June 28, 2020 and June 30, 2019, respectively. The condensed consolidated financial statements and disclosures included herein are labeled based on that convention. This practice only affects interim periods, as the Company’s fiscal year ends on December 31.

The condensed consolidated financial statements include the accounts of ~~September 11, 2018 included~~PAE Incorporated and subsidiaries and ventures in which the Company owns more than 50% or otherwise controls. All intercompany amounts have been eliminated in consolidation.

Use of Estimates

These consolidated financial statements are prepared in conformity with U.S. GAAP, which requires the use of estimates and assumptions, including assumptions to determine the fair value of acquired assets and liabilities, recoverability of long-lived assets, goodwill, valuation allowances on deferred taxes, inputs used in stock based compensation and anticipated contract costs and revenues utilized in the earnings recognition process, which affect the reported amounts in the consolidated financial statements and accompanying notes. Due to the size and nature of many of the Company’s programs, the estimation of total revenues and cost at completion is subject to a wide range of variables, including assumptions for schedule and technical issues. Actual results may differ from management’s estimates.

Update to Significant Accounting Policies

There have been no material changes to the Company’s significant accounting policies described in the Company’s ~~Current Report on~~ Form ~~8-K~~8-K/A filed with the SEC on ~~September 17, 2018.~~

March 11, 2020, other than Accounts Receivable, net and Net ~~Income/~~Income (Loss) Per ~~Common~~ Share

as described below.

Accounts Receivable, net

Amounts billed and due from customers are recorded as billed receivables within accounts receivable, net on the condensed consolidated balance sheets. Generally, customer accounts are due within 30 to 45 days of billings. The Company ~~has two classes~~recognizes an allowance for credit losses based on historical experience, current conditions and reasonable and supportable forecasts. The Company assesses its overall allowance for credit losses at least on a quarterly basis. Prior to the implementation of ~~shares, which are referred~~the allowance for credit losses the Company recorded adjustments to ~~as Class A common stock and Class F common stock.~~ an allowance for doubtful accounts when collectability was uncertain.

Net ~~income/~~Income (Loss) Per Share

Basic net income (loss) per common share is ~~computed utilizing~~determined by dividing the ~~two-class method. The two-class method is an earnings allocation formula that determines earnings per share separately for each class~~net income (loss) allocable to stockholders by the weighted average number of common ~~stock based on an allocation of undistributed earnings per~~shares outstanding during the rights of each class. At September 30, 2018, the Company did not have any dilutive securities or other contracts that could, potentially, be exercised or converted into common stock and then share in the earnings of the Company under the treasury stock method. As a result, diluted net income/(loss) per common share is the same as basic net income/(loss) per common share for the period. The table below presents a reconciliation of the numerator and denominator used to compute basic and diluted net income/periods presented. Diluted income (loss) per share ~~for each class~~is computed by dividing the net income (loss) allocable to common stockholders by the weighted average number of ~~common stock:~~

For the Three Months Ended
September 30, 2018

For the Nine Months Ended
September 30, 2018

Class A

Class F

Class A

Class F

Basic and diluted net income/(loss) per share:

Numerator:

Allocation of net income/(loss)

$
332,628

$
(81,006
)

$
358,373

$
(127,268
)

Denominator:

Weighted-average shares outstanding

8,696,000

10,781,250

2,932,000

10,781,250

Basic and diluted net income/(loss) per share

$
0.04

$
(0.01
)

$
0.12

$
(0.01
)

~~Concentration of Credit Risk~~

Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash accounts in a financial institution and the Trust Account, which at times, may exceed the Federal depository insurance coverage of $250,000. The Company has not experienced losses on these accounts and management believes the Company is not exposed to significant risks on such accounts.

~~Financial Instruments~~

The fair value of the Company’s assets and liabilities, which qualify as financial instruments under FASB ASC 820, “Fair Value Measurements and Disclosures,” approximates the carrying amounts represented in the balance sheet.

~~Offering Costs~~

The Company complies with the requirements of the ASC 340‑10‑S99‑1 and SEC Staff Accounting Bulletin (SAB) Topic 5A — “Expenses of Offering.” Offering costs consist principally of professional and registration fees incurred through the balance sheet date that are related to the Public Offering and were charged to stockholders’ equity upon the completion of the Public Offering. Accordingly, at September 30, 2018 and December 31, 2017, offering costs were approximately $22,731,922 and $153,198 respectively, (including $22,000,000 in underwriter’s fees), have been charged to stockholders’ equity.

~~Redeemable Common Stock~~

As discussed in Note 3, all of the 40,000,000 shares of class A common stock sold as part of the Units in the Public Offering contain a redemption feature which allows for the redemption of such public shares in connection with the Company’s liquidation, if there is a stockholder vote or tender offer in connection with the Business Combination and in connection with certain amendments to the Company’s charter. In accordance with ASC 480, redemption provisions not solely within the control of the Company require common stock subject to redemption to be classified outside of permanent equity. Ordinary liquidation events, which involve the redemption and liquidation of all of the entity’s equity instruments, are excluded from the provisions of ASC 480. Although the Company did not specify a maximum redemption threshold, its charter provides that currently, the Company will not redeem its public shares in an amount that would cause its net tangible assets (stockholders’ equity) to be less than $5,000,001.

The Company recognizes changes in redemption value immediately as they occur and adjusts the carrying value of redeemable common stock to equal the redemption value at the end of each reporting period. Increases or decreases in the carrying amount of redeemable common stock are affected by charges against additional paid in capital.

~~Accordingly, at September 30, 2018, 38,250,049 of the 40,000,000 public shares are classified outside of permanent equity at their redemption value.~~

~~Use of Estimates~~

The preparation of financial statements in conformity with U.S. GAAP requires the Company’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

~~Income Taxes~~

The Company follows the asset and liability method of accounting for income taxes under ASC 740, “Income Taxes.” Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statements carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.

For those liabilities or benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. The Company recognizes accrued interest and penalties related to unrecognized tax liabilities as income tax expense. No amounts were accrued for the payment of interest and penalties at September 30, 2018.

The Company may be subject to potential examination by U.S. federal, states or foreign jurisdiction authorities in the areas of income taxes. These potential examinations may include questioning the timing and amount of deductions, the nexus of income amounts in various tax jurisdictions and compliance with U.S. federal, states or foreign tax laws.

~~The Company is incorporated in the State of Delaware and is required to pay franchise taxes to the State of Delaware on an annual basis.~~

~~Cash and Cash Equivalents~~

The Company considers all highly liquid instruments purchased with an original maturity of three months or less to be cash equivalents. The Company continually monitors its positions with and the credit quality of the financial institutions with which it invests. As of the balance sheet date, and periodically throughout the year, the Company has maintained balances in various operating accounts in excess of federally insured limits.

~~Investments and Cash Held in Trust Account~~

At September 30, 2018, the Company had $400,382,026 in the Trust Account which may be utilized for Business Combinations. At September 30, 2018, the Trust Account consisted of both cash and treasury bills.

The Company’s amended and restated certificate of incorporation provides that, other than the withdrawal of interest to pay taxes, if any, none of the funds held in trust will be released until the earlier of: (i) the completion of the Business Combination; (ii) the redemption of any public shares of common stock ~~properly tendered in connection with a stockholder vote to amend the Company’s amended~~ and ~~restated certificate of incorporation to modify the substance or timing of the Company’s obligation to redeem 100% of such public shares of~~ common stock if the Company does not complete the Business Combination within 24 months from the closing of the Public Offering; or (iii) the redemption of 100% of the public shares of common stock if the Company is unable to complete a Business Combination within 24 months from the closing of the Public Offering, subject to the requirements of law and stock exchange rules.

~~Recently issued accounting pronouncements not yet adopted~~

Management does not believe that any recently issued, but not yet effective, accounting pronouncements, if currently adopted, would have a material effect on the Company’s financial statements based on current operations of the Company. The impact of any recently issued accounting standards will be re-evaluated on a regular basis or if a business combination is completed where the impact could be material.

~~Going Concern Consideration~~

~~If the Company does not complete its Business Combination by September 11, 2020, the Company will (i) cease all operations except~~equivalents outstanding for the purpose of winding up, (ii) as promptly as reasonably possible but not more than ten business days thereafter, redeem 100% of the common stock sold as part of the units in the Public Offering, at a per-share price, payable in cash, equal to the aggregate amount then on deposit in the Trust Account, including interest (which interest shall be net of franchise and income taxes payable and less up to $100,000 of such net interest which may be distributed to the Company to pay dissolution expenses), divided by the number of then outstanding public shares, which redemption will completely extinguish public stockholders’ rights as stockholders (including the right to receive further liquidation distributions, if any), subject to applicable law, and (iii) as promptly as reasonably possible following such redemption, subject to the approval of the Company’s remaining stockholders and the Company’s Board of Directors, dissolve and liquidate, subject in each case to the Company’s obligations under Delaware law to provide for claims of creditors and the requirements of other applicable law.

In the event of such distribution, it is possible that the per share value of the residual assets remaining available for distribution (including Trust Account assets) will be less than the initial public offering price per unit in the Public Offering. In addition if the Company fails to complete its Business Combination by September 11, 2020, there will be no redemption rights or liquidating distributions with respect to the warrants, which will expire worthless.

In addition, at September 30, 2018 and December 31, 2017, the Company had current liabilities of $464,512 and $261,619, respectively, and working capital of $1,118,473 and $1,316, respectively, largely due to amounts owed to professionals, consultants, advisors and others who are working on seeking a Business Combination as described in Note 1. Such work is continuing after September 30, 2018 and amounts are continuing to accrue.

~~3. Public Offering~~

~~Public Units~~

On September 11, 2018, the Company sold 40,000,000 units at a price of $10.00 per unit (the “Units”), including 2,500,000 Units as a result of the underwriter’s partial exercise of its over-allotment option, generating gross proceeds of $400,000,000. Each Unit consists of one share of the Company’s Class A common stock, $0.0001 par value, and one-third of one redeemable Class A common stock purchase warrant (the “Warrants”). Each Whole Warrant entitles the holder to purchase one share of Class A common stock for $11.50 per share. Each Warrant will become exercisable on the later of 30 days after the completion of the Business Combination or 12 months from the closing of the Public Offering and will expire five years after the completion of the Business Combination or earlier upon redemption or liquidation. However, if the Company does not complete the Business Combination on or prior to the 24-month period allotted to complete the Business Combination, the Warrants will expire at the end of such period. The Warrants were issued in registered form under a warrant agreement between Continental Stock Transfer & Trust Company, as warrant agent, and the Company. The Company did not register the shares of common stock issuable upon exercise of the Warrants under the Securities Act of 1933, as amended (the “Securities Act”) or any state securities law. Under the terms of the warrant agreement, the Company has agreed to use its best efforts to file a registration statement under the Securities Act following the completion of the Business Combination covering the shares of common stock issuable upon exercise of the Warrants. The Company paid an upfront underwriting discount of 2.00% ($8,000,000) of the per Unit offering price to the underwriter at the closing of the Public Offering, with an additional fee (the “Deferred Discount”) of 3.50% of the per Unit offering price payable upon the Company’s completion of a Business Combination. The Deferred Discount will become payable to the underwriter from the amounts held in the Trust Account solely in the event the Company completes its Business Combination.

~~4. Related Party Transactions~~

~~Founder Shares~~

On November 3, 2017, the Sponsor purchased 10,781,250 shares of Class F common stock (the “Founder Shares”) for an aggregate purchase price of $25,000, or approximately $0.002 per share. Subsequently, the Sponsor transferred an aggregate of 75,000 Founder Shares to the Company’s independent directors (together with the Sponsor, the “Initial Stockholders”). On October 22, 2018, the Sponsor forfeited 781,250 Founder Shares following the expiration of the unexercised portion of underwriter’s over-allotment option, so that the Founder Shares held by the Initial Stockholders would represent 20.0% of the outstanding shares of common stock following completion of the Public Offering. The Founder Shares are identical to the common stock included in the Units sold in the Public Offering except that the Founder Shares will automatically convert into shares of Class A common stock at the time of the Business Combination on a one-for-one basis, subject to adjustment as described in the Company’s amended and restated certificate of incorporation.

~~Private Placement Warrants~~

The Sponsor purchased from the Company an aggregate of 6,666,666 warrants at a price of $1.50 per warrant (a purchase price of $10,000,000) in a private placement that occurred simultaneously with the Public Offering (the “Private Placement Warrants”). Each Private Placement Warrant entitles the holder to purchase one share of Class A common stock at $11.50 per share. A portion of the purchase price of the Private Placement Warrants was added to the proceeds from the Public Offering to be held in the Trust Account pending completion of the Business Combination.

The Private Placement Warrants have terms and provisions that are identical to those of the Warrants sold as part of the Units in the Public Offering, except that the Private Placement Warrants may be exercised on a cashless basis and are not redeemable so long as they are held by the Sponsor or its permitted transferees.

If the Company does not complete a Business Combination, then the Private Placement Warrants proceeds will be part of the liquidation distribution to the public stockholders and the Private Placement Warrants will expire worthless.

~~Registration Rights~~

The holders of Founder Shares, Private Placement Warrants and warrants issued upon conversion of working capital loans, if any, have registration rights (in the case of the Founder Shares, only after conversion of such shares to common shares) pursuant to a registration rights agreement entered into by the Company, the Sponsor and the other security holders named therein on September 6, 2018. These holders will also have certain demand and “piggy back” registration rights. The Company will bear the expenses incurred in connection with the filing of any such registration statements.

~~Sponsor Loan~~

On November 3, 2017, the Sponsor agreed to loan the Company an aggregate of $300,000 by the issuance of an unsecured promissory note (the “Note”) issued by the Company in favor of the Sponsor to cover organizational expenses related to the Proposed Offering. On November 3, 2017, the Company borrowed $150,000 against the Note, and on August 30, 2018, the Company borrowed an additional $150,000. This Note was non-interest bearing and payable on the earlier of November 30, 2018 or the completion of the Public Offering. These Notes were repaid in full upon the completion of the Public Offering.

~~Administrative Services Agreement~~

The Company entered into an administrative services agreement on September 6, 2018, pursuant to which it agreed to pay to an affiliate of the Sponsor $20,000 a month for office space, utilities and secretarial support. Services commenced on the date the securities were first listed on the NASDAQ Capital Market and will terminate upon the earlier of the consummation by the Company of a Business Combination or the liquidation of the Company.

~~For the period commencing September 7, 2018 through September 30, 2018 the Company has paid the affiliate $16,000.~~

~~5. Deferred Underwriting Compensation~~

The Company is committed to pay a deferred underwriting discount totaling $14,000,000 or 3.50% of the gross offering proceeds of the Public Offering, to the underwriter upon the Company’s consummation of a Business Combination. The underwriter is not entitled to any interest accrued on the Deferred Discount, and no Deferred Discount is payable to the underwriter if there is no Business Combination.

~~6. Income Taxes~~

Income tax expense during interim periods is based on applying an estimated annual effective income tax rate to year-to-date income, plus any significant unusual or infrequently occurring items which are recorded in the interim period. The Company’s effective tax rate is estimated to be 24.66%. The provision for income taxes for the nine months ended September 30, 2018 differs from the amount that would be provided by applying the statutory U.S. federal income tax rate of 21% to pre-tax income primarily because of state income taxes.

The computation of the annual estimated effective tax rate at each interim period requires certain estimates and significant judgment including, but not limited to, the expected operating income for the year, projections of the proportion of income earned and taxed in various jurisdictions, permanent and temporary differences, and the likelihood of recovering deferred tax assets generated in the current year. The accounting estimates used to compute the provision for income taxes may change as new events occur, more experience is obtained, additional information becomes known or as the tax environment changes.

The Company has evaluated tax positions taken or expected to be taken in the course of preparing the financial statements to determine if the tax positions are “more likely than not” of being sustained by the applicable tax authority. Tax positions not deemed to meet the “more likely than not” threshold would be recorded as a tax benefit or expense in the current year. The Company has concluded that there was no impact related to uncertain tax positions on the results of its operations for the period ended September 30, 2018. As of September 30, 2018, the Company has no accrued interest or penalties related to uncertain tax positions. The Company is currently not aware of any issues under review that could result in significant payments, accruals or material deviation from its position. The Company’s conclusions regarding tax positions will be subject to review and may be adjusted at a later date based on factors including, but not limited to, ongoing analyses of tax laws, regulations, and interpretations thereof.

Fair Value ~~Measurement~~

~~The Company complies with FASB ASC 820,~~ of Financial Instruments

Fair ~~Value Measurements, for its financial assets and liabilities that are re-measured and reported at fair~~ value ~~at each reporting period, and non-financial assets and liabilities that are re-measured and reported at fair value at least annually. ASC 820 determines fair value to be~~is the price that would be received to sell an asset or ~~would be~~ paid to transfer a liability ~~(i.e.,~~in the ~~exit price)~~principal or most advantageous market in an orderly transaction between ~~market~~marketplace participants at the measurement date.

The ~~following table presents information about the Company’s assets that are measured at fair value on a recurring basis as of September 30, 2018, and indicates the fair value hierarchy of the~~ valuation techniques the Company utilized to ~~determine such~~measure the fair value of financial instruments are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect internal market assumptions.

These two types of inputs create the following fair value hierarchy:

Level 1 – Quoted prices for identical instruments in active markets.

Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identicalor similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.

Level 3 – Significant inputs to the valuation model are unobservable.

The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, and amounts included in other current assets and current liabilities that meet the definition of a financial instrument approximate fair value because of the short-term nature of these amounts.

The carrying value of the Company’s outstanding debt obligations approximates its fair value. ~~In general,~~The fair ~~values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities. Fair values determined by~~value of long-term debt is calculated using Level 2 inputs, ~~utilize data points that are observable such as quoted prices,~~based on interest rates available for debt with terms and ~~yield curves. Fair values determined~~maturities similar to the Company’s existing debt arrangements.

3. Recent Accounting Pronouncements

Accounting Pronouncements Adopted

In June 2016, the Financial Accounting Standards Board (“FASB��) issued Accounting Standards Update (ASU) No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses for financial instruments, which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost, replacing the existing incurred loss impairment model. The new standard is effective for reporting periods beginning after December 15, 2019, with early adoption permitted. The Company adopted this guidance effective January 1, 2020 under the modified retrospective method and such adoption did not have a material impact on the Company’s financial statements.

In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Topic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract, which requires the tracking and recognition of costs that will be capitalized as an asset and amortized over the assets useful life. The new standard is effective for reporting periods beginning after December 15, 2019, with early adoption permitted. The Company adopted this guidance effective January 1, 2020 prospectively and the standard did not have a material impact on the Company’s financial statements.

4. Revenues

Disaggregated Revenues

Disaggregated revenues by ~~Level 3 inputs are unobservable data points~~customer type were as follows (in thousands):


	Three Months Ended June 28, 2020
	GMS		NSS		Total
DoD	$	204,634	$	62,096	$	266,730
Other U.S. government agencies	260,714		49,434		310,148
Commercial and non-U.S. customers	42,506		23,919		66,425
Total	$	507,854	$	135,449	$	643,303


	Six Months Ended June 28, 2020
	GMS		NSS		Total
DoD	$	392,240	$	129,275	$	521,515
Other U.S. government agencies	510,660		120,156		630,816
Commercial and non-U.S. customers	62,398		45,827		108,225
Total	$	965,298	$	295,258	$	1,260,556


	Three Months Ended June 30, 2019
	GMS		NSS		Total
DoD	$	214,657	$	56,713	$	271,370
Other U.S. government agencies	281,154		93,742		374,896
Commercial and non-U.S. customers	30,214		19,127		49,341
Total	$	526,025	$	169,582	$	695,607


	Six Months Ended June 30, 2019
	GMS		NSS		Total
DoD	$	415,059	$	115,464	$	530,523
Other U.S. government agencies	555,266		182,952		738,218
Commercial and non-U.S. customers	60,179		40,171		100,350
Total	$	1,030,504	$	338,587	$	1,369,091

Disaggregated revenues by contract type were as follows (in thousands):


	Three Months Ended June 28, 2020
	GMS		NSS		Total
Cost-reimbursable	$	299,906	$	34,288	$	334,194
Fixed-price	158,247		53,693		211,940
Time and materials	49,701		47,468		97,169
Total	$	507,854	$	135,449	$	643,303


	Six Months Ended June 28, 2020
	GMS		NSS		Total
Cost-reimbursable	$	565,986	$	71,192	$	637,178
Fixed-price	320,285		122,650		442,935
Time and materials	79,027		101,416		180,443
Total	$	965,298	$	295,258	$	1,260,556


	Three Months Ended June 30, 2019
	GMS		NSS		Total
Cost-reimbursable	$	304,688	$	23,481	$	328,169
Fixed-price	175,592		72,080		247,672
Time and materials	45,745		74,021		119,766
Total	$	526,025	$	169,582	$	695,607


	Six Months Ended June 30, 2019
	GMS		NSS		Total
Cost-reimbursable	$	595,379	$	45,703	$	641,082
Fixed-price	350,991		148,594		499,585
Time and materials	84,134		144,290		228,424
Total	$	1,030,504	$	338,587	$	1,369,091

Disaggregated revenues by geographic location were as follows (in thousands):


	Three Months Ended June 28, 2020
	GMS		NSS		Total
United States	$	277,536	$	133,875	$	411,411
International	230,318		1,574		231,892
Total	$	507,854	$	135,449	$	643,303


	Six Months Ended June 28, 2020
	GMS		NSS		Total
United States	$	526,446	$	292,014	$	818,460
International	438,852		3,244		442,096
Total	$	965,298	$	295,258	$	1,260,556


	Three Months Ended June 30, 2019
	GMS		NSS		Total
United States	$	261,413	$	167,923	$	429,336
International	264,612		1,659		266,271
Total	$	526,025	$	169,582	$	695,607


	Six Months Ended June 30, 2019
	GMS		NSS		Total
United States	$	521,501	$	335,707	$	857,208
International	509,003		2,880		511,883
Total	$	1,030,504	$	338,587	$	1,369,091

Remaining Performance Obligations

The Company’s remaining performance obligations balance represents the expected revenue to be recognized for the satisfaction of remaining performance obligations on existing contracts. This balance excludes unexercised contract option years and task orders that may be issued underneath an indefinite delivery, indefinite quantity contract. The remaining performance obligations balance as of June 28, 2020 and December 31, 2019 was $1,260.0 million and $1,640.0 million, respectively.

The Company expects to recognize approximately 95.2% and 4.8% of the remaining performance obligations balance as revenue over the next year and thereafter, respectively.

5. Contract Assets and Contract Liabilities

Contract assets consist of unbilled receivables which represent rights to payment for work or services completed but not billed as of the reporting date. Contract assets are recorded as unbilled receivables within accounts receivable, net on the condensed consolidated balance sheets.

Contract liabilities are advances and milestone payments from customers on certain contracts that exceed revenue earned to date. Contract liabilities are recorded as customer advances and billings in excess of costs on the condensed consolidated balance sheets.

Contract assets and contract liabilities consisted of the following as of the dates presented (in thousands):


	June 28,		December 31,
	2020		2019
Contract assets	$	297,146	$	295,103
Contract liabilities	$	70,695	$	51,439

The increase in contract assets of $2.0 million during the six-month period ended June 28, 2020 was primarily due to the timing of billings, partially offset by revenue recognized related to the satisfaction of performance obligations.

The increase in contract liabilities of $19.3 million during the six-month period ended June 28, 2020 was primarily due to the timing of advance payments from customers partially offset by revenue recognized during the period.

During the three-month and six-month periods ended June 28, 2020, the Company recognized $1.1 million and $33.4 million, respectively, relating to amounts that were included in the beginning balance of contract liabilities. During the three-month and six-month periods ended June 30, 2019, the Company recognized $4.5 million and $16.6 million, respectively, relating to amounts that were included in the beginning balance of contract liabilities.

6. Business Combinations and Acquisitions

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 orrecorded. 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 by simultaneous equity recapitalization of Shay (“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 11 - “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 11 - “Stockholders’ Equity - Warrants” for further information about the warrants.

In connection with the Business Combination, the Company recorded $20.9 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.

During the second quarter, pursuant to the post-closing adjustment provisions contained in the Merger Agreement, the Company determined that a post-closing adjustment payment was due to the Shay Stockholders. As a result of such determination, the Company recorded a $20.2 million liability and ~~includes situations where~~an adjustment to additional paid-in capital in the Company’s condensed consolidated balance sheets as of June 28, 2020.

7. Accounts Receivable, net

The components of Accounts receivable, net consisted of the following as of the dates presented (in thousands):


	June 28,		December 31,
	2020		2019
Billed receivables	$	136,904	$	148,747
Unbilled receivables	297,146		295,103
Less allowance for credit losses	(1,865)		(1,670)
Total accounts receivables, net	$	432,185	$	442,180

As of June 28, 2020 approximately 91.7% of the Company’s accounts receivable are with the U.S. government.

8. Goodwill and Intangible Assets, net

Goodwill

Based on management’s assessment of goodwill, there ~~is little, if any, market activity~~was 0 impairment or change for the ~~asset~~three-month and six-month periods ended June 28, 2020.

The Company considered the implications of COVID-19 as it relates to goodwill and indefinite-lived assets fair value. COVID-19 has had a marginally unfavorable impact on the Company’s results of operations for the three-month and six-month periods ended June 28, 2020. Since the Company’s primary customers are departments and agencies within the U.S. Government, it has not historically had significant issues collecting its receivables and management does not foresee issues collecting receivables in the foreseeable future. In addition, the Company’s contract awards typically extend to at least five years, including options, and it has a strong history of being awarded a majority of these contract options. Management does not anticipate that the pandemic will have a materially adverse impact on such options. The Company’s liquidity position has not been materially impacted, and management continues to believe that the Company has adequate liquidity to fund its operations and meet its debt service obligations for the foreseeable future. Based on management’s assessment there has been no impact to goodwill and indefinite-lived assets fair value due to the implications of COVID-19.

Intangible Assets, net

The components of intangible assets, net consisted of the following as of the dates presented (in thousands):


	June 28, 2020
	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount


Customer relationships	$	286,900	$	(132,107)	$	154,793
Technology	1,700		(1,700)		—
Trade name	16,900		(7,323)		9,577
Total	$	305,500	$	(141,130)	$	164,370

	December 31, 2019
	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount


Customer relationships	$	286,900	$	(116,923)	$	169,977
Technology	1,700		(1,700)		—
Trade name	16,900		(6,413)		10,487
Total	$	305,500	$	(125,036)	$	180,464

As of the six-month period ended June 28, 2020, customer relationships and trade name intangibles had weighted average remaining useful lives of 7.2 and 5.5 years, respectively. As of the year-ended December 31, 2019, customer relationships and trade name had weighted average remaining useful lives of 7.9 and 6.0 years, respectively.

During the three-month and six-month periods ended June 28, 2020 amortization expense was approximately $8.0 million and $16.1 million, respectively. During the three-month and six-month periods ended June 30, 2019, amortization expense was approximately $8.2 million and $16.9 million, respectively.

Estimated amortization expense in future years is expected to be:


	As of
	June 28, 2020
Remainder of 2020	$	16,094
2021	31,824
2022	31,775
2023	24,565
2024	20,490
Thereafter	39,622
Total	$	164,370

9. Consolidated Variable Interest Entities

The Company has entered into ventures and investments that allow it to participate in projects in areas where it is advantageous or ~~liability:~~

required by law to partner with a local organization.

Significant

Significant

Other

Other

Quoted Prices in

Observable

Unobservable

September 30,

Active Markets

Inputs

Inputs

Description

2018

(Level 1)

(Level 2)

(Level 3)

Investments and cash held in Trust Account

400,382,026

400,382,026

—

—

Total

$
400,382,026

$
400,382,026

$
—

$
—

~~8. Stockholders’ Equity~~

~~Common Stock~~

The Company is ~~authorized~~the majority shareholder and primary beneficiary of PAE (New Zealand) Limited, ATOM Training Limited, PAE-Perini LLC, Syncom Space Services LLC, PAE-SGT Partners LLC, and accordingly, these entities are consolidated. As the primary beneficiary, the Company has a risk and obligation to ~~issue 220,000,000~~absorb any losses significant to the VIE and the power, through voting rights or similar rights, to direct the activities that could impact economic performance of the VIE. The use of the assets of the VIEs to settle the Company’s obligations is subject to the approval of the managing body of each VIE.

The cash flows generated by these VIEs are included within the Company’s condensed consolidated statements of cash flows. The condensed consolidated balance sheets include the following amounts from these consolidated VIEs as of the dates presented (in thousands):


	June 28,		December 31,
	2020		2019
Assets
Total assets	$	132,384	$	127,742

Liabilities and equity
Total liabilities	$	78,327	$	80,151
Total equity	54,057		47,591
Total liabilities and equity	$	132,384	$	127,742

The condensed consolidated statements of operations include the following amounts from consolidated VIEs for the periods presented (in thousands):


	Three Months Ended						Six Months Ended
	June 28,		June 30,		June 28,		June 30,
	2020		2019		2020		2019
Income statements
Revenues	$	94,454	$	89,789	$	181,644	$	153,049
Cost of revenues	76,634		71,552		145,159		121,954
Selling, general and administrative expenses	15,864		21,438		33,881		39,727
Total operating expenses	92,498		92,990		179,040		161,681
Program income (loss)	1,956		(3,201)		2,604		(8,632)
Other (income) expense, net	840		(500)		(209)		(854)
Net income (loss)	$	2,796	$	(3,701)	$	2,395	$	(9,486)

10. Debt

Long-term debt consisted of the following as of the dates presented (in thousands):


	June 28,		December 31,
	2020		2019
First Term Loan	$	499,320	$	506,772
Second Term Loan	128,783		265,329
Revolving Credit Facility	—		—
Total debt	628,103		772,101
Unamortized discount and debt issuance costs	(15,306)		(22,164)
Total debt, net of discount and debt issuance costs	612,797		749,937
Less current maturities of long-term debt	(22,969)		(22,007)
Total long-term debt, net of current	$	589,828	$	727,930

Credit Agreements

The Company’s borrowing arrangement provides for current borrowings up to $499.3 million under a first lien term loan credit agreement, dated October 26, 2016, as amended (the “First Term Loan”), $128.8 million under a second lien term loan credit agreement, dated October 26, 2016, as amended (the “Second Term Loan”), and $150.0 million under a revolving credit facility dated October 26, 2016, as amended (the “Revolving Credit Facility,” and together with the First Term Loan and the Second Term Loan, the “Credit Agreements”). Principal and interest are due quarterly on the First Term Loan and interest only is due quarterly on the Second Term Loan. The maturity date of the First Term Loan is October 20, 2022. For the Second Term Loan the maturity date is October 20, 2023. For the Company’s Revolving Credit Facility the maturity date is October 20, 2021.

In connection with the Business Combination, Shay was required to amend its existing credit facilities and reduce its outstanding indebtedness under its credit facilities such that the total indebtedness under the facilities, minus cash on hand at the consummation of the transaction would not be greater than $572.1 million. Immediately after the closing of the transaction the

outstanding balance on the Second Term Loan was reduced by approximately $136.5 million to a principal balance of $128.8 million.

The Credit Agreements require the Company to comply with specified financial covenants under certain circumstances, including the maintenance of certain leverage ratios.

The Credit Agreements also contain various non-financial covenants, including affirmative covenants with respect to reporting requirements and maintenance of business activities, and negative covenants that, among other things, may limit or impose restrictions on the Company’s ability to alter the character of the business, consolidate, merge, or sell assets, incur liens or additional indebtedness, make investments, and undertake certain additional actions.

The Company was in compliance with the financial covenants under the Credit Agreements as of June 28, 2020 and December 31, 2019, respectively.

Future principal maturities of the Company’s long-term debt are summarized as follows (in thousands):


	As of
	June 28, 2020
Remainder of 2020	$	22,358
2021	29,810
2022	447,152
2023	128,783
2024	—
Thereafter	$	—
Total	$	628,103

As of June 28, 2020 and December 31, 2019, the available borrowing capacity under the Revolving Credit Facility was approximately $83.5 million and $121.8 million, respectively.

Interest Rates on Credit Agreements

The interest rate per annum applicable to amounts borrowed under the First Term Loan is equal to either the Base Rate (as defined below) or the LIBO Rate (as defined below), in either case, plus (i) 4.5% in the case of the Base Rate loans and (ii) 5.5% in the case of LIBO Rate loans.

The interest rate per annum applicable to amounts borrowed under the Second Term Loan is equal to either the Base Rate or the LIBO Rate, in either case, plus (i) 8.5% in the case of the Base Rate loans and (ii) 9.5% in the case of LIBO Rate loans.

The “Base Rate” is defined as a fluctuating rate per annum equal to the highest of (a) the Federal Funds Rate plus one half of one percent, (b) the rate of interest in effect for such day as publicly announced from time to time by Bank of America (“BofA”) as its “prime rate,” and (c) the LIBO Rate for a LIBO Rate loan with a one month Interest Period commencing on such day plus 1.0%. The “prime rate” is a rate set by BofA based upon various factors including BofA’s costs and desired return, general economic conditions and other factors, and is used as a reference point for pricing some loans, which may be priced at, above, or below such announced rate. The

LIBO Rate is defined as the rate per annum equal to the London Interbank Offered Rate or a comparable or successor rate, whichever rate is approved by the Administrative Agent (as that term is defined in the Credit Agreements).

The interest rate per annum applicable to the Revolving Credit Facility is equal to either a Base Rate or a LIBO Rate plus (i) a range of 0.8% to 1.3% in the case of Base Rate loans and (ii) a range of 1.8% to 2.3% in the case of LIBO Rate loans, each based on average availability as of the first day of each quarter.

As of June 28, 2020 and December 31, 2019, the applicable interest rate on the amounts borrowed under the First Term Loan was 6.5% and 7.4%, respectively. As of June 28, 2020 and December 31, 2019, the applicable interest rate on amounts borrowed under the Second Term Loan was 10.5% and 11.4%, respectively.

As of June 28, 2020 and December 31, 2019, the applicable interest rate on amounts borrowed under the Revolving Credit Facility was 4.0% and 5.8%, respectively.

In addition, the interest rate on our term loan borrowings and revolving loan borrowings is based on the London Interbank Offered Rate (“LIBOR” or “LIBO Rate”). LIBOR is the subject of recent national, international, and other regulatory guidance and proposals for reform. In July 2017, the Chief Executive of the U.K. Financial Conduct Authority (the “FCA”), which regulates LIBOR, announced that the FCA will no longer persuade or compel banks to submit rates for the calculation of the LIBOR benchmark after 2021. This announcement indicates that the continuation of LIBOR on the current basis cannot and will not be guaranteed after 2021, and it appears likely that LIBOR will be discontinued or modified by 2021. The consequences of the discontinuance of the LIBOR benchmark cannot be entirely predicted but could include an increase in the cost of our variable rate indebtedness.

Letters of Credit

The Company had 11 outstanding letters of credit for program and insurance requirements totaling approximately $21.2 million as of both June 28, 2020 and December 31, 2019.

11. Stockholders’ Equity

Authorized and Outstanding Stock

In connection with the Business Combination, the Company made changes to its capital stock. The Company’s amended and restated certificate of incorporation authorizes the issuance of 211,000,000 shares of ~~common~~capital stock, par value of $0.0001 per share, consisting of ~~200,000,000~~(a) 210,000,000 shares of Class A common stock, ~~par value $0.0001~~and (b) 1,000,000 shares of preferred stock.

As a result of the Business Combination, the shares issued to Shay Stockholders are reflected as if they were issued and outstanding as of the earliest reported period to reflect the new capital structure.

Warrants

As of June 28, 2020, there were warrants outstanding to acquire 19,999,985 shares of our Class A Common Stock including: (i) 13,333,319 warrants sold as part of the public units issued in our

IPO on September 11, 2018 (the “Public Warrants”), and (ii) 6,666,666 warrants issued or transferred to our former sponsor in a private placement on the IPO closing date (the “Private Placement Warrants” and, together with the Public Warrants, the “Warrants”). The Company currently has an effective registration statement on Form S-1 relating to the issuance by the Company of up to (i) 13,333,333 shares of its Class A Common Stock issuable upon the exercise of the outstanding Public Warrants, and (ii) 6,666,666 shares of its Class A Common Stock issuable upon exercise of the Private Placement Warrants.

Each whole Warrant entitles the registered holder to purchase 1 share of Class A Common Stock at a price of $11.50 per share. The Warrants became exercisable on March 11, 2020, thirty days following the completion of the Business Combination, and expire five years after that date, or upon redemption or liquidation. The Company may redeem outstanding Public Warrants and, unless held by the former sponsor or its permitted transferees, the Private Placement Warrants at a price of $0.01 per Warrant, provided the last reported sales price of the Company’s Class A Common Stock equals or exceeds $18.00 per share for any 20 trading days within a 30-trading-day period ending on the third business day before the Company gives proper notice of such redemption to the warrant holders.

The Private Placement Warrants are identical to the Public Warrants except that, so long as they are held by the former sponsor or its permitted transferees: (i) they will not be redeemable by the Company; (ii) they may be exercised by the holders on a cashless basis; and ~~20,000,000~~(iii) they are subject to registration rights.

Any transactions related to the Warrants are recorded within the stockholders’ equity section of the Company’s condensed consolidated financial statements. However, the issuance of shares pursuant to the exercise of these warrants is contingent upon the share price reaching $11.50. Therefore, share activity related to such warrants will not be recorded until such time as the contingency has been met.

Earn-Out Agreement

In connection with the Business Combination, stockholders of Shay immediately prior to the transaction (which stockholders consisted of certain affiliates of Platinum Equity, LLC and members of PAE management (the “Shay Stockholders”)) will be entitled to receive up to an aggregate of 4,000,000 additional shares of Class FA Common Stock (the “Earn-Out Shares”) if at any time during the five-year period following the Closing Date (the “Earn-Out Period”) the volume weighted average closing sale price of one share of Class A Common Stock on the Nasdaq (or the exchange which shares of Class A Common Stock are then listed) for a period of at least 10 days out of 20 consecutive trading days (the “Common Share Price”) exceeds certain thresholds, described below.

The thresholds (each a “Triggering Event”) causing the Earn-Out Shares to be issued by the Company to the Shay Stockholders is any such event occurs within the Earn-Out period are: (i) a one-time issuance of 1,000,000 shares if the Common Share Price is greater than $13.00; (ii) a one-time issuance of 1,000,000 shares if the Common Share Price is greater than $15.50; (iii) a one-time issuance of 1,000,000 shares if the Common Share Price is greater than $18.00; and (iv) a one-time issuance of 1,000,000 shares if the Common Share Price is greater than $20.50.

Further, if during the Earn-Out Period there is a change in control (as defined in the Merger Agreement) that results in the holders of Class A Common Stock receiving a per share price in

respect of their Class A Common Stock that is equal to or greater than the applicable Common Share Price required in connection with any Triggering Event (an “Acceleration Event”), then any such Triggering Event that has not previously occurred will be deemed to have occurred, and the Company must issue Earn-Out Shares accordingly.

If no Triggering Event is achieved within the Earn-Out Period, the Company will not be required to issue the Earn-Out Shares. No Triggering Event was achieved during the three-month and six-month periods ended June 28, 2020.

Any transactions related to Earn-Out Shares are recorded within the stockholders’ equity section of the Company’s condensed consolidated financial statements. Earn-Out Shares will be recognized as stock dividends and recorded at fair value as an increase in accumulated deficit (or reduction of retained earnings) and as an increase in Common Stock and Additional Paid-in Capital when they are effectively declared by virtue of a Triggering Event being achieved.

12. Stock-Based Compensation

2016 Participation Plan

On May 23, 2016, the Company adopted the Pacific Architects and Engineers Incorporated 2016 Participation Plan (the “2016 Participation Plan”). The purpose of the 2016 Participation Plan was to provide incentive compensation to key employees by granting performance units (“Units”). The Units were valued on the date of grant by the compensation committee of the pre-Business Combination company. Participants in the Plan were entitled to receive compensation for their Units in the event a qualifying event occurs. In connection with the Business Combination, which was a qualifying event, the 2016 Participation Plan was terminated effective immediately prior to the Closing Date and, in exchange for a release of claims relating to the plan, plan participants received payments totaling approximately $17.4 million. The $17.4 million was paid out during the three-month ended March 29, 2020, and was recorded as compensation expense.

2020 Incentive Plan

Prior to the closing of the Business Combination, the Gores III Board of Directors and stockholders approved the PAE Incorporated 2020 Equity Incentive Plan (the “2020 Incentive Plan”). The 2020 Incentive Plan provides for the grant of stock options, stock appreciation rights, restricted units (RSUs) and other stock or cash-based awards.

Restricted Stock Units

During the three-month period ended June 28, 2020, the Company issued 2,141,273 RSUs to certain employees out of the shares approved for issuance under the 2020 Incentive Plan. In addition, the Company issued 35,875 RSUs to its 3 independent directors in connection with their annual compensation as directors. RSUs cliff vest in accordance with their respective service period or grade vest on an anniversary date, subject to the terms of the grant agreements and the 2020 Incentive Plan.

The Company recognized $3.5 million in share-based compensation costs related to RSUs during the three-month and six-month periods ended June 28, 2020. Forfeitures are recognized in compensation costs when those occur.

Activity related to RSUs during the six-months ended June 28, 2020 is as follows:


	As of June 28, 2020
		Weighted-Average
		Grant Date
Restricted Stock Unit	Shares	Fair Value
Balance at December 31, 2019	—	$	—
Granted	2,177,148	7.07
Vested	(26,116)	10.65
Forfeited	—	—
Balance at June 28, 2020	2,151,032	$	7.29

The Company issued 330,303 performance-based restricted stock units (“PSUs”) to certain employees out of the shares approved for issuance under the 2020 Incentive Plan. These PSUs earn out over a 3-year performance period, subject to the terms of the grant agreements and the 2020 Incentive Plan. The vesting of PSUs is contingent on the achievement of performance goals stated in the agreement, such as revenue growth, weighted at 50%, and EBITDA margin, weighted at 50%. Compensation costs are recognized when the performance conditions are satisfied or likely to be satisfied. The Company recognized $0.2 million in PSUs compensation costs during the three-month and six-month periods ended June 28, 2020. Forfeitures are recognized in compensation costs when those occur.

Activity related to PSUs during the six months ended June 28, 2020 is as follows:


	As of June 28, 2020
		Weighted-Average
		Grant Date
Performance-based Restricted Stock Unit	Shares	Fair Value
Balance at December 31, 2019	—	$	—
Granted	330,303	8.04
Vested	—	—
Forfeited	—	—
Balance at June 28, 2020	330,303	$	8.04

13. Net Income (Loss) Per Share

Basic net income (loss) per common share is determined by dividing the net income (loss) attributed to stockholders by weighted average number of common shares outstanding during period presented. Diluted income (loss) per share is determined by adjusting the weighted

average number of shares of common stock ~~par~~and common stock equivalents outstanding for the dilutive effect of common stock equivalents for the periods presented.

The following table sets forth the computation of basic and diluted loss per share attributable to the Company’s common stockholders for the periods presented (in thousands, except shares and per share amounts):


	Three Months Ended						Six Months Ended
	June 28,		June 30,		June 28,		June 30,
	2020		2019		2020		2019

Numerator:
Net income (loss) attributed to PAE Incorporated	$	16,021	$	2,674	$	11,078	$	(3,046)

Denominator:
Basic weighted average shares	92,044,098		21,127,823		75,890,028		21,127,823
Diluted weighted average shares	92,787,379		21,127,823		76,273,931		21,127,823

Basic income (loss) per share	$	0.17	$	0.13	$	0.15	$	(0.14)
Diluted income (loss) per share	$	0.17	$	0.13	$	0.15	$	(0.14)

The Company has not included the effect of 19,999,985 shares of Common Stock issuable upon the exercise of Warrants in the calculation of diluted net income (loss) per share for the three-month and six-month periods ended June 28, 2020. Warrants are excluded when the exercise price exceeds the average market value ~~$0.0001 per share. Holders~~ of the Company’s common stock price during the applicable period.

The Company has not included the effect of 4,000,000 Earn-Out Shares in the calculation of basic and diluted net (loss) income per share for the three-month and six-month periods ended June 28, 2020. The condition for the issuance of these shares is based on weighted average closing sale price of the Company’s Class A Common Stock and such condition had not been met as of June 28, 2020.

Unvested RSUs and PSUs will not impact the calculation of basic earnings per share (“EPS”) until vested, in which case they would be included in the total weighted average numbers of shares. All potential dilutive securities, which include unvested RSUs, are included in the diluted EPS calculation. Unvested PSUs are included in the calculation of diluted EPS to the extent that the performance criteria have been achieved.

14. Leases

At June 28, 2020, the Company had right-of-use (“ROU”) assets, net of $154.4 million and lease liabilities of $157.4 million recorded on the condensed consolidated balance sheet.

The Company rents certain facilities and equipment under operating leases. The Company’s total lease cost is recorded primarily within selling, general and administrative expenses on the condensed consolidated statements of operations. Rents which are directly chargeable to a project are charged to cost of revenues.

During the three-month and six-month periods ended June 28, 2020, the Company recognized operating lease costs of approximately $14.3 million and $28.4 million, respectively.

The Company’s future minimum operating lease payments for noncancelable operating leases were as follows (in thousands):


	As of
	June 28, 2020
Remainder of 2020	$	20,344
2021	39,437
2022	34,047
2023	30,160
2024	22,030
Thereafter	51,674
Total future minimum lease payments	197,692
Less imputed interest	40,294
Present value of minimum lease payments	157,398
Less current maturities of lease liabilities	38,946
Long-term lease liabilities	$	118,452

The weighted-average remaining lease term and the weighted-average discount rate for the Company’s operating leases were approximately 6.95 years and 7.3%, respectively, at June 28, 2020.

The Company made cash payments of approximately $10.6 million and $21.2 million for operating leases for the three-month and six-month periods ended June 28, 2020, which are included in cash flows from operating activities in the condensed consolidated statement of cash flows.

15. Legal Proceedings, Commitments, and Contingencies

The Company is a party to, or has property subject to, litigation and other proceedings. Management believes the probability is remote that the outcome of the matters will have a material adverse effect on its operations as a whole, notwithstanding that the unfavorable resolution of any matter may have a material effect on net earnings in a future period. The Company cannot predict the outcome of legal proceedings and loss or range of loss contingencies with certainty.

16. Segment Reporting

The Company's operations and reportable segments are organized around the nature of the services and products provided to customers. The Company defines its reportable segments based on the way the chief operating decision maker (“CODM”), currently its President and Chief Executive Officer, manages the operations of the Company for purposes of allocating resources and assessing performance.

The GMS operating segment provides support to the U.S. Government and its partners within and outside the United States providing sustainment, training and readiness support and advancing foreign policy objectives. The NSS operating segment provides a wide-ranging portfolio of offerings that support all facets of national security, including intelligence, homeland security and civil government missions.

While the CODM uses a variety of different measures to evaluate the Company’s segments, the primary measures used to evaluate segment performance are revenues and operating income. As a result, interest expense, net and provision for income taxes as recorded on the condensed consolidated statements of operations are not allocated to the Company’s operating segments.

The following table shows information by reportable segment for the periods presented (in thousands):


	Three Months Ended						Six Months Ended
	June 28,		June 30,		June 28,		June 30,
	2020		2019		2020		2019
Revenues
GMS	$	507,854	$	526,025	$	965,298	$	1,030,504
NSS	135,449		169,582		295,258		338,587
Corporate	—		—		—		—
Total revenues	$	643,303	$	695,607	$	1,260,556	$	1,369,091

Operating income
GMS	$	31,537	$	25,276	$	44,140	$	51,067
NSS	7,725		3,974		12,092		3,187
Corporate	(4,967)		(3,091)		(14,479)		(13,743)
Total operating income	$	34,295	$	26,159	$	41,753	$	40,511

Amortization of intangible assets
GMS	$	4,115	$	4,140	$	8,231	$	8,399
NSS	3,932		4,056		7,863		8,454
Corporate	—		—		—		—
Total amortization of intangible assets	$	8,047	$	8,196	$	16,094	$	16,853

Under U.S. Government cost accounting standards, indirect costs including depreciation expense are collected in numerous indirect cost pools, which are then collectively allocated to the Company’s reportable segments based on a representative causal or beneficial relationship

of the costs in the pool to the costs in the base. While depreciation expense is a component of the allocated costs, the allocation process precludes depreciation expense from being specifically identified by the Company’s individual reportable segments. For this reason, depreciation expense by reportable segment is not presented separately above.

Asset information by segment is not a key measure of performance used by the CODM and therefore segment assets are not presented.

Less than 10% of the Company’s revenues and tangible long-lived assets are generated by or owned by entities outside of the United States. Therefore, additional segment financial information by geographic location is not presented.

17. Related-Party Transactions

Tax Overpayment/Underpayment Amount

In connection with the Business Combination, the Shay Stockholders are entitled to ~~one vote~~a payment of the net cash savings in U.S. federal, state and local income tax that the post-closing company actually realizes (or is deemed to realize in certain circumstances) in periods after the Closing Date. The liability for ~~each share~~this estimated payment and the corresponding charge to equity of ~~common stock~~$4.7 million are reflected in the Company’s consolidated balance sheets as of June 28, 2020.

Advisory Services

During the six-month period ended June 28, 2020 and ~~vote together~~twelve month ended December 31, 2019, the Company recognized management fees, transaction and advisory fees, and expenses of approximately $15.8 million and $5.1 million, respectively. As a result of the Business Combination $15.0 million was grouped with other similar transactional expenses and recorded as a ~~single class. At September~~reduction to the recapitalized equity and $0.8 million was recorded in selling, general and administrative expenses. The amount of $5.1 million was recorded in selling, general and administrative expenses for the period ended December 31, 2019.

These expenses were for services rendered by one or more affiliates of Platinum Equity, LLC.

18. Income Taxes

The Company’s provision for income tax expense (benefits) were approximately $3.8 million, and $(5.0) million and its effective income tax rates were 18.3% and (70.4)% for the three-month and six-month periods ended June 28 2020, respectively. The Company’s provision for income tax expense (benefits) were approximately $1.2 million and $(2.0) million and its effective income tax rates were 25.4% and 52.9% for the three-month and six-month periods ended June 30, ~~2018, there were 40,000,000 shares~~2019 respectively.

The provision for income taxes for the period ended June 28, 2020 differed from the U.S. federal statutory rate computed by applying the U.S. federal statutory rate to income or loss before income taxes primarily due to the benefit of ~~Class A common stock (inclusive~~Foreign Derived Intangible Income (“FDII’), increased prior year interest expense deduction under the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), nontaxable income and settlement of foreign taxes offset by disallowed compensation deduction under Section 162(m) and disallowed transaction costs. The provision for income taxes for the ~~38,250,049 shares subject~~period ended June 30, 2019 differed from the U.S. federal statutory rate computed by applying the U.S. federal statutory rate to ~~redemption)~~income or loss before

income taxes primarily due to a disallowed interest deduction, non-deductible settlement paid to the U.S. Government, non-deductible goodwill and ~~10,781,250 shares~~the effect of ~~Class F common stock issued~~foreign operations offset by a benefit from foreign derived intangible income.

On March 27, 2020, President Trump signed into U.S. federal law the CARES Act, which is aimed at providing emergency assistance and ~~outstanding.~~

~~Preferred Stock~~

health care for individuals, families, and businesses affected by the COVID-19 pandemic and generally supporting the U.S. economy. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carry-back periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property.

In particular, under the CARES Act, for taxable years beginning in 2019 and 2020, the base for interest deductibility is increased from 30% to 50% of EBITDA. As of June 28, 2020, the Company estimated that the tax benefit on increased 2019 interest expense deduction related to the CARES Act is approximately $3.6 million. The Company is ~~authorized~~expecting to ~~issue 1,000,000 shares~~defer $35.0 million of ~~preferred stock, par value $0.0001 per~~employer share ~~with such designations, voting~~Social Security tax under the CARES Act that will be paid equally by December 31, 2021 and ~~other rights and preferences as may be determined from time to time by~~2022. We are in the ~~Board~~process of ~~Directors. At September 30, 2018, there were no shares of preferred stock issued and outstanding.~~

~~9. Subsequent Events~~

~~Management has performed an evaluation of subsequent events through~~analyzing the ~~date of issuance~~different aspects of the ~~condensed financial statements, noting no items which require adjustment or disclosure~~CARES Act to determine whether any other ~~than those set forth in~~specific provision may impact the ~~preceding notes to the condensed financial statements.~~

Company.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is designed to provide a reader of our financial statements with a narrative from the perspective of management on the Company’s financial condition, results of operations, liquidity and certain other factors that may affect future results. The following discussion ~~and analysis~~ of the Company’s financial condition and results of operations should be read in conjunction with ~~our unaudited condensed~~the MD&A and the consolidated financial statements and ~~the~~related notes ~~related thereto which are~~ included in ~~“Item 1. Financial Statements” of this Quarterly~~the Company’s Annual Report on Form ~~10‑Q.~~

~~Cautionary note regarding forward-looking~~10-K for the fiscal year ended December 31, 2019, which was filed with the Securities and Exchange Commission (the “SEC”) on March 11, 2020, the Company’s Current Report on Form 8-K/A filed with the SEC on March 11, 2020, the Form 424B3 prospectus filed with the SEC on April 23, 2020, and the unaudited condensed consolidated financial statements

~~All statements other than statements of historical fact included~~ and related notes contained in this Quarterly Report on Form ~~10‑Q including, without limitation,~~10-Q. Unless otherwise noted, the MD&A compares the three-month and six-month periods ended June 28, 2020 to the three-month and six-month periods ended June 30, 2019.

This Quarterly Report on Form 10-Q of PAE contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended (the “Exchange Act’). These forward-looking statements ~~under this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” regarding~~include information concerning the Company’s ~~financial position, business strategy~~plans, objectives, goals, strategies, future events, future revenues, performance, capital expenditures, financing needs and other information that is not historical information. Many of these statements appear, in particular, in the ~~plans and objectives of management for future operations, are forward-looking statements.~~MD&A. When used in this Quarterly Report on Form ~~10‑Q,~~10-Q, the words “anticipates,” “assumes,” “believes,” “estimates,” “expects,” “intends,” “may,” “plans,” “projects,” “seeks,” “should,” and variations of such ~~as “anticipate,” “believe,” “estimate,” “expect,” “intend” and~~words or similar expressions, ~~as they relate to us~~ or the ~~Company’s management,~~negatives thereof, are intended to identify forward-looking statements. ~~Such~~All forward-looking statements, ~~are~~including, without limitation, those based on the ~~beliefs~~Company’s examination of ~~management, as well as assumptions made by, and information currently available to,~~historical operating trends, are based upon the Company’s ~~management. Actual~~current expectations and various assumptions. The Company believes there is a reasonable basis for its expectations and assumptions, but there can be no assurance that the Company will realize its expectations or that the Company’s assumptions will prove correct.

There are a number of risks and uncertainties that could cause the Company’s actual results to differ materially from the forward-looking statements contained in this Quarterly Report. Important factors that could cause the Company’s actual results to differ materially from those ~~contemplated by~~expressed as forward-looking statements are set forth in the ~~forward-looking statements~~Company’s 2019 Annual Report on Form 10-K in Part I, Item 1A under the heading Risk Factors, the Company’s Current Report on Form 8-K/A filed on March 11, 2020 under the heading Risk Factors, and the Company’s Form 424B3 prospectus filed on April 23, 2020 under the heading Risk Factors. Such risks, uncertainties and other important factors include, among others, risks related to:

•a loss of contracts with the U.S. federal government or its agencies or other state, local or foreign governments or agencies, including as a result of ~~certain factors detailed~~a reduction in government spending;

•service failures or failures to properly manage projects;

•issues that damage our professional reputation;

•disruptions in or changes to prices of our supply chain, including from difficulties in the supplier qualification process;

•failures on the part of our subcontractors or joint venture partners to perform their contractual obligations;

•failures to maintain strong relationships with other contractors;

•the impact of a negative audit or other investigation;

•failure to comply with numerous laws and regulations regarding procurement, anti-bribery and organizational conflicts of interest;

•inability to comply with the laws and other security requirements governing access to classified information;

•inability to share information from classified contracts with investors;

•the impact of implementing various data privacy and cybersecurity laws;

•costs and liabilities arising under various environmental laws and regulations;

•various claims, litigation and other disputes that could be resolved against PAE;

•delays, contract terminations or cancellations caused by competitors’ protests of major contract awards received by us;

•risks from operating internationally;

•disruptions caused by natural or environmental disasters, terrorist activities or other events outside our control;

•disruptions caused by social unrest, including related protests or disturbances;

•the impact of public health crises, such as COVID-19;

•issues arising from cybersecurity threats or intellectual property infringement claims;

•the loss of members of senior management;

•the inability to attract, train or retain employees with the requisite skills, experience and security clearances;

•the impact of the expiration of our collective bargaining agreements; and

•other risks and uncertainties described in this Form 10-Q, including under the section entitled “Risk Factors,” and described in our other filings with the SEC. ~~All subsequent written~~

There may be other factors that may cause the Company’s actual results to differ materially from those expressed in these forward-looking statements. Except as may be required by law, the Company undertakes no obligation to publicly update or ~~oral~~revise forward-looking statements ~~attributable~~that may be made to usreflect events or ~~persons acting on~~circumstances after the ~~Company’s behalf are qualified in their entirety by this paragraph.~~

~~Overview~~

~~We are a blank check company incorporated on October 23, 2017 as a Delaware corporation and formed for~~date made or to reflect the ~~purpose~~occurrence of effecting a Business Combination with one or more target businesses. We completed our Public Offering on September 11, 2018. As of September 30, 2018, we had not identified any business combination target nor initiated any substantive discussions directly or indirectly, with respect to identifying any business combination target.

Since completing our Public Offering, we have reviewed, and continue to review, a number of opportunities to enter into a Business Combination with an operating business, but we are not able to determine at this time whether we will complete a Business Combination with anyunanticipated events.

Stockholders of the ~~target businesses that we have reviewed or with any other target business. We intend to effectuate our Business Combination using cash from~~Company should read the ~~proceeds~~following discussion and analysis of our ~~Public Offering~~financial condition and results of operations together with the ~~sale of the Private Placement Warrants, our capital stock, debt, or a combination of cash, stock and debt.~~

~~Results of Operations~~

For the nine months ended September 30, 2018, we had net income of $231,105. Our business activities during the quarter mainly consisted of identifying and evaluating prospective acquisition candidates for a Business Combination. We believe that we have sufficient funds available to complete our efforts to effect a Business Combination with an operating business by September 11, 2020. However, if our estimates of the costs of identifying a target business, undertaking in-depth due diligence and negotiating a Business Combination are less than the actual amount necessary to do so, we may have insufficient funds available to operate our business prior to our Business Combination.

~~As indicated in the accompanying unaudited~~condensed consolidated financial statements and related notes that are included elsewhere in this Quarterly Report on Form 10-Q.

This MD&A generally discusses 2020 and 2019 items and year-over-year comparisons between 2020 and 2019. As used in this MD&A, unless the context indicates otherwise, the financial information relating to the three-month and six-month periods ended June 30, 2019, are those of Shay Holdings and its subsidiaries, and the financial information and data for the three-month and six-month periods ended June 28, 2020 includes the financial information and data of Shay Holdings and its subsidiaries for the period prior to the Closing and the financial information and data of PAE Incorporated for the period subsequent to the Closing. See Note 1 – “Description of Business” and Note 6 – “Business Combinations and Acquisitions” for additional information.

We are subject to the informational requirements of the Exchange Act, and we file or furnish reports, proxy statements and other information with the SEC. Such reports and other information we file with the SEC are available free of charge at ~~September 30, 2018, we had approximately $1,559,568 in cash~~https://investors.pae.com/financials-and-filings/sec-filings as soon as practicable after such reports are available on the SEC’s website at www.sec.gov. The SEC’s website contains reports, proxy and ~~deferred offering costs of $14,000,000. Further, we expect to continue to incur significant costs in~~information statements, and other information regarding issuers that file electronically with the ~~pursuit of~~SEC. We periodically provide other information for investors on our ~~acquisition plans. We cannot assure you that~~corporate website, www.pae.com, and our ~~plans to complete our Business Combination will be successful.~~

~~Liquidity~~investor relations website, https://investors.pae.com. This includes press releases and ~~Capital Resources~~

In November 2017, our Sponsor purchased an aggregate of 10,781,250 Founder Shares for an aggregate purchase price of $25,000, or approximately $0.002 per share. Subsequently, our Sponsor transferred an aggregate of 75,000 Founder Sharesother information about financial performance, information on corporate governance and details related to our ~~independent directors. On October 22, 2018, following the expiration~~annual meeting of the unexercised portion of the underwriter’s over-allotment option, our Sponsor forfeited 781,250 Founder Shares so that the remaining Founder Shares held by our Initial Stockholders represented 20.0% of the outstanding shares upon completion of our Public Offering.

On September 11, 2018, we consummated our Public Offering of 40,000,000 Units at a price of $10.00 per Unit, including 2,500,000 Units as a result of the underwriter’s partial exercise of its over-allotment option, generating gross proceeds of $400,000,000. On the Public Offering Closing Date, we completed the private sale of an aggregate of 6,666,666 Private Placement Warrants, each exercisable to purchase one share of Common Stock at $11.50 per share, to our Sponsor, at a price of $1.50 per Private Placement Warrant, generating gross proceeds, before expenses, of $10,000,000. After deducting the underwriting discounts and commissions (excluding the Deferred Discount, which amount will be payable upon consummation of the Business Combination, if consummated) and the estimated offering expenses, the total net proceeds from our Public Offering and the sale of the Private Placement Warrants were $401,100,000, of which $400,000,000 (or $10.00 per share sold in the Public Offering) was placed in the Trust Account. The amount of proceeds not deposited in the Trust Account was $1,100,000 at the closing of our Public Offering. Interest earned on the funds held in the Trust Account may be released to us to fund our Regulatory Withdrawals, subject to an annual limit of $750,000, for a maximum of 24 months and/or to pay our franchise and income taxes.

As of September 30, 2018 and December 31, 2017, we had cash held outside of the Trust Account of approximately $1,559,568 and $109,737, respectively, which is available to fund our working capital requirements. Additionally, interest earned on the funds held in the Trust Account may be released to us to fund our Regulatory Withdrawals, subject to an annual limit of $750,000, for a maximum of 24 months and/or to pay our franchise and income taxes.

At September 30, 2018 and December 31, 2017, the Company had current liabilities of $464,512 and $261,619 and working capital of $1,118,473 and $1,316, respectively, largely due to amounts owed to professionals, consultants, advisors and others who are working on seeking a Business Combination. Such work is continuing after September 30, 2018 and amounts are continuing to accrue.

stockholders. We intend to use ~~substantially all~~our website as a means of disclosing material non-public information and for complying with our disclosure obligations under Regulation FD. Accordingly, investors should monitor our website, in addition to following the Company's press releases, SEC filings and public conference calls and webcasts. The information contained on the websites referenced in this Quarterly Report on Form 10-Q is not incorporated by reference into this filing. Further, our references to website URLs are intended to be inactive textual references only.

Business Overview

PAE is a leading, highly diversified, global company that provides a broad range of operational solutions and outsourced services to meet the critical, enduring needs of the ~~funds held in~~U.S. government, other allied governments, international organizations and companies. PAE merges technology with advanced business practices to deliver faster, smarter and more efficient managed services. Whether clients require high-profile support to operate the ~~Trust Account, including interest (which interest shall be net~~largest U.S. embassies around the world or need technical solutions for programs that monitor bioterrorism agents, PAE delivers for its customers. PAE leverages its scale, 65 years of ~~Regulatory Withdrawals~~experience and ~~taxes payable)~~talented global workforce of approximately 20,000 to ~~consummate our Business Combination. Moreover, we may~~provide the essential services PAE’s clients need to ~~obtain~~tackle some of the world’s toughest challenges.

Basis of Presentation

PAE provides a wide variety integrated support solutions, including defense and military readiness, diplomacy, intelligence support, business process outsourcing, counter-terrorism solutions, peacekeeping, development, host nation capacity building, aircraft and ground equipment maintenance and logistics, and operations and maintenance of facilities and infrastructure. Customers include agencies of the U.S. Government, such as the Department of Defense (“DoD”) and Department of State (“DoS”), the National Aeronautics and Space Administration (“NASA”), Department of Homeland Security, intelligence community agencies and other civilian agencies, as well as allied foreign governments and international organizations such as the United Nations.

PAE’s operations are organized into two reportable segments, Global Mission Services (“GMS”) and National Security Solutions (“NSS”).

•The GMS segment generates revenues through contracts under which PAE provides customers with logistics and stability operations, force readiness and infrastructure management.

•The NSS segment generates revenues through contracts under which PAE provides customers with counter-threat solutions, intelligence solutions and information optimization.

Segment performance is based on consolidated revenues and consolidated operating income. For additional ~~financing either~~information regarding PAE’s reportable segments, refer to ~~complete a~~Note 16 - “Segment Reporting” of the notes to PAE’s condensed consolidated financial statements.

Factors Affecting PAE’s Operating Results

Business Combinations and Acquisitions

Business Combination

Merger Consideration

As described in Note 1 - “Description of Business” and Note 6 - “Business Combinations and Acquisitions” of the notes to the condensed consolidated financial statements, the Company completed the Business Combination or because we become obligated to redeem a significant number of shares of our Common Stock upon completion of a Business Combination. Subject to compliance with applicable securities laws, we would only complete such financing simultaneously with the completion of our Business Combination. If we are unable to complete our Business Combination because we do not have sufficient funds available to us, we will be forced to cease operations and liquidate the Trust Account. In addition, following our Business Combination, if cash on hand is insufficient, we may need to obtain additional financing in order to meet our obligations. To the extent that our capital stock or debt is used, in whole or in part, as consideration to consummate our Business Combination, the remaining proceeds held in our Trust Account, if any, will be used as working capital to finance the operations of the target business or businesses, make other acquisitions and pursue our growth strategy.

~~Off-balance sheet financing arrangements~~

We had no obligations, assets or liabilities which would be considered off-balance sheet arrangements at September 30, 2018. We do not participate in transactions that create relationships with unconsolidated entities or financial partnerships, often referred to as variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements.

We had not entered into any off-balance sheet financing arrangements, established any special purpose entities, guaranteed any debt or commitments of other entities, or entered into any non-financial agreements involving assets.

~~Contractual obligations~~

As of September 30, 2018 and December 31, 2017, we did not have any long-term debt obligations, capital lease obligations, operating lease obligations, purchase obligations or long-term liabilities. In connection with the Public Offering, we entered into an administrative services agreement to pay monthly recurring expenses of $20,000 to The Gores Group for office space, utilities and secretarial support. The administrative services agreement terminates upon the earlier of the completion of a Business Combination or the liquidation of the Company.

The underwriter is entitled to underwriting discounts and commissions of 5.5%, of which 2.0% ($8,000,000) was paid at the closing of the Public Offering, and 3.5% ($14,000,000) was deferred. The Deferred Discount will become payable to the underwriter from the amounts held in the Trust Account solely in the event that the Company completes a Business Combination, subjectFebruary 10, 2020. Pursuant to the terms of the Merger Agreement, the aggregate merger consideration paid for the Business Combination was approximately $1,427.0 million. The consideration paid to the Shay Stockholders consisted of a combination of cash and stock consideration. The aggregate cash consideration paid to the Shay Stockholders at the Closing was approximately $424.2 million, consisting of (a) approximately $408.0 million of cash available to Gores III from its trust account, after giving effect to income and franchise taxes payable in respect of interest income earned in the trust account and redemptions that were elected by Gores III’s public stockholders, plus (b) all of Gores III’s other cash and cash equivalents, plus (c) gross proceeds of approximately $220.0 million from a private placement offering conducted by Gores III in which investors purchased an aggregate of 23,913,044 shares of Class A Common Stock for $9.20 per share, less (d) certain transaction fees and expenses, including the payment of deferred underwriting ~~agreement.~~commissions agreed to at the time of Gores III’s initial public offering, less (e) certain payments to participants in the 2016 Participation Plan, less (f) approximately $136.5 million used to repay a portion of the indebtedness of Shay immediately prior to the Closing, less (g) approximately $33.8 million of transaction fees and expenses of Shay. The ~~underwriter~~remainder of the consideration paid to the Shay Stockholders consisted of 21,127,823 newly issued shares of Class A Common Stock.

In addition to the foregoing consideration paid on the Closing Date, Shay Stockholders will be entitled to receive additional Earn-Out Shares of up to an aggregate of four million 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 or if there is an Acceleration Event. See Note 11 - “Stockholders’ Equity - Earn-Out Agreement” of the notes to the condensed consolidated financial statements for additional information.

During the second quarter, pursuant to the post-closing adjustment provisions contained in the Merger Agreement, the Company determined that a post-closing adjustment payment was due to the Shay Stockholders. As a result of such determination, the Company recorded a $20.2 million liability and an adjustment to additional paid-in capital in the Company’s condensed consolidated balance sheets as of June 28, 2020.

Incentive Plan

For a discussion on the 2020 Incentive Plan refer to Note 12 - “Stock-Based Compensation” of the notes to the condensed consolidated financial statements.

Debt

Financial and Other Highlights

From December 31, 2019 to June 28, 2020, PAE’s overall contract backlog decreased by 1.4% from $6,351.8 million to $6,265.6 million, of which $1,240.6 million was funded. Backlog is an operational measure representing PAE’s estimate of the amount of revenue that it expects to realize over the remaining life of awarded contracts and task orders; the funded backlog refers to the value on contracts for which funding is appropriated less revenues previously recognized on these contracts. Unfunded backlog represents the estimated future revenues to be earned from negotiated contracts for which funding has not been appropriated or authorized, and unexercised priced contract options. The total backlog consists of remaining performance obligations plus unexercised options. PAE believes backlog is a useful metric for investors because it is an important measure of business development performance and revenue growth. This metric is used by management to conduct and evaluate its business during its regular review of operating results for the periods presented. See Note 4 - “Revenues" of the notes to the condensed consolidated financial statements for more information.

The estimated value of PAE’s total backlog was as follows (in thousands):


	As of		As of
	June 28,		December 31,
	2020		2019
Global Mission Services:
Funded GMS backlog	$	970,554	$	1,173,196
Unfunded GMS backlog	3,771,073		3,393,081
Total GMS backlog	$	4,741,627	$	4,566,277
National Security Solutions:
Funded NSS backlog	$	270,065	$	311,214
Unfunded NSS backlog	1,253,905		1,474,309
Total NSS backlog	$	1,523,970	$	1,785,523
Total:
Funded backlog	$	1,240,619	$	1,484,410
Unfunded backlog	5,024,978		4,867,390
Total backlog	$	6,265,597	$	6,351,800

As of June 28, 2020, PAE had a contract base of more than 469 active contracts and task orders. PAE served as the prime contractor on approximately 96.3% of its contracts. The DoD and DoS are PAE’s largest customers and accounted for 37.4% and 18.4% of its revenue during the six-month period ended June 28, 2020, respectively and 36.3% and 24.7% of its revenue during the six-month period ended June 30, 2019, respectively. International Logistics and Stabilization, Infrastructure and Logistics, Readiness and Sustainment, and Business Process Solutions were PAE’s largest contributors by service area, representing 32.8%, 28.9%, 14.9%, and 11.6% of its revenue, respectively during the six-month period ended June 28, 2020. International Logistics and Stabilization, Infrastructure and Logistics, Readiness and Sustainment, and Business Process Solutions were PAE’s largest contributors by service area, representing 34.9%, 25.1%, 15.3%, and 15.2% of its revenue, respectively during the six-month period ended June 30, 2019.

PAE’s long-tenured contracts have created a recurring base business with its top revenue-generating contracts having a weighted average contract length of greater than 7.72 years, as of June 28, 2020. We believe that revenue from these long-running contracts will continue to be secure as PAE’s contracts are predominately funded from stable portions of the U.S. Government budget with little dependence on wartime or emergency overseas contingency operations funding.

Trends and Factors Affecting PAE’s Future Performance

External Factors

PAE’s business primarily focuses on providing services to the U.S. Government and allied nations and organizations; PAE’s performance is inherently linked to governmental missions and goals. We have concentrated our business efforts on those missions and goals that are enduring and that have limited exposure to abrupt policy changes. For example, PAE has supported U.S. embassies since the 1970s. We are also trusted by our customers to support them on major policy initiatives that require immediate response to solve an acute crisis. Examples of this work include our rapid establishment and operation of Ebola treatment units in Liberia in 2015 and our work this year on behalf of the state of Georgia in converting a convention center to a COVID-19 treatment center in less than one week.

Over most of the last two decades, the U.S. Government has increased its reliance on the private sector for a wide range of professional and support services. This increased use of outsourcing by the U.S. Government has been driven by a variety of factors, including lean-government initiatives launched in the 1990s, surges in demand during times of national crisis, the increased complexity of missions conducted by the U.S. military and the DoS, increased focus of the U.S. military on war-fighting efforts and loss of skills within the government caused by workforce reductions and retirements.

Although the size of future U.S. Government department and agency budgets remains subject to change, current indications are that overall U.S. Government spending will remain consistent with current spending levels. PAE believes the following industry trends will result in continued strong demand in the target markets for the types of services it provides:

•the continued transformation of military forces, leading to increased outsourcing of non-combat functions, including life-cycle asset management functions ranging from organizational to depot level maintenance;

•an increased level of coordination between the DoS and DoD on key national security initiatives and foreign policies;

•increased maintenance, overhaul and upgrade needs to support aging military platforms; and

•the on-going evolution of international relations that may require enhanced or new policy initiatives.

CurrentEconomic Conditions

PAE believes that its industry and customer base are less likely to be affected by many of the factors generally affecting business and consumer spending. PAE’s contract awards typically extend to five years, including options, and it has a strong history of being awarded a majority of these contract options. Additionally, since PAE’s primary customers are departments and agencies within the U.S. Government, it has not historically had significant issues collecting its receivables. However, PAE cannot be certain that the economic environment, government debt levels, or other factors will not adversely impact its business, financial condition or results of operations in the future. The government has taken several financial precautions and measures to combat the current financial market conditions, including in response to the COVID-19 pandemic.

Impact of COVID-19

We continue to work with our stakeholders (including customers, employees, suppliers and local communities) to address this global pandemic. Specifically, we are working closely with our customers, including those within the U.S. Government, to permit continued contract performance and to mitigate the impact of the current COVID-19 pandemic on our operations and personnel. We continue to review our contractual provisions, hold discussions with customers regarding the pandemic’s potential impact on contract operations, and take actions to reduce the impact of COVID-19 on our business, workforce, supply chain, revenues, and results of operations. We are continuing to monitor the impact of the pandemic and other related uncertainties on financial markets, which has caused us to delay undertaking certain actions in support of our strategic plans. In response to COVID-19, we have taken a number of steps to ensure the protection of employees and customers, as well as to mitigate any operational and financials impacts. In particular, we are:

•Implementing enhanced health and safety protocols, including at customer sites, in order to protect our employees and customers and to maintain continuity of operations;

•Monitoring on a daily basis the COVID-19 status of employees and independent contractors;

•Reviewing on a daily basis the impact of COVID-19 on programs, facilities and contracts with customers;

•Reducing overhead costs by among other things delaying planned hiring and by cancelling travel that is not ~~entitled~~directly related to ~~any interest accrued~~program requirements;

•Developing contingency and business continuity plans in case COVID-19 disruptions increase or key personnel become incapacitated;

•Identifying new business opportunities related to COVID-19, including expanded service offerings for existing customers;

•Entering into contract modifications and advance agreements where applicable to permit recovery of costs relating to COVID-19; and

•Engaging in frequent and ongoing dialogue and contract negotiations with customers to either:

◦Permit PAE employees to continue to work safely (including remotely); or,

◦Permit PAE to be reimbursed the costs of paid leave for employees who are unable to work (as provided by Section 3610 of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”).

COVID-19 has had a marginally unfavorable impact on the ~~Deferred Discount.~~

Company’s results of operations for the three-month and six-month periods ended June 28, 2020. Although our operations have been disrupted by the COVID-19 pandemic, the impact has been mitigated due to the nature of our business. In particular, our U.S. Government customers have taken steps to ensure the continuance of many of the services provided by us and other contractors, including, but not limited to, designating certain PAE contracts as essential for continued performance and authorizing remote work for contractor personnel that cannot access worksites. In addition, the impact may be further mitigated by Section 3610 of the CARES Act, which allows U.S. government agencies to reimburse contractors such as us at the minimum applicable contract billing rate for costs of certain paid leave for employees who cannot access work sites or telework through September 30, 2020. However, some U.S. Government customers have suspended or reduced work under certain of our contracts.

COVID-19 related costs for us and our subcontractors could be significant, and we are seeking reimbursement of such costs under our U.S. Government contracts through a combination of contract actions and reimbursement of costs under Section 3610 of the CARES Act. Reimbursement of any costs under Section 3610 is not expected to include profit or fee. Costs for employees whose jobs cannot be performed remotely may not be fully recoverable under our contracts. We also have no assurance that Congress will appropriate funds to cover the reimbursement of contractors authorized by the CARES Act.

Management expects that the impact of COVID-19 will be marginally unfavorable on our full year results based on information known to us at this time. Since our primary customers are departments and agencies within the U.S. Government, we have not historically had significant issues collecting our receivables and do not foresee issues collecting our receivables in the foreseeable future. In addition, our contract awards typically extend to at least five years, including options, and we have a strong history of being awarded a majority of these contract options; we do not anticipate that the pandemic will have a materially adverse impact on such awards.

Our liquidity position has not been materially impacted, and we continue to believe that we have adequate liquidity to fund our operations and meet our debt service obligations for the foreseeable future. However, we cannot predict the impact of the COVID-19 pandemic, and the longer the duration of the event and the more widespread in geographic locations where we and our suppliers operate, the more likely it is that it could have an adverse impact on our financial condition, results of operations, and/or cash flows in the future.

Inflation and Pricing

Most of PAE’s contracts provide for estimates of future labor costs to be escalated for any option periods, while the non-labor costs in its contracts are normally considered reimbursable at cost. PAE’s property and equipment consists principally of computer systems equipment, machinery and transportation equipment, leasehold improvements, and furniture and fixtures. PAE does not expect the overall impact of inflation on replacement costs of its property and equipment to be material to its future results of operations or financial condition.

Primary Components of Operating Results

Revenues

The majority of PAE’s revenues are generated from contracts with the U.S. Government and its agencies. PAE enters into a variety of contract types, including fixed price, cost reimbursable, and time and materials contracts.

Cost of revenues

Cost of revenues includes costs related to labor, material, subcontract labor and other costs that are allowable and allocable to contracts under federal procurement standards.

Selling, general and administrative expenses

Selling, general and administrative expenses primarily consist of (i) fringe benefits related to the contract costs; (ii) salaries and wages plus associated fringe benefits and occupancy costs related to executive and senior management, business development, bid and proposal, contracts administration, finance and accounting, human resources, recruiting, information systems support, legal and corporate governance; and (iii) unallowable costs under applicable procurement standards that are not allocable to contracts for billing purposes. Unallowable costs do not generate revenue but are necessary for business operations.

Results of Operations

Comparison of Results for the Three Months Ended June 28, 2020 (unaudited) and June 30, 2019 (unaudited) (in thousands):



	Three Months Ended							Percent
	June 28,		June 30,		Dollar		Change
	2020		2019		Change		%

Revenues	$	643,303	$	695,607	$	(52,304)	(7.5)

Cost of revenues	496,678		540,772		(44,094)		(8.2)
Selling, general and administrative expenses	105,451		126,438		(20,987)		(16.6)
Amortization of intangible assets	8,047		8,196		(149)		(1.8)
Total operating expenses	610,176		675,406		(65,230)		(9.7)

Program profit (loss)	33,127		20,201		12,926		64.0
Other income, net	1,168		5,958		(4,790)		(80.4)

Operating income	34,295		26,159		8,136		31.1
Interest expense, net	(13,757)		(21,617)		7,860		(36.4)
Income before income taxes	20,538		4,542		15,996		352.2
Expense from income taxes	3,752		1,153		2,599		225.4
Net income	16,786		3,389		13,397		395.3
Noncontrolling interest in earnings of ventures	765		715		50		7.0
Net income attributed to PAE Incorporated	$	16,021	$	2,674	$	13,347	499.1

Revenues

Revenues for the three-month period ended June 28, 2020, decreased by approximately $52.3 million, or 7.5%, from the comparable period in 2019. The decrease was attributable to a $58.5 million impact from COVID-19, of which approximately $40.4 million was non-labor, and $18.1 million was labor, which was partially offset by a $6.2 million net increase in contract volume and new business programs. The GMS and NSS segment revenues decreased by approximately $18.2 million and $34.1 million, respectively.

Cost of revenues

Cost of revenues for the three-month period ended June 28, 2020, decreased by approximately $44.1 million, or 8.2%, from the comparable period in 2019. The decrease in cost of revenues was primarily driven by lower revenue volume offset by lower non-labor volumes.

Selling, general and administrative expenses

Selling, general and administrative expense for the three-month period ended June 28, 2020, decreased by approximately $21.0 million, or 16.6%, from the comparable period in 2019. The decrease in selling, general and administrative expenses was primarily driven by lower indirect expenses, and the sale of substantially all the assets of PAE ISR LLC in 2019.

Amortization of intangible assets

Amortization of intangible assets for the three-month period ended June 28, 2020, decreased by approximately $0.1 million, or 1.8%, from the comparable period in 2019. The reduction was associated with amortizing certain customer relationships, development technologies, and trade names.

Other income, net

Other income, net for the three-month period ended June 28, 2020, decreased by approximately $4.8 million, from the comparable period in 2019. The decrease is primarily due to a one-time contract reserve write-off in 2019.

Operating income

Operating income for the three-month period ended June 28, 2020, increased by approximately $8.1 million, from the comparable period in 2019. The increase resulted from lower selling, general, and administrative expenses, and increased volume on higher margin programs, partially offset by lower revenue volume.

Interest expense, net

Interest expense, net for the three-month period ended June 28, 2020, decreased by approximately $7.9 million, or 36.4%, from the comparable period in 2019. This decrease was driven by the reduction of debt year over year.

Net income

Net income attributed to PAE for the three-month period ended June 28, 2020 was $16.0 million compared with a net income attributed to PAE of approximately $2.7 million in the comparable period in 2019. The increase in net income for the three-month period ended June 28, 2020, was primarily driven by factors impacting operating income and lower interest expenses, which was driven by a reduction in debt year over year.

Comparison of Results for the Six Months Ended June 28, 2020 (unaudited) and June 30, 2019 (unaudited) (in thousands):



	Six Months Ended							Percent
	June 28,		June 30,		Dollar		Change
	2020		2019		Change		%

Revenues	$	1,260,556	$	1,369,091	$	(108,535)	(7.9)

Cost of revenues	961,886		1,057,931		(96,045)		(9.1)
Selling, general and administrative expenses	242,777		261,474		(18,697)		(7.2)
Amortization of intangible assets	16,094		16,853		(759)		(4.5)
Total operating expenses	1,220,757		1,336,258		(115,501)		(8.6)

Program profit (loss)	39,799		32,833		6,966		21.2
Other income, net	1,954		7,678		(5,724)		(74.6)

Operating income	41,753		40,511		1,242		3.1
Interest expense, net	(34,705)		(44,277)		9,572		(21.6)
Income (loss) before income taxes	7,048		(3,766)		10,814		(287.1)
Benefit from income taxes	(4,961)		(1,994)		(2,967)		148.8
Net income (loss)	12,009		(1,772)		13,781		(777.7)
Noncontrolling interest in earnings of ventures	931		1,274		(343)		(26.9)
Net income (loss) income attributed to PAE Incorporated	$	11,078	$	(3,046)	$	14,124	(463.7)

Revenues

Revenues for the six-month period ended June 28, 2020, decreased by approximately $108.5 million, or 7.9%, from the comparable period in 2019. The decrease was attributable to a $72.0 million impact from COVID-19, of which approximately $49.7 million was non-labor, and $22.3 million was labor, and by a $36.5 million net decrease in contract volume and new business programs. The GMS and NSS segment revenues decreased by approximately $65.2 million and $43.3 million, respectively.

Cost of revenues

Cost of revenues for the six-month period ended June 28, 2020, decreased by approximately $96.0 million, or 9.1%, from the comparable period in 2019. This decrease in cost of revenues was attributable to lower revenue volume offset by lower non-labor volumes.

Selling, general and administrative expenses

Selling, general and administrative expense for the six-month period ended June 28, 2020, decreased by approximately $18.7 million, or 7.2%, from the comparable period in 2019. This decrease in selling, general and administrative expenses was primarily driven by lower revenue volume.

Amortization of intangible assets

Amortization of intangible assets for the six-month period ended June 28, 2020, decreased by approximately $0.8 million, or 4.5%, from the comparable period in 2019. The reduction was associated with amortizing certain customer relationships, development technologies, and trade names.

Other income, net

Other income, net for the six-month period ended June 28, 2020, decreased by approximately $5.7 million, from the comparable period in 2019. This decrease was driven by a one-time contract reserve write-off in 2019.

Operating income

Operating income for the six-month period ended June 28, 2020, increased by approximately $1.2 million, from the comparable period in 2019. The increase was driven by increased volume on higher margin programs, partially offset by lower revenue volume and lower other operating income in 2020.

Interest expense, net

Interest expense, net for the six-month period ended June 28, 2020, decreased by approximately $9.6 million, or 21.6%, from the comparable period in 2019. This decrease was primarily driven by reduction of debt year over year.

Net income (loss)

Net income attributed to PAE for the six-month period ended June 28, 2020 was $11.1 million compared with a net loss attributed to PAE of approximately $3.0 million in the comparable period in 2019. The increase in net income for the six-month period ended June 28, 2020, was primarily driven by the decrease in interest expense and provision for income taxes, as well as by the factors impacting operating income.

PAE’s Segments

Comparison of Results by Segments for the Three Months Ended June 28, 2020 (Unaudited), and June 30, 2019 (Unaudited) (in thousands):


	June 28, 2020					June 30, 2019
	Revenues		% of Total Revenues	Revenues		% of Total Revenues
GMS	$	507,854	78.9	$	526,025	75.6
NSS	135,449		21.1	169,582		24.4
Corporate	—		—	—		—
Consolidated revenues	$	643,303	100.0	$	695,607	100.0

	Operating Income (Loss)		Profit Margin %	Operating Income (Loss)		Profit Margin %
GMS	$	31,537	4.9	$	25,276	3.6
NSS	7,725		1.2	3,974		0.6
Corporate	(4,967)			(3,091)
Consolidated operating income	$	34,295		$	26,159

Global Mission Services Segment Results

Revenues

Revenues for the three-month period ended June 28, 2020, decreased by $18.2 million, or 3.5%, from the comparable period in 2019. The decrease was attributable to a $40.7 million impact from COVID-19, of which approximately $29.7 million was non-labor and $11.0 million was labor, partially offset by $22.5 million net increase in contract volume and new business programs.

Operating income

Operating income for the three-month period ended June 28, 2020 increased by $6.3 million from the comparable period in 2019. This improvement was primarily the result of increased volume on higher margin programs partially offset by lower revenue volume.

National Security Solutions Segment Results

Revenues

Revenues for the three-month period ended June 28, 2020 decreased by $34.1 million, or 20.1%, from the comparable period in 2019. This decrease was attributable to a $17.8 million impact from COVID-19, of which approximately $11.0 million was non-labor, and $6.8 million was labor, and by a $16.3 million net decrease from small business re-compete losses, net of new business wins .

Operating income

Operating income for the three-month period ended June 28, 2020 increased by $3.8 million from the comparable period in 2019. The increase was primarily driven by lower selling, general, and administrative expenses, and increased volume on higher margin programs, partially offset by lower revenue volume.

Comparison of Results by Segments for the Six Months Ended June 28, 2020 (Unaudited), and June 30, 2019 (Unaudited) (in thousands):


	June 28, 2020					June 30, 2019
	Revenues		% of Total Revenues	Revenues		% of Total Revenues
GMS	$	965,298	76.6	$	1,030,504	75.3
NSS	295,258		23.4	338,587		24.7
Corporate	—		—	—		—
Consolidated revenues	$	1,260,556	100.0	$	1,369,091	100.0

	Operating Income (Loss)		Profit Margin %	Operating Income (Loss)		Profit Margin %
GMS	$	44,140	3.5	$	51,067	3.7
NSS	12,092		1.0	3,187		0.2
Corporate	(14,479)			(13,743)
Consolidated operating income	$	41,753		$	40,511

Global Mission Services Segment Results

Revenues

Revenues for the six-month period ended June 28, 2020, decreased by $65.2 million, or 6.3%, from the comparable period in 2019. The decrease was attributable to a $52.9 million impact from COVID-19, of which approximately $38.6 million was non-labor, and $14.3 million was labor, and by a $12.3 million net decrease in contract volume and new business programs.

Operating income

Operating income for the six-month period ended June 28, 2020 decreased by $6.9 million from the comparable period in 2019. This decrease was primarily from lower revenue volume and increases in selling, general and administrative expenses.

National Security Solutions Segment Results

Revenues

Revenues for the six-month period ended June 28, 2020 decreased by $43.3 million, or 12.8%, from the comparable period in 2019. This decrease was attributable to a $19.1 million impact from COVID-19, of which approximately $11.8 million was non-labor, and $7.3 million was labor, and by a $24.2 million net decrease in contract volume and new business programs.

Operating income

Operating income for the six-month period ended June 28, 2020 increased by $8.9 million from the comparable period in 2019. The increase was primarily driven by lower selling, general, and administrative expenses, partially offset by lower revenue volume.

Liquidity and Capital Resources

As of June 28, 2020, PAE had cash and cash equivalents totaling $138.5 million and the Company had no outstanding borrowings on its asset-based revolving loan credit facility.

As of December 31, 2019, PAE had cash and cash equivalents totaling $68.0 million and the Company had no outstanding borrowings on its asset-based revolving loan credit facility.

PAE’s primary sources of liquidity are cash flow from operations and borrowings under its credit facility to provide capital necessary for financing working capital requirements, capital expenditures and making selective strategic acquisitions.

PAE expects the combination of its current cash, cash flow from operations, and the available borrowing capacity under its Revolving Credit Facility to be sufficient to continue to meet its normal working capital requirements, capital expenditures and other cash requirements. However, significant increases or decreases in revenues, accounts receivable, accounts payable, and merger and acquisition activity can affect PAE’s liquidity. PAE’s accounts receivable and accounts payable levels can be affected by changes in the level of contract work it performs, by the timing of large materials purchases, and subcontractor efforts used in its contracts. Government funding delays can cause delays in PAE’s ability to invoice for revenues earned, presenting a potential negative impact on liquidity.

See Note 10 - “Debt” of the notes to the condensed consolidated financial statements for further information on the terms and availability of PAE’s credit facilities.

Cash Flows Analysis

Comparison of Results for the Three Months Ended June 28, 2020 (Unaudited), and June 30, 2019 (Unaudited) (in thousands):


	Three Months Ended
	June 28,		June 30,		Dollar
	2020		2019		Change
Net cash provided by operating activities	44,675		32,560		$	12,115
Net cash (used in) provided by investing activities	(1,156)		23		(1,179)
Net cash used in financing activities	(5,938)		(19,144)		13,206
Effect of exchange rate changes on cash and cash equivalents	1,098		(747)		1,845
Net increase in cash and cash equivalents	$	38,679	$	12,692	$	25,987

Net cash provided by operating activities

Net cash provided by operating activities for the quarter of $44.7 million, increased by $12.1 million over the prior year period, primarily as a result of an increase in accounts payable and accrued salaries, offset by reduced cash collections.

Net cash (used in) provided by investing activities

Cash used in investing activities for the three-month period ended June 28, 2020 increased from the comparable period in 2019, primarily driven by lower proceeds from sale of assets and property and equipment.

Net cash used in financing activities

Cash used in financing activities for the three-month period ended June 28, 2020 was $(5.9) million, a decrease of $13.2 million from the comparable period in 2019. The decrease was primarily driven by lower long-term debt borrowings.

Comparison of Results for the Six Months Ended June 28, 2020 (Unaudited), and June 30, 2019 (Unaudited) (in thousands):


	Six Months Ended
	June 28,		June 30,		Dollar
	2020		2019		Change
Net cash provided by operating activities	$	55,588	$	71,923	$	(16,335)
Net cash used in investing activities	(1,560)		(3,591)		2,031
Net cash provided by (used in) financing activities	15,596		(62,844)		78,440
Effect of exchange rate changes on cash and cash equivalents	810		(1,205)		2,015
Net increase in cash and cash equivalents	$	70,434	$	4,283	$	66,151

Net cash provided by operating activities

Net cash provided by operating activities for the six-month period ended June 28, 2020 decreased by $16.3 million primarily as a result of an increase in accounts payable and accrued salaries, offset by reduced cash collections.

Net cash used in investing activities

Cash used in investing activities for the six-month period ended June 28, 2020 improved by $2.0 million from the comparable period in 2019, primarily driven by lower expenditures for property and equipment.

Net cash provided by (used in) financing activities

Cash provided by financing activities for the six-month period ended June 28, 2020 was $15.6 million, an increase of $78.4 million from the comparable period in 2019. The increase was primarily driven by the Recapitalization, partially offset by prepayment of the Second Lien Term Loan event from previous quarter.

Financing

Long-term debt consisted of the following as of the dates presented (in thousands):


	June 28,		December 31,
	2020		2019
First Term Loan	$	499,320	$	506,772
Second Term Loan	128,783		265,329
Revolving Credit Facility	—		—
Total debt	628,103		772,101
Unamortized discount and debt issuance costs	(15,306)		(22,164)
Total debt, net of discount and debt issuance costs	612,797		749,937
Less current maturities of long-term debt	(22,969)		(22,007)
Total long-term debt, net of current	$	589,828	$	727,930

The Company’s borrowing arrangement provides for borrowings up to $499.3 million under a first lien term loan credit agreement, dated October 26, 2016, as amended (the “First Term Loan”), $128.8 million under a second lien term loan credit agreement, dated October 26, 2016, as amended (the “Second Term Loan”), and $150.0 million under a revolving credit facility dated October 26, 2016, as amended (the “Revolving Credit Facility,” and together with the First Term Loan and the Second Term Loan, the “Credit Agreements”). Principal and interest are due quarterly on the First Term Loan and interest is due quarterly on the Second Term Loan. The maturity date of the First Term Loan is October 20, 2022. For the Second Term Loan the maturity date is October 20, 2023. For the Company’s Revolving Credit Facility the maturity date is October 20, 2021.

The Credit Agreements require the Company to comply with specified financial covenants under certain circumstances, including the maintenance of certain leverage ratios.

PAE was in compliance with the financial covenants under the Credit Agreements as of June 28, 2020. See Note 10 - “Debt” of the notes to the condensed consolidated financial statements.

Off-Balance Sheet Arrangements

PAE has outstanding performance guarantees and cross-indemnity agreements in connection with certain aspects of its business. PAE also has letters of credit outstanding principally related to performance guarantees on contracts and surety bonds outstanding principally related to performance and subcontractor payment bonds as described in Note 10 - “Debt" of the notes to the condensed consolidated financial statements.

PAE has entered into various arrangements to provide program management, construction management and operations and maintenance services. The ownership percentage of these ventures is typically representative of the work to be performed or the amount of risk assumed by each venture partner. Some of these ventures are considered variable interest entities. PAE has consolidated all ventures over which it has control. For all others, PAE’s portion of the earnings are recorded in equity in earnings of ventures. See Note 9 - “Consolidated Variable Interest Entities" of the notes to the condensed consolidated financial statements.

PAE does not believe that it has any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on its financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that would be material to investors.

Recently Issued Accounting Pronouncements

For a description of recently announced accounting standards, including the expected dates of adoption and estimated effects, if any, on PAE’s condensed consolidated financial statements, see Note 3 - “Recent Accounting Pronouncements" of the notes to the condensed consolidated financial statements.

Critical Accounting Policies

~~The preparation of~~

PAE’s MD&A is based upon its consolidated financial statements, ~~and related disclosures~~which are prepared in conformity with U.S. generally accepted accounting principles (“GAAP”). The preparation of these financial statements in accordance with GAAP requires ~~our management to make~~the use of estimates and assumptions ~~that~~which affect the reported amounts in the consolidated financial statements. Due to the size and nature of many of PAE’s programs, the estimation of total revenues and cost at completion is subject to a wide range of variables, including assumptions for schedule and technical issues. Actual results may differ from PAE’s management’s estimates.

PAE has identified the following Significant Accounting Principles and Policies as critical because they require significant judgments and assumptions about highly complex and inherently uncertain matters and the use of reasonably different estimates and assumptions could have a material impact on its results of operations or financial condition.

•Revenue Recognition

•Goodwill and Indefinite-Lived Intangibles

•Income Taxes

Revenue Recognition

PAE accounts for a contract when it has been approved by all parties in the arrangement, the rights of the parties and payment terms are identified, and collectability of consideration is probable. At contract inception, PAE identifies distinct goods or services promised in the contract, referred to as performance obligations, and then determines the transaction price for the contract.

PAE’s contracts contain promises to provide distinct goods or services to its customers. These represent separate performance obligations and units of account. PAE’s management evaluates whether a single contract should be accounted for as more than one performance obligation or whether two or more contracts should be combined and accounted for as one single arrangement at the outset of the contract. Most of PAE’s contracts consist of providing a complex set of interrelated goods and services that together provide a single deliverable or solution to the customer, and accordingly are accounted for as a single performance obligation. PAE also may engage with a customer on a contract where multiple distinct goods or services may be provided. In such circumstance, multiple performance obligations exist, and PAE would allocate the contract’s transaction price to the individual performance obligations based on estimated relative standalone selling price. The primary method used to estimate standalone selling price is the expected cost plus a margin approach, under which PAE forecasts expected costs of satisfying a performance obligation and then adds an appropriate margin for that distinct good or service promised.

Revenue is recognized when, or as, the performance obligation is satisfied. For substantially all of PAE’s contracts, PAE satisfies its performance obligations over time as its customer simultaneously receives and consumes benefits. Revenue is recognized over time when there is a continuous transfer of control to the customer.

For U.S. Government contracts, this continuous transfer of control to the customer is supported by clauses in the contract that allow the U.S. Government to unilaterally terminate the contract for convenience, pay for costs incurred plus a reasonable profit and take control of any work in process. When control is transferred over time, revenue is recognized based on the extent of progress towards completion of the performance obligation. Based on the nature of the products and services provided in the contract, PAE uses judgment to determine if an input measure or output measure best depicts the transfer of control over time.

For service type contracts, performance obligations are typically satisfied as services are rendered and PAE uses a contract cost-based input method to measure progress. Contract costs include labor, material and allocable indirect expenses. Revenue is recognized proportionally as contract costs are incurred plus estimated fees. If a contract does not meet the criteria for recognizing revenue over time, revenue is recognized at the point in time when control of the good or service is transferred to the customer. Control is considered to have transferred when PAE has a right to payment and the customer has legal title.

PAE reviews the progress and execution of performance obligations under the estimate at completion process. As part of this process, PAE reviews information including, but not limited

to, key contract terms and conditions, program schedule, progress towards completion, identified risks and opportunities and the related changes in estimates of revenues and costs. The risks and opportunities include judgments about the ability and cost to achieve the contract milestones and other technical contract requirements. PAE must make assumptions and estimates regarding labor productivity and availability, the complexity of the work to be performed, the availability of materials, the length of time to complete the performance obligation, execution by subcontractors, the availability and timing of funding from customers and overhead cost rates, among other variables. A significant change in one or more of these estimates could affect the profitability of PAE’s contracts.

Goodwill and Indefinite-Lived Intangibles

PAE evaluates goodwill for potential impairment annually on the first day of the fourth quarter or if an event occurs or circumstances change that indicate that the fair value of a reportable segment may have fallen below its carrying value. The evaluation includes a qualitative assessment to determine if it is more likely than not that fair value of a reportable segment is less than its carrying amount. If, as result of the qualitative assessment, it is more likely than not that the fair value of a reportable segment is less than its carrying amount, PAE compares the fair value of each of the reportable segments using a discounted cash flow methodology, or other fair value measures as considered appropriate in the circumstances, to its net book value, including goodwill. If the net book value exceeds the fair value, PAE will measure impairment by comparing the derived fair value of goodwill to its carrying value, and any impairment is recorded in the current period.

During the fourth quarter of 2019, PAE performed the annual qualitative impairment test for both of its reportable segments and noted that no impairment existed. There were no events or circumstances during the three-month and six-month periods ended June 28, 2020 indicating that the carrying amount of goodwill was impaired. The Company has considered the implications of COVID-19 as they relate to the carrying value of goodwill and indefinite-lived assets. COVID-19 has had a marginally unfavorable impact on the Company’s results of operations for the three-month and six-month periods ended June 28, 2020. Management expects that such impact will similarly be marginally unfavorable to the Company’s full year results. Since our primary customers are departments and agencies within the U.S. Government, we have not historically had significant issues collecting our receivables and do not foresee issues collecting our receivables in the foreseeable future. In addition, our contract awards typically extend to at least five years, including options, and we have a strong history of being awarded a majority of these contract options; we do not anticipate that the COVID-19 pandemic will have a materially adverse impact on such options. Our liquidity position has not been materially impacted, and we continue to believe that we have adequate liquidity to fund our operations and meet our debt service obligations for the foreseeable future. However, we cannot predict the impact of the COVID-19 pandemic, and the longer the duration of the event and the more widespread in geographic locations where we and our suppliers operate, the more likely it is that it could have an adverse impact on our financial condition, results of operations, and/or cash flows in the future.

Income Taxes

Income taxes are accounted for using the asset and liability method whereby deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the consolidated financial statement carrying amounts of assets and liabilities, ~~disclosure of contingent assets~~ and ~~liabilities at the date of the financial statements,~~their respective tax bases, and ~~income~~operating loss and ~~expenses during the periods reported. Actual results could materially differ from those estimates. We have identified the following as our critical accounting policies:~~

~~Offering costs~~

We comply with the requirements of the Accounting Standards Codification (the “ASC”) 340‑10‑S99‑1 and SEC Staff Accounting Bulletin Topic 5A — “Expenses of Offering.” Offering costs consist principally of professional and registration fees incurred through the balance sheet date that are related to our Public Offering and were charged to stockholders’ equity upon the completion of our Public Offering. Accordingly, at September 30, 2018 and December 31, 2017, offering costs totaling approximately $22,731,922 and $153,198, respectively, (including $22,000,000tax credit carry forwards. PAE accounts for

tax contingencies in ~~underwriter’s fees), have been charged to stockholders’ equity.~~

~~Redeemable Common Stock~~

All of the 40,000,000 shares of Class A common stock sold as part of the Units in our Public Offering contain a redemption feature which allows for the redemption of such shares in connection with our liquidation, if there is a stockholder vote or tender offer in connection with our Business Combination and in connection with certain amendments to our charter. In accordance with ASC 480, “Distinguishing Liabilities from Equity” (“ASC 480”), redemption provisions not solely within our control require common stock subject to redemption to be classified outside of permanent equity. Ordinary liquidation events, which involve the redemption and liquidation of all of the entity’s equity instruments, are excluded from the provisions of ASC 480. Although we did not specify a maximum redemption threshold, our charter provides that the Company will not redeem our public shares in an amount that would cause our net tangible assets (stockholders’ equity) to be less than $5,000,001.

We recognize changes in redemption value immediately as they occur and adjust the carrying value of redeemable common stock to equal the redemption value at the end of each reporting period. Increases or decreases in the carrying amount of redeemable common stock are affected by charges against accumulated deficit.

~~Accordingly, at September 30, 2018, 38,250,049 of the 40,000,000 public shares are classified outside of permanent equity at their redemption value.~~

~~Net income/(loss) per common share~~

The Company has two classes of shares, which are referred to as Class A common stock and Class F common stock. Net income/(loss) per common share is computed utilizing the two-class method. The two-class method is an earnings allocation formula that determines earnings per share separately for each class of common stock based on an allocation of undistributed earnings per the rights of each class. At September 30, 2018, the Company did not have any dilutive securities or other contracts that could, potentially, be exercised or converted into common stock and then share in the earnings of the Company under the treasury stock method. As a result, diluted net income/(loss) per common share is the same as basic net income/(loss) per common share for the period.

740-10- 25, Income ~~taxes~~

Taxes – Recognition (Topic 740). Deferred ~~income~~ tax assets and liabilities are ~~computed for differences between the financial statement and tax bases of assets and liabilities that will result in future taxable or deductible amounts, based on~~measured using enacted tax ~~laws and~~ rates ~~applicable~~expected to apply to taxable income in the ~~periods~~years in which ~~the~~those temporary differences are expected to ~~affect taxable income. Valuation allowances are established, when necessary, to reduce~~be recovered or settled. The effect on deferred tax assets and liabilities due to a change in tax rates is recognized in income in the ~~amount expected to be realized.~~

~~Recently issued accounting pronouncements not yet adopted~~

~~Management does not believe~~period that ~~any recently issued, but not yet effective, accounting pronouncements, if currently adopted, would have a material effect~~includes the enactment date. Estimates of the realizability of deferred tax assets are based on the ~~Company’s financial statements based on current operations~~scheduled reversal of ~~the Company. The impact of any recently issued accounting standards~~deferred tax liabilities, projected future taxable income, and tax planning strategies.PAE’s effective tax rate will be ~~re-evaluated~~higher due to establishment of valuation allowance on ~~a regular basis~~the disallowed interest expense. Any interest or ~~if a business combination is completed where the impact could be material.~~

penalties incurred in connection with income taxes are recorded as part of income tax expense for financial reporting purposes.

Item 3. Quantitative and Qualitative Disclosures About Market ~~Risk~~

~~Market~~Risks

There have not been any material changes to the Company’s market risk ~~is a broad term for the risk~~since December 31, 2019. For additional information, refer to “Management’s Discussion and Analysis of ~~economic loss due to adverse changes~~Financial Condition and Results of Operations” included in the fair value of a financial instrument. These changes may be the result of various factors, including interest rates, foreign exchange rates, commodity prices and/or equity prices. Our business activities for the nine months ended September 30, 2018 consisted solely of organizational activities and activities relating to our Public Offering and the identification of a target company for our Business Combination. As of September 30, 2018, $400,382,026 (including accrued interest and subject to reduction by the Deferred Discount due at the consummationExhibit 99.2 of the ~~Business Combination) was held in~~Company’s Current Report on Form 8-K/A filed with the Trust Account for the purposes of consummating our Business Combination. As of September 30, 2018, investment securities in the Company’s Trust Account consist of $400,381,806 and in United States Treasury Bills and $220 in cash. As of September 30, 2018, the effective annualized interest rate generated by our investments was approximately 2.03%.

We have not engaged in any hedging activities during the nine months ended September 30, 2018. We do not expect to engage in any hedging activities with respect to the market risk to which we are exposed.

SEC on March 11, 2020.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in company reports filed or submitted under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

As required by Rules ~~13a‑15~~13a-15 and ~~15d‑15~~15d-15 under the Exchange Act, our Chief Executive Officer and Chief Financial Officer carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of ~~September 30, 2018.~~June 28, 2020. Based upon their evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures (as defined in Rules ~~13a‑15(e)~~13a-15(e) and ~~15d‑15(e)~~15d-15(e) under the Exchange Act) were effective.

Internal Control over Financial Reporting

During the most recently completed fiscal quarter, ~~there has been no change in our~~the Company continued to make changes to certain internal ~~control over financial reporting that has materially affected, or is reasonably likely~~controls to ~~materially affect, our internal control over financial reporting.~~

reflect the operations of PAE acquired as a result of the Business Combination.

~~PART II—OTHER~~ ~~INFORMATION~~

Part II. Other Information

Item 1. Legal Proceedings

~~None.~~

PAE is involved in various legal proceedings, government audits, investigations, claims and disputes that arise in the normal course of business, including those related to employment matters, contractual relationships and other business matters. These legal proceedings seek various remedies, including claims for monetary damages in varying or unspecified amounts. In addition, awards of government contracts may be protested at the U.S. Government Accountability Office or the U.S. Court of Federal Claims; and conversely, PAE may from time to time protest awards made to other companies.

Although the outcome of any such matter is inherently uncertain and may be materially adverse, based on current information, PAE does not expect any of the currently ongoing audits, reviews, investigations, or litigation to have a material adverse effect on its financial condition or operating results. Its view of the matters not specifically disclosed could change in future periods as events unfold.

Item 1A. Risk Factors

~~Factors~~

For a discussion of risk factors that could ~~cause~~significantly and negatively affect our ~~actual~~business, financial condition, results ~~to differ materially from those in this report are any~~ of operations, cash flows and prospects, see the ~~risks described~~disclosure under the heading "Risk Factors" in our prospectus on Form 424B3, filed with the SEC on ~~September 7, 2018. Any~~April 23, 2020, File No. 333-236468 (the “Prospectus”). There have been no material changes from the risk factors set forth in the Prospectus, other than the additional risk factor provided below, which is an update to the risk factor included in Part II, item 1A of ~~these factors~~our Quarterly Report on Form 10-Q for the quarter ended March 29, 2020. .

We face various risks related to public health crises, such as the coronavirus (“COVID-19”), that could disrupt PAE’s business and result in loss of revenue or higher expenses.

Our operations face risks related to public health crises, such as the global outbreak of COVID-19 and other pandemics and epidemics. The COVID-19 virus has spread to over 100 countries, including the United States, and the World Health Organization has classified the COVID-19 outbreak as a pandemic. The ability of our personnel to work effectively and travel and the continued adequacy of our supply chains have been adversely impacted by the pandemic and responses thereto, such as the travel restrictions resulting from the COVID-19 virus. Additionally, as a result of COVID-19, we have experienced, and expect that we will experience in the future, delays, or partial reductions or full suspensions of contract work, which have caused and could result in further decreases of revenue and may have a material adverse impact on our business. We have experienced increased medical, housing, facility cleaning, and other costs due to quarantine requirements imposed by various jurisdictions and exposure of our personnel to pandemics such as the COVID-19 virus. In addition, we are permitting employees to telework who can meet our customer commitments remotely, and many of our employees are teleworking. Due to COVID-19, we are uncertain when and how many teleworking employees will return to work in person. We have not previously experienced so

many employees working remotely for such an extended period of time, so the long-term effects on our operations are unknown. Moreover, we may be subject to additional cybersecurity risks as a result of a significant portion of our workforce working remotely. In addition, the resulting volatility in the global capital markets could, among other things, restrict our access to capital and/or increase our cost of capital. At this time, we cannot predict the impact of the COVID-19 pandemic or the duration of time that the pandemic and its impacts will last, but it could have a material adverse effect on our business, financial position, results of operations and/or ~~financial condition. Additional risk factors not presently known to us or that we currently deem immaterial may also impair our business or results~~cash flows. See “Management’s Discussion and Analysis of ~~operations.~~

AsFinancial Condition and Results of Operations—Current Economic Conditions – Impact of COVID-19” for additional discussion of management’s assessment of the date of this Quarterly Report on Form 10-Q, there have been no material changes to the risk factors disclosed in our prospectus filed with the SEC on September 7, 2018; however, we may disclose changes to such factors or disclose additional factors from time to time in our future filings with the SEC.

COVID-19 pandemic.

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

~~Unregistered Sales~~

On November 3, 2017, our Sponsor purchased 10,781,250 Founder Shares for an aggregate purchase price of $25,000, or approximately $0.002 per share. Subsequently, our Sponsor transferred an aggregate of 75,000 Founder Shares to our independent directors. On October 22, 2018, following the expiration of the unexercised portion of the underwriter’s over-allotment option, our Sponsor forfeited 781,250 Founder Shares, so that the remaining Founder Shares held by the Initial Stockholders would represent 20.0% of the outstanding shares of Capital Stock following the completion of our Public Offering. Our Public Offering was consummated on September 11, 2018.

Prior to the Public Offering Closing Date, we completed the private sale of an aggregate of 6,666,666 Private Placement Warrants to our Sponsor at a price of $1.50 per Private Placement Warrant, generating total proceeds, before expenses, of $10,000,000. The Private Placement Warrants are substantially similar to the Warrants underlying the Units issued in our Public Offering, except that the Private Placement Warrants may be exercised on a cashless basis and are not redeemable so long as they are held by our Sponsor or its permitted transferees. If the Private Placement Warrants are held by holders other than our Sponsor or its permitted transferees, the Private Placement Warrants will be redeemable by us and exercisable by the holders on the same basis as the Warrants.

~~The sales of the above securities by the Company were exempt from registration in reliance on Section 4(a)(2) of the Securities Act as transactions by an issuer not involving a public offering.~~

~~Use of Proceeds~~

On August 10, 2018, our registration statement on Form S‑1 (File No. 333-226794) was declared effective by the SEC for the Public Offering pursuant to which we sold an aggregate of 40,000,000 Units at an offering price to the public of $10.00 per Unit, including 2,500,000 Units as a result of the underwriter’s partial exercise of its over-allotment option, generating gross proceeds of $400,000,000.

After deducting the underwriting discounts and commissions (excluding the Deferred Discount, which amount will be payable upon the consummation of our Business Combination, if consummated) and the estimated offering expenses, the total net proceeds from our Public Offering and the sale of the Private Placement Warrants were $401,100,000, of which $400,000,000 (or $10.00 per share sold in the Public Offering) was placed in the Trust Account in the United States maintained by the trustee.

Through September 30, 2018, we incurred approximately $8,731,922 for costs and expenses related to the Public Offering. At the closing of the Public Offering, we paid a total of $8,000,000 in underwriting discounts and commissions. In addition, the underwriter agreed to defer $14,000,000 in underwriting commissions, which amount will be payable upon consummation of our Business Combination, if consummated. There has been no material change in the planned use of proceeds from our Public Offering as described in our final prospectus dated September 7, 2018 which was filed with the SEC.

Our Sponsor, executive officers and directors have agreed, and our amended and restated certificate of incorporation provides, that we will have only 24 months from the Public Offering Closing Date to complete our Business Combination. If we are unable to complete our Business Combination within such 24‑month period, we will: (i) cease all operations except for the purpose of winding up, (ii) as promptly as reasonably possible but not more than ten business days thereafter, redeem the public shares, at a per-share price, payable in cash, equal to the aggregate amount then on deposit in our Trust Account, including interest (which interest shall be net of taxes payable, and less up to $100,000 of interest to pay dissolution expenses) divided by the number of then outstanding public shares, which redemption will completely extinguish public stockholders’ rights as stockholders (including the right to receive further liquidation distributions, if any), subject to applicable law, and (iii) as promptly as reasonably possible following such redemption, subject to the approval of our remaining stockholders and our Board, dissolve and liquidate, subject in each case to our obligations under Delaware law to provide for claims of creditors and the requirements of other applicable law.

As of September 30, 2018, after giving effect to our Public Offering and our operations subsequent thereto, approximately $400,382,026 was held in the Trust Account, and we had approximately $1,559,568 of unrestricted cash available to us for our activities in connection with identifying and conducting due diligence of a suitable Business Combination, and for general corporate matters.

None.

Item 3. Defaults Upon Senior Securities

~~None~~

None.

Item 4. Mine Safety Disclosures

~~Not Applicable.~~

None.

Item 5. Other Information

None.

Item 6. Exhibits

~~The following exhibits are filed as part of, or~~

See the Exhibit Index below, which is incorporated by reference ~~into, this Quarterly Report on Form 10‑Q.~~

herein.

Exhibit Index

Exhibit Number	~~Description~~
~~3.1~~ Exhibit No.

10.1*		Form of Amended and Restated ~~Certificate of Incorporation (incorporated~~Restricted Stock Unit Grant Notice and Restricted Stock Unit Agreement for Directors under the PAE Incorporated 2020 Equity Incentive Plan

31.1		Certification by ~~reference to Exhibit 3.1~~the Chief Executive Officer of the ~~Company’s Current Report on Form 8‑K filed with the SEC on September 12, 2018).~~

~~3.2~~	~~By Laws (incorporated by reference to Exhibit 3.3 filed with the Form S‑1 filed by the Registrant on August 10, 2018).~~

~~4.1~~	~~Specimen Unit Certificate (incorporated by reference to Exhibit 4.1 filed with the Form S‑1 filed by the Registrant on August 10, 2018).~~

~~4.2~~	~~Specimen Class A Common Stock Certificate (incorporated by reference to Exhibit 4.2 filed with the Form S‑1 filed by the Registrant on August 10, 2018).~~

~~4.3~~	~~Specimen Warrant Certificate (incorporated by reference to Exhibit 4.3 filed with the Form S‑1 filed by the Registrant on August 10, 2018).~~

~~4.4~~	~~Warrant Agreement, dated September 6, 2018, between the~~ Company ~~and Continental Stock Transfer & Trust Company, as warrant agent (incorporated by reference to Exhibit 4.1 of the Company’s Current Report on Form 8‑K filed with the SEC on September 12, 2018).~~

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

31.2* 31.2		Certification ~~of Principal~~by the Chief Financial Officer ~~Pursuant to Rules 13a‑14(a) and 15d‑14(a) under~~of the ~~Securities Exchange Act of 1934, as Adopted~~Company Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1* 32.1		Certification ~~of Principal~~by the Chief Executive Officer ~~Pursuant to 18 U.S.C. Section 1350, as Adopted~~of the Company Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2
32.2*	Certification ~~of Principal~~by the Chief Financial Officer ~~Pursuant to 18 U.S.C. Section 1350, as Adopted~~of the Company Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS		Inline XBRL Instance Document

101.SCH		Inline XBRL Taxonomy Extension Schema Document

101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document

101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB		Inline XBRL Taxonomy Extension Labels Linkbase Document

101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document
104		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit ~~101~~	The following financial statements from the Quarterly Report on Form 10-Q of Gores Holdings III, Inc. for the quarter ended September 30, 2018, formatted in eXtensible Business Reporting Language (XBRL): (i) Balance Sheets, (ii) Statements of Income, (iii) Statements of Changes in Stockholders’ Equity, (iv) Statement of Cash Flows and (v) Notes to Financial Statements. 101)

*	~~Filed herewith.~~

*Management contract or compensatory plan or arrangement

SIGNATURES

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

~~GORES HOLDINGS III, INC.~~

Dated: August 6, 2020

PAE Incorporated

~~Date: November 13, 2018~~

~~By:~~

~~/s/ Mark Stone~~

By:

~~Mark Stone~~

/s/ Charles D. Peiffer

Name:

~~Chief Executive Officer~~

Charles D. Peiffer

Title:

~~(Duly Authorized~~

Executive Vice President & Chief Financial Officer ~~and Principal Executive Officer)~~

	September 30, 2018		December 31, 2017
	(unaudited)		(unaudited)
CURRENT ASSETS:
Cash and cash equivalents	$	1,559,568	$	109,737
Prepaid assets & deferred costs		23,417		153,198
Total current assets		1,582,985		262,935
Investments and cash held in Trust Account		400,382,026		—
Total assets	$	401,965,011	$	262,935

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accrued expenses, formation and offering costs		377,220		111,011
Notes payable - related party		-		150,000
Income tax payable		75,501		-
State franchise tax accrual		11,791		608
Total current liabilities		464,512		261,619
Deferred underwriting compensation		14,000,000		—
Total liabilities		14,464,512		261,619

Commitments and Contingencies:
Class A subject to possible redemption, 38,250,049 and 0 shares at September 30, 2018 and December 31, 2017, respectively (at redemption value of $10.00 per share)		382,500,490		—

Stockholders’ equity:
Preferred stock, $0.0001 par value; 1,000,000 shares authorized, none issued or outstanding		—		—
Common stock
Class A common stock, $0.0001 par value; 200,000,000 shares authorized, 1,749,951 and 0 shares issued and outstanding (excluding 38,250,049 and 0 shares subject to possible redemption) at September 30, 2018 and December, 31, 2017, respectively		175		—
Class F common stock, $0.0001 par value; 20,000,000 shares authorized, 10,781,250 shares issued and outstanding		1,078		1,078
Additional paid-in-capital		4,791,335		23,922
Retained earnings		207,421		(23,684	)

Total stockholders’ equity		5,000,009		1,316

Total liabilities and stockholders’ equity	$	401,965,011	$	262,935

	Three			Nine
	Months Ended			Months Ended
	September 30, 2018			September 30, 2018
Revenues	$	—		$	—
Professional fees and other expenses		(44,312	)		(63,629	)
State franchise taxes, other than income tax		(10,591	)		(11,791	)
Net loss from operations		(54,903	)		(75,420	)
Other income - interest income		382,026			382,026
Net income/(loss) before income taxes	$	327,123		$	306,606
Provision for income tax		(75,501	)		(75,501	)
Net income/(loss) attributable to common shares	$	251,622		$	231,105

Net Income/(Loss) per ordinary share:
Class A ordinary shares - basic and diluted	$	0.04		$	0.12
Class F ordinary shares - basic and diluted	$	(0.01	)	$	(0.01	)

	Class A Ordinary Shares						Class F Ordinary Shares				Additional			Retained			Stockholder's
	Shares			Amount			Shares		Amount		Paid-In Capital			Earnings			Equity
Beginning Balance at January 1, 2018		—		$	—			10,781,250	$	1,078	$	23,922		$	(23,684	)	$	1,316
Proceeds from initial public offering of Units on September 11, 2018 at $10.00 per Unit		40,000,000			4,000			—		—		399,996,000			—			400,000,000
Sale of 6,666,666 Private Placement Warrants to Sponsor on September 11, 2018 at $1.50 per Private Placement Warrant		—			—			—		—		10,000,000			—			10,000,000
Underwriters discounts		—			—			—		—		(8,000,000	)		—			(8,000,000	)
Offering costs charged to additional paid-in capital		—			—			—		—		(731,922	)		—			(731,922	)
Deferred underwriting compensation		—			—			—		—		(14,000,000	)		—			(14,000,000	)
Class A common stock subject to possible redemption; 38,250,049 shares at a redemption price of $10.00		(38,250,049	)		(3,825	)		—		—		(382,496,665	)		—			(382,500,490	)
Net income		—			—			—		—		—			231,105			231,105
Balance at September 30, 2018		1,749,951		$	175			10,781,250	$	1,078	$	4,791,335		$	207,421		$	5,000,009

	For the Three Months Ended September 30, 2018					For the Nine Months Ended September 30, 2018
	Class A		Class F			Class A		Class F
Basic and diluted net income/(loss) per share:
Numerator:
Allocation of net income/(loss)	$	332,628	$	(81,006	)	$	358,373	$	(127,268	)

Denominator:
Weighted-average shares outstanding		8,696,000		10,781,250			2,932,000		10,781,250
Basic and diluted net income/(loss) per share	$	0.04	$	(0.01	)	$	0.12	$	(0.01	)

					Significant		Significant
					Other		Other
			Quoted Prices in		Observable		Unobservable
	September 30,		Active Markets		Inputs		Inputs
Description	2018		(Level 1)		(Level 2)		(Level 3)
Investments and cash held in Trust Account		400,382,026		400,382,026		—		—
Total	$	400,382,026	$	400,382,026	$	—	$	—